With Verizon’s announcement of their intent to acquire CDN provider EdgeCast, naturally many are asking me what this means for Akamai and their CDN business. This deal has a negative impact on Akamai in a couple different ways, from a revenue and product standpoint, but the impact to Akamai won’t be felt overnight. We also have to keep in mind that as good a deal as this is for Verizon, it all comes down to execution and Verizon still needs to prove themselves in the market. But from my discussions with Verizon, they understand execution is the key and by letting EdgeCast continue to run, operate and grow the CDN, Verizon is setting themselves up for success. From the way I see it, there are four areas where this deal impacts Akamai from a negative standpoint.
Until the deal is done, Verizon won’t comment on how this impacts their current re-seller deal with Akamai, but it’s not hard to figure it out. Verizon currently resells Akamai’s enterprise services and depending on whom you ask, I’m told the value to Akamai is between $75-$100M in revenue this year. But without confirmation from Akamai or Verizon on those numbers, we don’t know for sure the revenue impact to Akamai. While Verizon has some commitments to Akamai in their re-seller contract, it’s unknown when this contract ends and what the commitments are. In a reseller deal like this, usually it is a guaranteed revenue commitment over a period of time. Verizon won’t give out any details on their Akamai contract, but it’s safe bet to say they aren’t going to renew it. With EdgeCast, they have no need to resell Akamai any longer and they should be able to stop reselling Akamai’s services, for any new customers, almost immediately after the deal is done.
EdgeCast was already competing with Akamai when it came to the CDN market for small and large object delivery, streaming video, software downloads and other traditional CDN services. EdgeCast is on track to do $100M in revenue this year, and the vast majority of it comes from these CDN services, not licensing CDN software to telcos like some have stated. While EdgeCast has a much smaller amount of CDN revenue than Akamai, now EdgeCast will have the resources of Verizon behind them to grow their revenue at a faster rate. For any CDN, the biggest challenge they always face is scaling the network and having enough R&D resources and budget to improve the reach of the network, the performance and add new products and services. Verizon has 100 employees in their Verizon Digital Media Services (VDMS) group of which half are R&D, engineering and developers, just for this one product line.
In addition to Akamai’s CDN business that will be impacted, the most important thing to look at it Akamai’s value add services business. EdgeCast recently rolled out a new PCI compliant based platform for commerce as well as platforms for delivering dynamic content, site acceleration and security services. On their own, EdgeCast could only get so far with these product lines as it takes a lot of resources to scale and build out those services which are much more complex than CDN. EdgeCast competed with Akamai for some RFPs in the market, but mostly on contracts that were smaller in size. Now with the backing of Verizon, these services will get built out much faster, scale broader and will have a large sales force capable of selling them. This won’t impact Akamai overnight since it will take Verizon time to build out these value add services, but soon Verizon will be competing with Akamai at scale on value add services.
Another impact Akamai is going to feel from this is with M&E and broadcast customers. To date, Akamai hasn’t put together and offered a true end-to-end video ecosystem platform for broadcasters, especially for live. Akamai’s expertise has always been the delivery component of the ecosystem but they don’t do signal acquisition via satellite, pull in video via Vyvx, encoding live streams and have any kind of automated software for broadcasters. They offer some of these services via their partners like Brightcove, iStreamPlanet and AEG Digital, but that’s not a true all-in-one platform and Akamai has no broadcast ops centers for video like Level 3 does. Akamai has a patchwork of third-party products that can’t be used and managed via a single platform. On the other hand, Verizon has nearly all of these video ecosystem pieces under their roof. They already ingest tons of content due to their FiOS TV service, transcode it and soon with EdgeCast, will be able to deliver it themselves. And with Verizon’s recent acquisition of Uplynk, they added the necessary software layer on top of the platform that once complete, allows broadcast customers to manage the whole ecosystem in one place. It’s the same strategy Level 3 has taken, and done very well with, going to a customer and telling them they can control their content from creation to distribution.
There has been a lot of talk by Akamai over the last few quarters of their telco business but when it comes to the licensed and managed CDN market, EdgeCast owns it hands down. EdgeCast has dominated that market for years being the first CDN to focus on having a true white-label solution for telcos and carriers, almost three years before Akamai. Nearly 20% of EdgeCast’s revenue this year, $20M, comes from the carrier market. While the entire market for these services is very small, less than $50M in total this year, Akamai is trying to get traction with carriers due to the impacts it has on their network performance and costs more than anything else. If you can get telcos and carriers local to a region to use your software, in many cases you can exit areas of the world where it is too expensive for a CDN to operate, like Akamai is trying to do with Orange in France. EdgeCast has the advantage as they already have more than a dozen carriers using their CDN software, which will allow Verizon to connect with more telcos and carriers around the world and should help to kick start some real telco federation in the market. While many think telcos compete with one another, most telcos are regional, not global, and they prefer working with one another over CDNs who tend to simply want to place a bunch of services inside their network, for free.
Another way this could impact Akamai, along with all the other major CDNs, in the current market price for CDN services. It’s unknown at this time what Verizon’s pricing strategy will be, but being under the umbrella of Verizon, EdgeCast should be able to reduce their costs. Once that happens, Verizon may make the strategic decision to be aggressive in the market on pricing and force CDN pricing down on delivery services for content live video and software downloads. This year, for video CDN deals, pricing fell on average by 25%, which was about the same pricing decline last year, as well. For the past three years, the rate of CDN pricing declines in the market has remained stable. But that could all change if Verizon decides to get aggressive with their CDN pricing. This is speculation at this time as it’s too early to know their pricing strategy, but it is certainly a possibility.
Akamai faces some new business challenges with Verizon as a competitor for CDN and value add services in the market. That’s not to say I am predicting doom and gloom for Akamai as they are still the largest vendor in the space and have the most revenue from these services. But that alone isn’t enough, for any company, to guarantee they will always dominate the market they are in. Every day it’s becoming more and more competitive for Akamai in all areas of their business and across all of their product lines. In addition to the many smaller providers they always had to compete with, now they have to compete with the likes of companies like Amazon and Verizon, which is impacting their business in the short and long-term.