MF90609 The Online Content Distribution...

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The Online Content Distribution Market Opportunities for CDN

Internet Services

Focus note

MF90609 – January 2010

Contributors

Samuel Ropert, Consultant [email protected] Vincent Bonneau, Head of Internet Business Unit

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ISBN 978-2-84822-196-0

The Online Content Distribution Market

www.idate-research.com © IDATE 2010 3

Table of Contents 1. Executive Summary.......................................................................................................... 6

2. Online Content Distribution Trends ................................................................................ 8 2.1. Internet traffic still growing exponentially .................................................................. 8 2.2. Challenges for scalability on the Internet................................................................ 10 2.3. Video on the Internet: big, but not big money......................................................... 10

3. Delivery Technologies.................................................................................................... 12 3.1. Main technologies for delivery of content ............................................................... 12 3.2. Traditional approach of CDN technologies............................................................. 14 3.3. Techniques for optimizing delivery ......................................................................... 15 3.4. Hybrid CDN technologies ....................................................................................... 15

4. Market ecosystem........................................................................................................... 18 4.1. A brief history of the CDN market ........................................................................... 18 4.2. Delivery chain ......................................................................................................... 18 4.3. Market players and ecosystem............................................................................... 19

5. Market Dynamics & market sizing................................................................................. 22 5.1. Market dynamics..................................................................................................... 22

5.1.1. Drivers .................................................................................................................................... 22 5.1.2. Barriers ................................................................................................................................... 23

5.2. Market trends .......................................................................................................... 23 5.3. Market sizing and forecasts .................................................................................... 24

6. Industry economics and business models .................................................................. 25 6.1. Value proposition .................................................................................................... 25 6.2. Pricing methods ...................................................................................................... 26 6.3. Economics of CDN players..................................................................................... 26 6.4. Business case for online video service based on CDN.......................................... 27

6.4.1. Catch-up TV model (e.g. ABC) ............................................................................................... 27 6.4.2. Premium VOD model .............................................................................................................. 28 6.4.3. Viral platform model (YouTube).............................................................................................. 28

7. Company profiles............................................................................................................ 30 7.1. Traditional CDN providers ...................................................................................... 30

7.1.1. General overview.................................................................................................................... 30 7.1.2. Akamai .................................................................................................................................... 31 7.1.3. Limelight Networks ................................................................................................................. 33 7.1.4. CDNetworks............................................................................................................................ 33



7.2. Telcos ..................................................................................................................... 34 7.2.1. General overview.................................................................................................................... 34 7.2.2. AT&T....................................................................................................................................... 35 7.2.3. Level3 ..................................................................................................................................... 37 7.2.4. Verizon.................................................................................................................................... 37 7.2.5. BT ........................................................................................................................................... 37 7.2.6. France Telecom (Orange)....................................................................................................... 37 7.2.7. Deutsche Telekom.................................................................................................................. 37

7.3. Internet giants ......................................................................................................... 38 7.3.1. General overview.................................................................................................................... 38 7.3.2. Amazon................................................................................................................................... 40 7.3.3. Microsoft ................................................................................................................................. 41

8. Outlook: towards cloud computing .............................................................................. 42 8.1. Business motivation................................................................................................ 42 8.2. Technical motivation ............................................................................................... 43

8.2.1. Cloud computing architecture segmentation........................................................................... 43 8.2.2. Comparison of architectures................................................................................................... 44

8.3. The cloud computing opportunity............................................................................ 45



Tables and Figures Figure 1: International bandwidth growth ............................................................................................................ 8 Figure 2: Consumer Internet traffic forecast ........................................................................................................ 9 Figure 3: Evolution of online video consumption............................................................................................... 11 Figure 4: Download, progressive download, streaming .................................................................................... 12 Figure 5: P2P solutions ..................................................................................................................................... 13 Figure 6: How CDN works................................................................................................................................. 14 Figure 7: Example of hybrid CDN architecture: the BBC iPlayer....................................................................... 17 Figure 8: The CDN value chain ......................................................................................................................... 19 Figure 9: Worldwide CDN market...................................................................................................................... 24 Figure 10: Catch-up TV revenue & costs according to volume of content .......................................................... 27 Figure 11: VOD premium, revenue & costs according to the volume of content................................................. 28 Figure 12: Viral platform, revenue & costs according to the volume of content .................................................. 29 Figure 13: CDNetworks’ revenue growth ............................................................................................................ 34 Figure 14: Global map of AT&T’s CDN (with POP description)........................................................................... 36 Figure 15: AT&T architecture ............................................................................................................................. 36 Figure 16: Limelight Networks’ customer concentration...................................................................................... 38 Figure 17: Amazon data centre map ................................................................................................................... 40 Figure 18: Microsoft delivery forecast ................................................................................................................. 41 Figure 19: Cloud computing value proposition from Akamai............................................................................... 43 Figure 20: Typical components of a cloud computing architecture ..................................................................... 44 Figure 21: Worldwide cloud computing market ................................................................................................... 46

***

Table 1: Main mergers/acquisitions in the CDN/P2P industry ......................................................................... 16 Table 2: Top market players ............................................................................................................................ 20 Table 3: Main partnerships between telcos and CDN/P2P providers .............................................................. 20 Table 4: Main mergers/acquisitions in the CDN/P2P industry ........................................................................ 21 Table 5: Trends in online video consumption (USA)........................................................................................ 22 Table 6: Financial data on CDN Players .......................................................................................................... 26 Table 7: CDN players' positioning .................................................................................................................... 31 Table 8: Akamai acquisitions ........................................................................................................................... 32 Table 9: Positioning of main telcos in the CDN business................................................................................. 35 Table 10: Main Internet giants strategies ........................................................................................................... 39



1. Executive Summary Content delivery is above all a response to a technical challenge The growing development of online content, especially video, requires advanced delivery solutions to counter the major drawbacks of simple unicasting systems. Unicasting, or basic point-to-point delivery in a client-server mode, cannot really scale transmissions, and any server collapses when the traffic load is too heavy. Added to which unicasting is not feasible from an economic standpoint as it involves chiefly linear costs for both storage and bandwidth. Advanced infrastructure is required to deliver online content efficiently. The Internet has been built on a best-effort model which is coming under increasing pressure as traffic skyrockets. To achieve faster delivery, web pages and video content are being served up through content delivery network (CDN) technologies which optimize use of the network with different techniques: primarily caching servers, but also switching, traffic allocation and load balancing. Standalone P2P technologies are very efficient for handling heavy traffic, and are already being used widely for swapping pirated content. But they have too many limitations (upload, volatility of nodes) to be used on a large scale by a single provider, except for delivering ultra-popular content (like the BBC’s iPlayer). P2P is therefore primarily an option to be combined with CDN technologies as part of hybrid solutions.

CDN: key enablers for sustainable business models With CDN solutions, end users benefit from third-party providers’ investments in infrastructure, which are spread out between the providers’ clients. This naturally means lower bandwidth costs, and allows end users to operate more rapidly and transform most of their capital expenditures into more variable operating expenditures. They can also be more flexible and able to scale more readily during traffic spikes and times of rapid growth. CDN is therefore positioned by providers as a way of guaranteeing a certain quality of service while scaling, but also as a more cost-effective solution. This is clearly reflected in the pricing schemes attached to mobile flat rate formulas based on volume rather than peak data rates, and which include roll-over volumes. This approach helps customers establish their business plans. Many Internet players clearly need these shared approaches to save on bandwidth costs. But even with important savings, many of the business models attached to online content offerings are still very tenuous. Only a few markets can really afford to pay for efficient delivery, notably e-commerce (web pages) or premium video-on-demand (VOD). Advertising in online videos still generates very little revenue, especially on sites offering mainly user-generated content – although the situation is improving. Some potential applications – especially the fastest-growing ones – are not all profitable, in fact, or operating on very slim margins.



CDN market is growing but subject to more and more pressure In the short term, despite impressive growth levels (47% in 2007, and 31% in 2008 in spite of the downturn), the CDN market is still not a money maker – generating only 1.3 billion USD worldwide in 2008 and an expected 3.5 billion USD by 2012. Most of the revenue is coming from North America, but Europe and South-East Asia are becoming key growth markets. Still dominating the market is Akamai which enjoyed a near monopoly in 2005. Competition is heating up, however, as other pure CDN technology providers, such as Limelight and CDNetworks, have entered the fray. But competition is also coming from newcomers to the CDN segment, and especially from Internet giants like Amazon (positioned as a low-cost solution) and from telcos such as Level3 and AT&T whose aim is to prevent their infrastructure assets from being underutilized. The benefits for telcos lie not only in the added revenue stream, but especially in the cost savings incurred, since they have to handle the traffic anyway. All of Europe’s top carriers (BT, France Telecom, Deutsche Telekom) are now working to forge themselves a position in this market. Competition is also coming from some of the (bigger) customers who are starting to develop their own CDN solutions, primarily for delivering content in-house: Google is using its own solution for YouTube, and Microsoft is taking the same route. Meanwhile, the BBC’s iPlayer has had a tremendous impact on the British market.

New opportunity to expand into SaaS The main CDN market is still serving up static web pages and their associated content. Expansion into digital content such as video is proving difficult from a revenue generating standpoint as the underlying market is hard to monetize. As a result, CDN players are looking to other markets. SaaS (Software as a Service) is currently considered the most promising opportunity. Software supply is shifting to an online, or in-the-cloud model and creating a new, fast-growing market that was already worth more than 6 billion USD in 2009. The required infrastructure for SaaS is supplied mainly through IaaS (Infrastructure as a Service) solutions, which earned over 4.5 billion USD in 2008 – making it a bigger market than CDN. SaaS is aimed chiefly at large accounts and small and medium businesses, which are safer bets for serving up the financing needed for the infrastructure. Most CDN technologies can be reused to deliver SaaS – provided they integrate more virtualization software technologies – so the majority of CDN players now have their eye on that market as well. Akamai was the first to enter the fray, but other companies are now adopting a convergent CDN-IaaS positioning, including Amazon – which in fact started out as a supplier of cloud infrastructure – and telcos which are leveraging their infrastructure to deliver both services.



2. Online Content Distribution Trends

2.1. Internet traffic still growing exponentially Overall traffic on the Internet is still growing very quickly, with an annual increase of close to 60%. The main factors contributing to this growth are the following: • Internet adoption: the Internet is still far from being saturated, as more and more people

are connecting to the web, through a PC or a mobile phone, at home, at work or at internet cafés. This trend is clear in emerging countries, but also applicable to almost all advanced countries in which the growth of the number of Internet users is still close to 10%.

• Broadband deployment, which translates into more end users and more bandwidth per end-user, which should help significantly increase consumption of the various services and content available on the web.

• P2P (peer-to-peer), which represents a great deal of traffic being concentrated by a small group of users.

• Video content, which has increased sharply over the past few years with the development of video-sharing platforms such as YouTube, along with catch-up TV sites from networks such as ABC and aggregators such as Hulu and TV.com.

• More applications and services moving online. With increasingly ubiquitous connectivity, other applications are moving online – software being a prime example.

Figure 1: International bandwidth growth

Source: Telegeography



Assuming that IP traffic has grown continuously over the past few years, the explosion of new applications/usages strongly suggests that this trend will continue in both the short and long term.

Figure 2: Consumer Internet traffic forecast

Source: Cisco

According to Cisco, with traffic nearly doubling every two years, IP traffic is on pace to increase by a factor of six by 2012. Although P2P traffic is still the main driver of Internet traffic, growth will be fostered by Internet video usage, now in its infancy, but is expected to grow sharply. Today, Internet video accounts for approximately one-third of all Internet traffic (excluding video exchanged through P2P file sharing); this figure will reach nearly 50% by 2012, overtaking P2P in volume.



2.2. Challenges for scalability on the Internet Historically, Internet traffic has been delivered on a best-effort basis. All users within the same network conditions (access speed) are allocated with a fair amount of bandwidth. Bitrate and delivery time depend on the current traffic load and the quality and length of the local loop. There is no quality of service (QoS) guaranteed (no acceptable level of “jitter,” latency, or packets lost). While limited QoS may not hinder some services, the potential impacts are significant for many applications, including video, e-commerce or SaaS for technical and/or business imperatives. This significant increase in traffic on networks could cause: • congestion (particularly at interconnection nodes) on many parts of the network,

including access networks; • poor performance for some usages, especially the ones with more requirements in

terms of bandwidth, jitter or delay. A reaction from telcos is therefore required to ensure the sustainable development of web services and applications (from their own business units and from third parties) with some quality of service. But the challenges are not only technical; they are also financial: • IP transit prices have dropped, leaving first-mile players little profit opportunity. At

the same time, the prices have not dropped as steeply as traffic has grown, leaving providers with a revenue gap as well.

• Only a few players get paid for the traffic poured on their networks. Most of the players are exchanging traffic for free through peering agreements. Therefore, only players providing the first mile get paid. Even peering is in fact not free, as all parties have at least to deploy some hardware to handle the traffic.

2.3. Video on the Internet: big, but not big money The category of application and service that has enjoyed the most important growth in recent years is by far online video, with the development of highly popular user-generated content (UGC) and video sharing websites like YouTube or DailyMotion. Numerous players have followed in their footsteps, including major TV channels with catch-up TV services or movies studios around platforms like Hulu and Epix. Traditional media players control the rights to some of the most sought-after content and generally provide them in HD or full-screen versions. The impact of video on overall traffic has been tremendous so far, and video traffic is expected to increase even more, even when taking into account potential breakthroughs from compression technologies: • increasing quality of encoding, matching the development of HD formats developing

offline; • end-user involvement: the web content catalogue will also increase dramatically (in

volume) because of both UGC and illegal content posting; • digitization of content, which allows for easier and cheaper content creation by

anybody; • increased usage: more usage per end-user; • non-video players’ (like brands or e-commerce providers) involvement in the video

world.



Figure 3: Evolution of online video consumption

Source: comScore

The major downside of distributing video over the Internet is the lack of sustainable business models outside of some specific but limited niches: • The marginal value generated by each paid VOD program (generally priced at several

USD per title) makes it possible to cover distribution costs easily, and to generate the highest per-video margins. But overall volumes are still very low.

• The economic equation of catch-up TV services is improving as consumption increases, but this is not a decisive factor in achieving economic equilibrium. There is a threshold that needs to be reached, however, below which marginal gains per video are not enough to make the offer profitable.

• Viral or UGC platforms are not yet managing to generate enough revenue per video to offset distribution costs, but the traffic generated by the service is allowing them to generate some display ad revenue, diminishing the handicap of having very little in-stream advertising. Despite their impressive audience figures, it has become vital for these services to segment their offer according to users’ stated tastes, and to incorporate professional content more and more to achieve a profitable model.



3. Delivery Technologies

3.1. Main technologies for delivery of content Online content can be delivered through different transmission techniques: • Downloading: Downloading requires that all of the data from a content stream/file be

loaded before the user can watch/use it, but enables temporary or permanent storage on a hard drive of the entire video. Protocols are ports used are then generally similar to those of HTTP.

• Streaming: With streaming the content is watched/consumed as the file is being loaded, using compression techniques adapted to the available bitrate. Streaming involves the use of a buffer memory that helps amortise data loss over the Web. For online video, streaming adapts the quality of the image to the performance of the user’s video player, according to the available bandwidth. This method is used chiefly for delivering content in real time (or with a slight delay) over the Internet. Streaming generally relies on specific protocols like RTSP (Real Time Streaming Technologies) or even proprietary solutions. Streaming technologies are generally more expensive because their are technically more evolved: they require dedicated servers, unlike download solutions (progressive and standard) which employ classic Web servers

• Progressive downloading: Also referred to as http streaming, progressive downloading gives viewers a consistent and potentially high quality image following an often lengthy pre-load time. Progressive downloading looks like streaming for end-user, but it is still downloading in terms of architecture and solution. The file is stored temporarily. The difference with traditional downloading is that the video content can be played before the end of the download. Protocol used is HTTP and can not directly be distinguished with other HTTP traffic.

Figure 4: Download, progressive download, streaming

Source: Equal Sign



Independently of the type of transmission, there are several ways to actually deliver the content. The content delivery process consists of all operations related to the architecture of distribution of content. It determines where are placed the different servers (origin server, optional edge servers, optional peers) necessary for the delivery and how they interact between them. The choice between the different delivery systems is mostly determined according to the client's needs (webcasting including live, on demand services, popularity of the content) and cost issues. The main content delivery systems include: • Unicasting in a client-server architecture, in which each user receives an individual

point-to-point stream or file download from the web hosting server, for example. This means that there are as many transmissions (possibly of the same sequence) as there are Internet users of the service. The overall architecture is centralized based on one or several (possibly networked) servers.

• Enriched unicast, based on the same principles as "regular" unicast (which is primarily a best-effort solution), but delivery is optimized over several backbones through continual monitoring and search for the best backbone to use at any given time.

• Multicasting allows the same sequence to be sent to a group of machines via a single transmission. Multicasting is therefore especially well suited to direct streaming. It is poorly suited to downloads or time-shifted streaming, however, because it is designed for simultaneous requests from a large group of users. Multicast is still delicate to operate in a non-controlled network environment, so it will only be mentioned here when relevant to the report.

• CDN (or Content Delivery Network), whose main principle is to bring web content closer to the end user (virtually or physically), usually by placing local servers at the periphery of the Internet (edge servers) close to ISPs. The servers are generally connected to one another to transfer or replicate content optimally (i.e. not all servers contain all available content). The end user will therefore access a local server directly, rather than the central server.

• P2P (peer-to-peer) system development efforts are aimed at solving the problems presented by unicasting (cost and service quality under heavy loads) by eliminating dependence on centralized resources as much as possible. In a P2P system, exchanges essentially occur between the users themselves since they are the ones who initiate not only the downstream flows but the upstream flows of file fragments. The first downloads or streams may be initiated by a central server (hybrid P2P).

Figure 5: P2P solutions

Source: IDATE



All these solutions have their own drawbacks and advantages in terms of performance, scalability and costs (server and bandwidth), so players delivering content online have to make certain trade-offs. While not efficient for moderate volumes, P2P has better scalability than the client-server model and is the best solution for handling heavy usage, even though it is not necessarily fully optimized from the ISP’s point of view (connection to random peers who might be not be the closest ones to the user). Unicasting in particular cannot really be scaled for content delivery. Multicasting is a good solution, of course, but is best suited to live distribution and has yet to prove that it can be operational over an open network like the Internet. As a result, providers are focusing on technologies like CDN and P2P to enable the mass distribution of popular content.

3.2. Traditional approach of CDN technologies A content delivery network delivers (web) content and applications from a set of strategically located and load-balanced servers. The distributed infrastructure provides services to ensure a website supports the needs of the client without costly capital expenditures and operating costs. A global network of servers provides load balancing, object caching, streaming, authorization, secure access, usage analysis, network monitoring, replicated storage and other services. CDN services reduce the infrastructure investment to deliver fast and reliable performance for normal and peak demand. CDN services overcome many of the performance issues associated with the Internet by deploying caching services located on the Internet near the end-user. The infrastructure generally provides a distributed set of caches, with a routing layer that determines which cache is closest to any given website visitor. Commonly requested content is served from the cache location closest to the user, minimizing both the length of the delivery path and access to the content provider website infrastructure.

Figure 6: How CDN works

Source: IDATE, based on 01net



3.3. Techniques for optimizing delivery Content may be fed to caching servers in two different ways: • by default, especially if the content is frequently requested or is of local interest; • or on demand, in which case content is transferred from the central server to the local

server when it is first requested and then remains there for subsequent requests. Local servers are deployed around the world near primary connection points to the World Wide Web (in Europe, the United States and Asia) and are supported by multiple backbones. The number of servers deployed depends on the CDN. This allows a CDN to optimize content distribution, especially for video, by allocating connection requests. It employs various techniques such as: • caching (storing popular content close to users); • switching (directing traffic to a virtual router that steers traffic to the best available

server); • traffic allocation (directing traffic to a server that is underutilized or nearby). A CDN can serve a variety of different needs, including media content distribution, traffic acceleration (web page, static content) or non-media application acceleration.

Guarantee of service Commercial CDNs charge customers for their services, and in turn they are bound with strong commitments to their end-users to meet the negotiated Service Level Agreement (SLA). An SLA is part of a contract between the service provider and their customers, which describes the provider’s commitments and specific penalties if those commitments are not met.

3.4. Hybrid CDN technologies P2P principles A peer-to-peer (or "P2P") computer network exploits diverse connectivity between participants in a network and the cumulative bandwidth of network participants, as opposed to conventional centralized resources where a relatively low number of servers provide the core value to a service or application. Peer-to-peer networks are typically used for connecting nodes via largely ad hoc connections. Such networks are useful for many purposes, but are used mainly for digital content delivery. A P2P delivery solution intervenes at the end of the chain, at the client level. In other words, it uses the peers’ bandwidth, which means savings on network costs for the media content provider. If the content is not available on the peer’s PC, however, the cache server will have to supply it – which generates network costs for the content provider. So, the greater the number of peers, the greater the savings. Service quality improves as the number of active users rises. Popular content that is simultaneously available from multiple users can be downloaded fairly quickly, sometimes faster than if delivered by unicasting or multicasting. As a P2P caching solution, a CDN architecture is characterized by distributed servers, therefore dedicated to popular content. But because P2P delivery solutions intervene at the end of the chain, i.e. on the client side of the equation, they could provide an interesting way to resolve bandwidth issues and enable substantial savings, even if it is only for the most popular content.



P2P limitations While P2P may appear to be a good solution for content providers, it has still a number of drawbacks: • limited upload capacities, which means that central servers will be used heavily (more

than peering); • no guarantee on QoS: sharing occurs between randomly allocated and volatile

peers/nodes. Therefore, stream paths may be longer and sometimes not even exist. Real time is also invariably a challenge;

• potential filtering/traffic shaping from telcos, because of the very large volumes involved, including off-net traffic;

• need to download software beforehand, which could prove a further impediment for media content providers working to establish partnerships, as it reduces the quality of the user experience.

Evolution from pure P2P to hybrid solutions P2P can not handle niche content items long because there are too few sources to support a satisfactory aggregated throughput. P2P can also not guarantee QoS for first downloaders/streamers. Employing a unicast server under a hybrid P2P model solves the problem of system priming (necessary when no one has the desired file at start-up), which can be slow in pure P2P. P2P was initially seen as an independent alternative solution for delivering content, competing directly with CDN and hosting offerings. This paradigm is shifting, as CDN is now looking to P2P and P2P is looking at CDN. As we mentioned earlier, the prime objective of a CDN solution is to get files (or objects) closer to the user and thereby reduce traffic on the network. P2P has limited usefulness for long-haul delivery, but it has some key advantages at the end of the delivery chain. Because of this, CDN players now tend to form partnerships with P2P technology providers and some have gone so far as to acquire a P2P player. Hybrid CDN/P2P solutions are being used increasingly as a complement to standalone CDN and standalone P2P offerings for optimizing delivery, especially for on-network traffic, and both traditional P2P and CDN players now offer them. Most players are moving away from pure, standalone P2P solutions, shifting to either direct offerings (Velocix) or partnerships (RawFlow/Tiscali).

Table 1: Main mergers/acquisitions in the CDN/P2P industry

Acquirer Player acquired

Acquired player activity

Date Amount

Akamai Red Swoosh P2P April 2007

$15 million

Ipercast 1-click Media P2P March 2008

NA

MK Capital

Kontiki P2P May 2008 $1,000,000, plus 3,980,000 shares of the purchaser's Series A-preferred stock.

VeriSign Kontiki P2P March 2006

$58 million

Source: IDATE



From November 2005 to February 2006, the BBC ran a 5,000-user trial of a solution based largely on the offering from Kontiki; Siemens, Red Bee Media and Microsoft also collaborated in the trial. Users had to install Kontiki’s peer-to-peer file sharing software.

Figure 7: Example of hybrid CDN architecture: the BBC iPlayer

Source: BBC

After the successful trial, a commercial service was launched for PC platforms, with streaming and downloads, in December 2007, and was extended to TV (Virgin Media), the iPhone and the Nintendo Wii. After three weeks, more than 3.5 million programs had been streamed or downloaded on demand. The top 10 programs accounted for about 50% of all consumption. Two months after launch, the BBC was reporting more than 2 million iPlayer users and over 5 million page views per month.



4. Market ecosystem

4.1. A brief history of the CDN market Content delivery networks have been around since the mid-90s when Sandpiper, InterVU and RBN started providing delivery services for video, and it has taken the past 14 years to get where we are today. Akamai’s system was launched in early 1999; it initially delivered only web objects (images and documents). It has since evolved to distribute dynamically generated pages and even applications to the network’s edge. Its main competitor, Limelight, was incorporated in 2001. During the dotcom boom, CDN providers harnessed their large network overlay infrastructure to cache and deliver static web pages to millions of consumers. On today’s web, however, static pages are more the exception than the rule, so CDNs have added compression, traffic shaping, intelligent routing and network optimization to accelerate everything from software downloads to video streaming, corporate web application performance, B2B transactions, and real-time web interactions. These market dynamics are leading to a confluence of content delivery network (CDN) and application delivery network (ADN) services. The integration of content delivery and network acceleration technologies will ultimately be usurped by a more comprehensive ADN paradigm. The importance tied to creating more robust outsourced end-to-end solutions is highlighted as customers seek solutions that will offload the growing complexity and cost tied to internal management of content delivery applications. In order to adapt to this new framework, CDNs have enlarged their product portfolio along the delivery chain. The main means for doing this has been to develop strategic partnerships with content creation/management players.

4.2. Delivery chain The web service delivery chain involves several main players and their associated offerings: • Content: content providers put their data – which can take numerous forms ranging from

digital video to web pages – on the Internet. • Content delivery technology: A number of technologies – encoding, transcoding,

content management, etc. – are needed to ensure proper delivery of content on the web. Noteworthy players in this area include Adobe (Flash), Microsoft (Silverlight) and On2. Specific technologies are generally used at both ends of the delivery chain, including more and more content consumption technologies (analytics, etc.). A great many providers offer those technologies and are generally specialized in their sub-segments.

• Web hosting/data centres: the content and/or web pages are stored on dedicated servers managed by web hosting/data centre providers that pay the Tier1 or the CDN provider for connection and related services (route optimization, acceleration).



• Network (both at the Tier 1 and ISP level): The content is delivered through the Internet via different networks, including access, regional and core networks. Tier 1 is connected to the data centre (IP transit) and to other lower tiers, then to the backbone networks and ISPs (hence to the end user) – typically through IP peering agreements.

Figure 8: The CDN value chain

Core Network

Origin Content Servers CDN cache

Access and Aggregation

Network

Regional Network

“CDN Middle Mile”

Transit link

“CDN Last Mile” “CDN First Mile”

Source: IDATE

Most CDN providers today are pure players. They are generally positioned in the middle of the network architecture with their edge servers, and act as virtual network operators within the Internet, using the most relevant and efficient routes. They have assembled the building blocks to create their CDN/P2P solutions. As we will see in the sections that follow, a few players focused on a specific part of the delivery chain are working to compete with CDN pure players. Telcos are the most active players among recent entrants, but a few content providers (Google/YouTube, Microsoft) and some technology suppliers (Thomson, which acquired SyncCast in 2007) have also shown interest in CDN technologies. Other challengers include P2P software and solution providers who are expanding their P2P technologies, which are being marketed to corporations and telcos for traffic optimization purposes, or being used by consumers.

4.3. Market players and ecosystem The competitive landscape of CDN and P2P markets was dominated for years by Akamai, one of the rare survivors of the bubble burst, while telcos positioned on CDN exited the market. Akamai even attained a monopoly position by 2005 when it acquired its major competitor (Speedera), except in some regions such as Asia. Since then, it has been challenged by Limelight and numerous new competitors. The CDN space is even getting crowded, as non-traditional players are positioning themselves in the market because of traffic coming from video services (UGC and professional services). Video technology vendors are designing their own offerings, while telcos are responding to video traffic and its impacts (on such items as QoS and revenue). There are also many small players (essentially start-ups) entering the P2P market. Overall, there are more than 40 active players in the market today, not including regional providers, but only a handful of them are significant in scale.



Table 2: Top market players

Rank Players Location

1 Akamai Worldwide

2 Limelight U.S., Europe and Asia

3 CDNetworks Asia

4 Internap Vitalstream North America, Europe, Asia, Australia

5 Level 3 U.S., Europe

6 Chinacache China

Source: IDATE

Telcos and IP infrastructure-based players are natural potential providers of CDN, and are beginning to position themselves as such. In November 2008, Amazon rolled out its CDN solution called CloudFront (HTTP-compatible only), which is compatible with the entire range of Amazon Web Services, including the popular S3 (storage services) and EC2 (content distribution services). This system offers extremely competitive rates, especially because it requires no minimum contract length. Last year also saw the arrival of telcos, with two different strategies. The first was based on strategic partnerships (Verizon) and the other consisted of building CDN architecture from scratch (AT&T). Most other telcos signed partnerships to optimize their network load management.

Table 3: Main partnerships between telcos and CDN/P2P providers

Telco CDN player Date

DT Edgecast January 2009

Tata Bitgravity March 2008

Reliance Globalcom Internap July 2008

Verizon Velocix November 2008

Level 3 Pando Networks November 2008

Source: IDATE

Early 2009 saw the beginning of a consolidation phase in the CDN market. Intermediate players reinforce their position (geographical, customers’ portfolio, etc.) by acquiring smaller competitors. For instance, CDNetworks purchased Panther Express, while Qualcomm acquired Digital Fountain. The economic downturn will likely reinforce this trend, as there are too many players offering CDN services. In recent years, most acquisitions were rooted in gaining access to specific technological expertise (in terms of acceleration performance, routing); today, strategic moves are being made to acquire marketing tools. Actually, as technology improves (telcos use similar technologies to improve the network management), marketing tools remain a key competitive advantage, and some telcos are partnering with CDN players for this type of service (DT and Edgecast for example). For instance, in 2009, Limelight Networks acquired Kiptronic, an online and mobile ad insertion company. Later it acquired EyeWonder, another rich-media ad platform. In late 2008, Akamai purchased Acerno, an online co-operative of shopping and purchase data for enabling more relevant online advertising, with the goal of improving Akamai’s advertising decision solutions.



Table 4: Main mergers/acquisitions in the CDN/P2P industry

Acquirer Player acquired

Player activity Date Amount (USD)

Alcatel Lucent Velocix Hybrid CDN July 2009 $20-25M (estimate)

Akamai Red Swoosh P2P April 2007 $15M

Akamai Speedera Networks

CDN June 2005 $142.2 M

Akamai Nine Systems Media management tools December 2006

$160M

Akamai Netli Service provider for accelerating applications and content over the Internet for the business market

February 2007

Against 3.2M shares of common Akamai stock

Akamai Acerno Online cooperative of shopping and purchase data

November 2008

NA

CDNetworks Panther Express

CDN February 2009

NA

Global Media Services

Grid Networks CDN April 2009 NA

Internap VitalStream CDN October 2006

$217M

Ipercast 1-click Media P2P March 2008 NA

MK Capital Kontiki P2P May 2008 $1M plus 3,980,000 shares of the purchaser’s Series A preferred stock.

Level 3 Servecast CDN July 2007 $45M

Level 3 SAVVIS Streaming specialist January 2007

$132.5M

Limelight Kiptronic online and mobile ad insertion company

May 2009 NA

Limelight Eyewonder Rich-media ad platform December 2009

$110M

Qualcomm Digital Fountain

CDN February 2009

NA

Thomson SyncCast Corporation

CDN September 2007

NA

VeriSign Kontiki P2P March 2006 $58M

Source: IDATE

Some network players prefer to invest in CDN providers rather than acquiring them or forming a partnership – a prime example here being BitGravity which received a $15 million in strategic funding from Tata Communications in 2008.



5. Market Dynamics & market sizing

5.1. Market dynamics

5.1.1. Drivers The major drivers behind CDN market growth are: • Growth of Internet consumption: As existing networks handle an ever increasing traffic

load, some websites are paying to ensure good availability and uptime for their services. E-commerce players are already major buyers of CDN services which can help to improve performance and convert prospects into buyers. CDN providers benefit, then, from the good health of other Internet markets such as e-commerce, which is growing at a rate of 15% to 25% a year in various countries, or online advertising, which is growing at 10% a year, even in the current global downturn.

• Growth of media consumption: Overall consumption of video has already been rising by more than 50% a year on a per-minute basis (combining a strong increase in the time spent per viewer and slight increases in the number of users and time per video from 2.6 minutes to 2.8 minutes). This traffic growth does not take into account the increasing quality of encoding on both UGC and professional sites, which is bringing HD video to the web.

Table 5: Trends in online video consumption (USA)

Date Time per viewer (per month)

January 2006 85 minutes

May 2006 100 minutes

January 2007 151 minutes

November 2007 205 minutes

March 2008 235 minutes

October 2008 274 minutes

December 2008 309 minutes

April 2009 385 minutes

August 2009 582 minutes

November 2009 732 minutes

Source: comScore



• Marketing tools: CDN solutions now include more and more marketing tools and analytics and even, in some cases, advertising networks, which are strong incentives for potential customers. CDN solutions can then be positioned more as a revenue generator (for example, by facilitating targeted advertising and other new services) than an additional cost.

5.1.2. Barriers If the growth in volume is tremendous, the growth of the market in value could remain more limited because of the following potential scenarios: • Profitability of CDN business falls off: While CDNs have so far been profitable when

used for website hosting and static content, it hasn’t yet been proven that the same is true for digital content or video. Only Akamai has really been making money in the past years, thanks to its quasi-monopoly, especially on static content. But even Akamai is having a tough time taking advantage of traditional CDN activities, while facing huge investments to keep up with the demand.

• Price wars depress revenue: Bandwidth costs have been falling in the CDN space, due to the intense competition imposed by new entrants. Players like Amazon and telcos, who may not necessarily see CDNs as generating revenue, could even accelerate this trend and commoditize this market.

• Content providers launch in-house initiatives: CDN providers could lose important content providers, which contribute a large part of their revenue (see, for example, Limelight’s loss of MySpace just prior to its IPO in 2007). Content providers could develop their own internal CDNs; this has already been done by Microsoft and YouTube, and MySpace and Facebook are building multiple data centres that could allow them to do this as well. Media content providers (like ABC) could launch similar initiatives.

• Increasingly personalized consumption: CDN is useless for one-to-one delivery. While Pareto rules (80% of traffic for 20% of content) are still solid, an evolution of the traffic toward more long-tail content would be very negative for the CDN market.

5.2. Market trends The CDN market is evolving along a few specific lines that are impacting providers’ business strategies: • More advanced customer needs: During the dotcom boom, CDN providers harnessed

their large network overlay infrastructure to cache and deliver static web pages to millions of consumers. The shift towards more advanced content is in progress, but the CDN market is still dominated by acceleration products and static content delivery. Hybrid P2P is clearly focused on delivery of video and large files (such as office documents).

• End-to-end solutions: The importance of creating more robust end-to-end solutions is highlighted as customers seek solutions that will offload the growing complexity and cost tied to internal management of content delivery applications. In order to adapt to this new framework, CDN and P2P players are working to enlarge their product portfolios along the delivery chain. The main mode was to develop strategic partnerships with content creation/management players and form a very large ecosystem.

• Segmented target market: Customer needs are very different depending on the vertical segment. For instance, media players need secure solutions with advanced features around video, while e-commerce players expect first and foremost fast delivery, so as to not lose potential customers. Corporate players expect high security for sensitive data and the ability to run any type of software. Therefore, some players address only some specific segments (Limelight for media). Main segments for both CDN and P2P are the media and entertainment (including social sites), commerce and enterprise markets.



• Internationalization of providers: Major players have first focused on their domestic markets and therefore generally come from advanced Internet markets (U.S., Korea and the UK). CDN activities rely in fact more on reach and scale economics (both for edge servers and network agreements) than other activities such as hosting. Some content providers also need to address end-users at a global scale (not just a national scale). There is, then, an unfolding trend that favours international expansion, with U.S.-based CDN players ramping up their local presence in Europe and/or in Asia (new offices from Local Mirror, Limelight). Similarly, Asian players are expanding into the U.S. and may expand into Europe (as with Korean CDNetworks in USA, and Chinacache through its partnership with RawFlow). The same is also happening for P2P-based players.

5.3. Market sizing and forecasts The CDN market represented around $1.3 billion worldwide in 2008 and should reach $3.5 billion by 2012 (a 28% compound annual growth rate). The current global downturn has some clear direct impact, as the CDN space has grown only by 31% in 2008, compared to 47% in 2007. Video is one of the major segments of this market, even if the lion’s share is still coming from non-video.

Figure 9: Worldwide CDN market (million USD)

1 010

1 325

1 600

1 977

2 570

3 500

0

500

1 000

1 500

2 000

2 500

3 000

3 500

2 007 2 008 2 009 2 010 2 011 2 012

Source: IDATE



6. Industry economics and business models

6.1. Value proposition The value proposition of CDN is still clearly driven by network optimization aspects, and the business models and offerings are generally adapted from telecom models.

Offering description Compared with other conventional transit solutions, CDN naturally allows for lower bandwidth costs (because of shorter paths). Whether a CDN is selected based on cost (choosing the least costly connection points) or performance (choosing the connection points closest to the user), the bandwidth implications often are the same. The cost of bandwidth is lower overall, the costs associated with local servers and system management are quite high compared with the unicast model. CDNs provide a better quality of service for large-scale services (service quality is very hard to sustain at high volumes with unicasting). Value proposition is then mainly driven by quality of delivery (overall experience) and customer support elements rather than price: • scalability for peak loads and flash crowds; • intelligent traffic management; • site speed and performance; • global coverage; • reliability; • cost optimization (no capital investment and staffing required), allowing for a short time-

to-market; • reporting tools to understand traffic and audience; • customized solution. Economic aspects are also key, as CDNs offer cost optimization (no capital investment and staffing required), shortening time to market, and reporting tools to understand traffic and audience, which are key for monetization.



Differentiation The value propositions can be differentiated through: • cost-effective solution on the CDN market, but not necessarily for media content

(Edgecast, Panther Express); • money generator through customer monitoring and direct relationship with the advertising

community (VitalStream); • enhanced consumer experience, including HD video quality delivery (in particular,

MoveNetworks and Akamai recently positioned on the segment); • bundling options for some providers (hosting, application delivery service, non-CDN

products).

6.2. Pricing methods The CDN pricing model is generally based on Gb delivered (volume). However, the bandwidth pricing model is still used (95th percentile) and some players use a tariff model based on number of pages viewed. An analysis based only on the level of pricing would not be fully relevant here, as some players do not offer the same depth of service. All costs, not only those related to network distribution, are billed on a per-Gb basis. Some players include content technology and reporting aspects in that price, while others offer only delivery. In fact, most CDNs no longer charge on price alone. Their prime selling points include customer service, SLA, geographic reach/blocking, reporting and content management. Major CDN players distribute all content formats (web pages, static content) and different forms of video (download, progressive download, streaming). Each type of content is generally offered with a separate contract, with different pricing levels (but same pricing scheme).

6.3. Economics of CDN players There are perhaps 10 major players at most in the CDN market, and the majority of them are still owned by private equity firms.

Table 6: Financial data on CDN Players

Rank Players CDN/P2P revenue for 2008 (US$

million)

2007/2008 Growth

2006/2007 Growth

EBITDA Net income

1 Akamai 791 +25% +65% 310 145.1

2 Limelight 130 +23% +74% 46 -63

3 CDNetworks 68 +33%* +30% NA NA

4 Internap Vitalstream 21 18% NA NA NA

5 Chinacache NA NA +125% NA NA * CDNetworks’ US revenue increased by 300%, from 2007 to 2008. Source: IDATE, based on operator data

There are no clear data for Level 3, with CDN revenue estimated at $100 million. Operating margins for CDN players are quite good, but below those of other telecom-like activities. Net margins are more limited and dropping with the current competition on price.



6.4. Business case for online video service based on CDN The outlook for the CDN market is very dependent on the prospects of its potential customers. CDN addresses primarily two types of data and their associated types of customers: • Web pages. The business of web page or static content delivery can rely on established

business models (online advertising, e-commerce), even though they are particularly challenged by the current downturn.

• Digital content (especially video). The business models of video delivery that have attracted many players to position themselves as CDN providers are less clear. Premium VOD and catch-up TV can operate at a healthy profit, but they still represent a very limited share of the volume of video content. On the other hand, UGC websites represent the bulk of the traffic but are not turning a profit. Without the support of a diversified group (like Google for YouTube), they could go bankrupt, which would exert tremendous pressure on prices.

6.4.1. Catch-up TV model (e.g. ABC) This model is based on the distribution of only professional videos, with ad revenue coming solely from in-video ads. In this case, revenue is in the upper bracket, with 100% of the content able to be monetized with a high per-video CPM. It is believed that delivery costs are 100% through CDN.

Figure 10: Catch-up TV revenue & costs according to volume of content (in million EUR / million videos per month)

-5

0

5

10

15

20

10 20 30 40 50 60 70 80 90

Catch up TV Net rev enues (M€) Deliv ery costs per y ear (M€)

Gross profit (M€) Operating profit (M€)

Source IDATE, market report on online video business models



6.4.2. Premium VOD model Only paid VOD services offered online are taken into account here, and not those marketed via IPTV offers. This model is based only on PPV revenue earned on professional content, both TV series and films. It also includes a breakdown between rental and sales. It is believed that delivery costs are 100% through CDN.

Figure 11: VOD premium, revenue & costs according to the volume of content (in million EUR / million videos per month)

-2-1012345

0.01 0.025 0.05 0.075 0.1 0.125 0.15 0.175 0.2

VOD premium Net rev enues (M€) Deliv ery costs per y ear (M€)


Source: IDATE, market report on online video business models

Taking account of the model’s hypotheses, a monthly transaction volume of 60,000 programs would be needed to achieve operating profits. The premium model is thus potentially profitable, particularly in the upper tier, despite initial deductions from income, which decrease per-view revenue drastically.

6.4.3. Viral platform model (YouTube) This model is based on the distribution of primarily UGC. With ad revenue being generated: • by banners on the browsing pages; • by in-video ads. It is believed that delivery costs are based on 90% CDN and 10% peered unicast, because long-tail videos are more numerous in those platforms.



Figure 12: Viral platform, revenue & costs according to the volume of content (in million EUR / million videos per month)

-5.00

0.00

5.00

10.00

15.00

346 496 646 796 946 1 096 1 246 1 396 1 546

Platform net rev enues (M€) Deliv ery costs per y ear (M€)


Source IDATE, market report on online video business models

The video website is operating at a loss when excluding banner ad revenue. But, according to our model, this revenue cannot compensate the losses generated by video distribution. The modelling exercise helps reveal the limits of the long-tail model for video services: • the long-tail approach does make it possible to aggregate monetizable traffic in the form

of advertising; • the costs associated with distributing the video are quickly outweighed when the content

is a program with little added value that has no appeal for advertisers.



7. Company profiles Many companies are trying to position themselves in the CDN market. However, those companies have very different origins and goals (or interests), which lead to very different strategies that are difficult to compare.

7.1. Traditional CDN providers

7.1.1. General overview Traditional CDN providers have a strong natural advantage in terms of technology for content delivery. Many new entrants in this market are not trying to play catch-up and compete directly with established players, instead preferring to partner with established CDN technology providers. But CDN providers are facing major business challenges with the limited growth of the market for static content and the non-profitable business video sector. Therefore, they are trying to diversify into the IaaS business. For now, they can already be strong contenders for software-based solutions and services that do not require advanced grid computing features or virtualization. To become real challengers in this market, they need to evolve their current architecture and its numerous assets (data centres). So far, Akamai is the only player to have really begun that transition, while CDN players with a media focus, such as Limelight, are partnering with other cloud players to leverage their infrastructure. Here, the competitive advantages of CDN players are: • Technology aspects in terms of acceleration delivery and marketing tools (consumption

reporting, advertising). Main partnerships with telcos (for instance) are initially contracted via this range of tools. Most of the players own technology patents.

• Robust value proposition: their commercial proposition is also based on a solid SLA and overall network cost reduction for content providers.

However, despite those aspects, they admit structural inhibitors to their development: • Network dependency: CDN players are very dependant on Tier 1 for their QoS

guarantees (that they cannot manage) while they propose nearly 100% SLA to their clients with high (and therefore risky) penalties. However, this is not a major inhibitor as they position themselves as virtual network operators and use multiple telcos for a same route.

• Too many small players: The market is structured by two dominant players, Akamai (with a market share of more than 70%) and Limelight. Others are too small to compete on a global basis.



• Previous clients as new competitors: The traditional CDN market will suffer from the arrival of new entrants. Amazon is now a direct competitor with CDN providers, even though it is not focused on the same segment (SMBs vs. large accounts). But the move from Microsoft, which is rerouting its content traffic through its own delivery network, is a negative signal for Akamai and Limelight. Akamai and Limelight used to rely on large content providers such as Microsoft.

• Price competition: The IP transit tariff decline has an impact on the CDN price. Moreover, among new entrants, some propose low-cost solutions (CloudFront from Amazon), leading to stiff price competition. The net margin could suffer from the competition, and the CDN business could suffer as well.

• Virtualization technologies: To expand into the IaaS business, CDN players would have to incorporate key technologies that are not necessary for CDN operations.

Table 7: CDN players' positioning

Player Activity Key description

Velocix Hybrid CDN P2P player in 2007 Partnership with Verizon Acquired by Alcatel Lucent in July 2009

Chinacache CDN Specialized in Asia (China)

Ipercast CDN France

Internap CDN Acquired Vitalstream

Bit Gravity CDN 15 million USD investment from Tata Communications in September 2008

Edgecast CDN Partnership with Navisite Partnership with DT Partnership with Global Crossing (Telco)

Pando Networks P2P Partnership with Level3

Itiva P2P Funding by Cisco

Raw Flow P2P Strong relationships with Velocix and Chinacache

Kontiki P2P Major clients (BT for instance) Acquired then sold by VeriSign

Source: IDATE

7.1.2. Akamai

Overview Akamai provides services for accelerating and improving the delivery of content and applications over the Internet, from live and on-demand streaming videos to conventional web page content and tools that help people do business. Akamai states that it has a pervasive platform with 48,000 servers in 70 countries with nearly 950 networks. Akamai is the world’s leading CDN player in terms of revenue, and has made several acquisitions which have helped reinforce its market leadership.



Table 8: Akamai acquisitions

Acquired company

Activity Date Amount

Speedera Networks

Content delivery services distributor June 2005 US$ 142.2 million

Nine Systems Media management tools December 2006 US$ 160 million

Netli Service provider for accelerating applications and content over the Internet for the business market

February 2007 Against 3.2 million shares of common Akamai stock

Red Swoosh P2P solutions provider April 2007 US$ 15 million

Acerno Online advertising tool November 2008 US$ 95 million

Source: IDATE

Akamai has a broad portfolio of customers from various industries: • Media and entertainment, • Commerce, • High tech, • Public sector. In mid-2009, Akamai reported that it delivers 20% of all web traffic.

Value proposition Akamai tends to address the needs of all clients and content types (both B2B and B2C) in terms of content and application delivery, thanks to a highly distributed architecture. This overall strategy can best seen by looking at the recent reorganization of its product portfolio: • Content delivery and downloading: Akamai Media Delivery (deliver and monetize

medias), Akamai Stream OS (media management), Electronic Software Delivery (software delivery), EdgeSuite Delivery (website reach and performance);

• Website accelerator, e-commerce (B2B): Dynamic Site Accelerator, Dynamic Site Accelerator Enterprise;

• Application performance solutions (to accelerate dynamic applications): Web Application Accelerator.

Pricing and revenue model Akamai derives income from the sale of services to customers that sign contracts with terms of one year or longer, as recurring revenue contracts or long-term contracts. These contracts generally commit the customer to a minimum monthly level of usage with additional charges (estimated at 25%) applicable for actual usage above the monthly minimum. In recent years, however, Akamai has entered into an increasing number of customer contracts that have minimum-usage commitments based on periods of 12 months or longer. Clients can choose between the following pricing models: • per Gb, • 95th percentile, • number of pages viewed.



Finally, Akamai claims its success is due to these key elements: • patented technology; • network: thanks to an important annual investment (more than 10% of its revenue each

year); • brand equity: 100-plus of the Fortune 500; • Akamai is currently looking at cloud computing technology to generate an added

source of revenue with its EdgePlatform (its distributed computing platform); • its value proposition relies on performance (the key advantage for Akamai), scalability

and overall security (the main challenge of such a service).

7.1.3. Limelight Networks Founded in 2001, Limelight Networks is one of the leading providers of high-performance content delivery network services. It issued an IPO in the first quarter of 2007, amassing $205 million. In 2008, Limelight Networks registered revenue of $103 million. Its top 20 customers still represent 50% of its total revenue. Limelight Networks claimed to have over 1,300 active customers at the end of 2008, but it also revealed that it lost a major big-traffic customer in the summer of 2007: MySpace.com. Beyond the delivery aspects, Limelight Networks provides some service tools for its customers such as content creation, content management and consumption monitoring. These services are not provided directly by Limelight Networks but in partnership with Tier companies. In May 2009, it acquired Kiptronic, an advertising tool company, to reinforce its tool capabilities. Moreover, in December 2009, it acquired EyeWonder, a rich-media ad platforms for 110 MUSD. Thanks to those acquisitions, it aims to compete with Akamai’s advertising solution. Just as many CDN players do, Limelight Networks proposes different pricing models to best fit specific needs for each customer: • 95/5 bandwidth peak – approximately 40% of contracts; • total data transferred per month – approximately 60%; • same unit cost for volumes over a set minimum, so the prime incentive in negotiations is

to bring down the unit cost up front by committing to larger volumes. Unlike several competitors (Akamai for instance), Limelight Networks operates its own optical backbone. Its CDN locations in the United States and Europe are interconnected via this dedicated optical backbone that includes redundant 10 Gbps connections to every location. Its logical CDN locations in Asia are connected to its U.S./European network via managed circuits. In 2008, Limelight signed a partnership with Rackspace for its cloud service (delivery service), but is not really active in the cloud space.

7.1.4. CDNetworks CDNetworks is a Korean CDN services provider founded in 2000. It is the world’s third largest CDN player and Asia's number one CDN in terms of revenue, targeting rich media and online gaming customers. It has more than 75 full-service PoPs in 45 regions around the world, and provides a global capacity of more than 1,000 Gbps. For its expansion, it received $96.5 million from venture capital firms. In 2008, it registered an increasing growth business in the United States (up 300%). Moreover, to reinforce its global presence, in 2008 it acquired a competitor Panther Express. Finally, it signed a reselling partnership with Telecom Italia in 2009.



Figure 13: CDNetworks’ revenue growth

Source: CDNetworks

7.2. Telcos

7.2.1. General overview • Telcos should be the natural players for managing bandwidth issues for web players, as

Internet traffic is going through their backbones (Tier 1) and/or their last-mile networks (ISPs). CDN is in fact a natural extension of their infrastructure.

• However, telcos are having difficulty monetizing their network pipes due to the earlier development paths of the Internet. Most players have been able to quickly distribute their services with limited bandwidth costs, thanks to peering agreements. Over-capacity inherited from the telecom bubble has also driven transit prices way down.

• Current traffic trends, especially the influence of video (more asymmetric than traditional web pages or email), have pushed telcos into a situation in which their networks are dealing with large amounts of traffic for which they get limited or no revenue; P2P players pay nothing, while CDN players pay only the first carrier, then exchange the traffic through peering with other telcos.

Telcos have logically tried to react by developing CDN and P2P solutions since 2008 (and even 2007 for Level 3), at least inside their own network infrastructures. For most telcos, especially those with access networks, CDN initiatives do not focus on generating new revenue but instead reducing the cost of the traffic telcos must already carry. The focus of ISPs is on their own access networks to deliver content for the open Internet, as well as around their IPTV/set-top box offers. In these industries, telcos have multiple competitive advantages: • Network expertise: Unlike other market players, they own and control the network, and

are adept at providing a high quality of service (QoS) that stems from their network expertise.

• ISP business: Most network operators have strong relationships with Internet end users while they are also Internet service providers. With this role, they could manage a specific QoS for their subscribers.

• Network tools user: They can benefit from network technology improvements that allow them to better manage their network traffic, such as deep packet inspection tools.



• Huge financial power: Telecom operators have at their disposal financial means that other market players (CDN providers, web hosting services and even Internet giants) lack. This financial advantage makes acquisitions and data centre investments possible.

However, telcos have to face major issues when designing full-scale offerings: • Peering agreement: Only the Tier 1 is remunerated through an IP transit contract.

Subsequent links are based on IP peering agreements, free of charge most of the time considering the traffic is symmetric. This affects the economics of the system, because growing video consumption means that the traffic is no longer symmetrical. Telecom operators prepare countermeasures by denouncing current business practices.

• Deployment: Telcos need to build new infrastructures with global coverage from scratch to compete with existing players and their advanced solutions.

• Business models: CDN and cloud computing business models rely on low margins but require huge investments, making it less attractive for telcos that already support major investments in other segments with higher margins. To limit the required investments, some telcos have partnered with CDN players to integrate their technologies.

Table 9: Positioning of main telcos in the CDN business

Player Positioning Other elements

TP Carrier + ISP Owned by France Telecom

AT&T Carrier + ISP

Deutsche Telekom Carrier + ISP Partnership with Edgecast

TeliaSonera Carrier + ISP CDN targeting mainly gaming

Global Crossing Carrier Partnership with Limelight and EdgeCast

France Telecom Carrier + ISP Deployment in Poland through TP

BT Carrier + ISP Partnership with Kontiki (iPlayer)

Level 3 Carrier Savvis CDN unit acquisition

Telecom Italia Carrier + ISP CDNetworks reseller (partnership)

Telefónica Carrier + ISP Member of P4P working group

Verizon Carrier + ISP Member of P4P working group Partnership with Velocix

Virgin Media ISP Separate trials with Cachelogic and Level3 Study to build an internal CDN

Source: IDATE

7.2.2. AT&T

Overview AT&T is the first major telco in the CDN market. In late 2007, AT&T announced its intention to launch a CDN solution. It had already unveiled its network map. In 2008, AT&T planned to have an increase in its caching and live streaming capabilities. It intended to invest over $70 million in 2008 for CDN aspects, targeting content delivery to all platforms (TV, mobile and web), partnering with ExtendMedia, Qumu and Stratcache for software aspects regarding encoding, live stream management and advertising to offer a "one-stop-shopping" experience.



Figure 14: Global map of AT&T’s CDN (with POP description)

Source: AT&T

Technology In 2008, AT&T unveiled a new approach to video delivery solutions. According to AT&T, this technology is supposed to be focused on its VoD service but could be extended to other services. It is based on CPM technology (Cooperative Peer-assisted and Multicast) which can be described as a hybrid solution that combines P2P and multicast. For AT&T, the bandwidth savings could be very important compared with unicast networks. The architecture could be compared to a hybrid CDN. First, with the multicast approach, the content is delivered and replicated to regional routers or servers, very close to the user (closer than CDN servers, for example). Users could then use P2P technology for the rest of the content delivery chain. Hence, content providers could observe bandwidth savings (thanks to limited transit costs).

Figure 15: AT&T architecture

Source: AT&T

AT&T planned to have nearly 400 Gbps of global capacity for its entire CDN offering by the end of 2008. While this is a good start, it is low compared with other CDNs (15 to 20% of the capacities of Limelight).



7.2.3. Level3 Level3 was founded in 1998. The company was focused primarily on building a world-class, continuously upgradeable network that was fully optimized for IP, and selling bandwidth and related activities such as collocation. Level3 has been actively engaged in a series of acquisitions since 2003, in bid to forge a strong foothold in voice (traditional and VoIP) markets, while content delivery has become a major priority of the company’s growth strategy since mid-2006 (see below). This strategic shift was achieved through two major acquisitions: Savvis and Servecast. The move was seen as inevitable, as a large share of the transit market was shifting to the CDN market, especially due the increasing popularity of video and the massive traffic it generates. The company’s key distinguishing features, and so its main selling points, are clearly its backbone expertise and its managed QoS. However, Level3 owns fewer nodes and servers than its main competitors. Its pricing model is based on traffic: 95/5 bandwidth peak (as for its transit solution).

7.2.4. Verizon The second largest telco in the United States has also had its eye on the CDN business since late 2008. Prior to that, it had been focused on optimizing its network, and was involved in different research programs. The most advanced working group is its P4P group. The main principle behind the technology relies on sharing ISP network topology with P2P software players to help them route traffic in a more advantageous fashion. It is possible to diminish the number of hops or to connect peers who are closer to one another, as they are using the same provider or the same backbone infrastructure, instead of selecting them randomly. In November 2008, Verizon partnered with Velocix, a hybrid CDN player (coming from the P2P market) and a member of the P4P consortium. The main goal for Verizon is to support a CDN service for media companies looking for faster service delivery for broadband FiOS residential service, and its optimization for peer-to-peer networking.

7.2.5. BT BT is Britain’s incumbent carrier, and in ISP in the UK. BT has announced that it will offer some CDN services by spring 2010 through BT Wholesale, targeting more traffic management and most likely focusing on Europe. BT plans to build its own CDN from scratch (not through acquisition/partnerships like other telcos).

7.2.6. France Telecom (Orange) France Telecom is the incumbent French telecom operator and an ISP in multiple countries, including France, the UK and Spain. Despite some CDN R&D studies, no commercial offering is available. However, it also has begun a CDN deployment through its subsidiary in Poland (CoDEEN).

7.2.7. Deutsche Telekom German carrier Deutsche Telekom got into the CDN business through a reseller agreement with EdgeCast in early 2009. It provides CDN services via the Edgecast global network despite having its own global network. Additionally attracted to potential network costs reduction, the main interest for the operator now resides in tool capabilities, such as the reporting, billing and provisioning features.



7.3. Internet giants

7.3.1. General overview Internet giants have understood that building an advanced infrastructure is key to delivering their services with some scalability and strong performance. Players such as Amazon and Google have clearly differentiated themselves with high levels of uptime and strong capacities for statistical analysis of large amounts of data (search, recommendations). Opening their infrastructures or platforms to third parties is not so much a revenue generator as an opportunity to get paid for some of their unused capacities for both CDN and cloud computing. It is also a way to gather new data that can help to improve statistical analysis. But those offers are mostly low cost and with limited SLAs. Efficient delivery of data is a core activity of their operations. These players could therefore represent a real threat for traditional CDN providers, for different reasons: • Revenue loss. The Internet giants were their among their biggest customers in the past,

thanks to the impressive traffic on their websites. Internet giants’ CDN costs tend to be significant and some prefer to handle it internally or to acquire a CDN player. For instance, Microsoft launched its own CDN for internal use (in the short term) but it could eventually be expanded for commercial deployment. Plus, multiple acquisitions (Microsoft-Limelight, Google-Akamai) have been rumoured in the recent months. This Microsoft CDN announcement is bad news for CDN providers as they will use a major client and a sizeable chunk of their revenue. Traditionally, the top 20 customers have represented 50% of CDN players’ total revenue, but this is tending to change.

Figure 16: Limelight Networks’ customer concentration

Source: Limelight Networks

• Market landscape move: considering their new positioning, they will compete directly with traditional CDN providers, with cheaper offerings like Amazon. However, they do not target the same customers : - On one the one side CDN providers target large customer (large businesses) with

huge traffic and whose platforms require high QoS and high level SLA. In this case, QoS is much more important than the distribution costs. However, traditional CDN providers will see the slash of the big consumers’ revenue such as video platforms, social networking platforms.



- On the other side, Internet players target small businesses regarding the SLA absence and the flexible pricing model. From them, the cost is more important than the high level QoS.

• Better positioned for the cloud market: Internet giants have major assets to operate both businesses and especially in the cloud: - Data centre required for traditional activity: Internet giants have to build a massive

infrastructure of servers in order to store their growing profiles database. Hence, they can capitalize on it to offer other services and generate additional revenue. Indeed, they are used to managing data centres for their traditional core business as well as their new services. As video is getting popular and therefore widespread on the web, every internet company (including Internet giants) must store billions of video clips, which requires massive storage capacity.

- Huge financial power: Internet giants also benefit from their strong financial base, thanks to a lucrative core business in which they are dominant players (online search for Google, software for Microsoft, e-commerce for Amazon, etc.). Hence, they can rapidly acquire data centres and servers and/or direct competitors. For them, data centre acquisition is not a barrier to enter this market.

However, Internet players admit several drawbacks: • Data security and privacy in the cloud market: Data security is both virtual (where the

data is located and what happens in case of data centre outage) and physical (data centres could be compromised physically). Another major concern is privacy, as Amazon or Google could be seen as “Big Brother,” controlling too much data.

• SLAs: The offerings of the Internet giants are not really competitive where service levels are concerned; SLAs are key for video delivery and even more so for critical data management.

Table 10: Main Internet giants strategies

Player Core business Key description

Amazon Online commerce CloudFront (Amazon Web Services)

Google Online search CDN test (not yet deployed)

Microsoft Software Edge Content Network (for internal use for the moment)

Source: IDATE



7.3.2. Amazon

Overview Amazon was one of the early Internet giants to propose an infrastructure that enabled computing capabilities. From a retail activity (B2C), Amazon converted its business into a third-party player (B2B2C) by offering, in the first stage, a way for retail SMB owners to expand their brand on Internet. With its Amazon Web Services, Amazon goes beyond that: It relies on its proprietary infrastructure (on which it spent more than $1 billion in the 10 past years) to provide new services such as cloud computing or storage to any business. Obviously, this new activity is expected to generate new applications and new revenue, based on storage and traffic (data transfer). The CDN service included in the Amazon Web Services has been baptised Amazon CloudFront. The other main building blocks of its cloud service are Amazon S3 (storage functionality) and Amazon EC2 for virtualization, computing service.

Value proposition The market proposition is built around: • reliability (data centre availability), • global coverage (main interest in this market: push the content the closest to the user

through edge locations), • cost benefits (pay-as-you-go pricing model), • ease of development: simple tools like APIs and most common programming

environments, and • Scalability of the infrastructure.

Architecture Amazon has a highly distributed network of data centres. They are located mainly in the U.S. and Europe (close to potential clients), but are also are present in Asia (Hong Kong and Japan). This architecture was unveiled at the launch of the CloudFront service, so Amazon could position itself as a credible competitor to traditional CDN providers.

Figure 17: Amazon data centre map

Source: Amazon



7.3.3. Microsoft After launching its cloud service (Windows Azure), Microsoft is building its own CDN using the technology that it licensed from Limelight Networks. Known as the Edge Content Network, Microsoft aims to substitute its current CDN partners (Akamai, Limelight, ChinaCache and Level3) for its own content delivery. In 2009, 40% of its content (video, large files such as software and security updates) would be delivered through its CDN (vs. less than 5% in 2009). Microsoft claims that video delivery accounted for 10% of its all content delivery in 2007 and will grow to 55% in 2010.

Figure 18: Microsoft delivery forecast

Source: Microsoft



8. Outlook: towards cloud computing

8.1. Business motivation Most players have focused in recent years on the opportunities provided by content delivery and have tried to replicate the initiatives of early entrants in the market, such as Akamai. Network optimization is still a necessary cost control measure for everyone. As it stands, however, there are no sound business models for content delivery: • Content providers. A great many content providers are struggling to generate revenue

from advertising, especially in the current global downturn, while paid VOD is still a marginal money maker on all platforms. Most consumers are not ready to pay for video over the Internet, while advertisers are still reluctant to use (and pay for) video services in any significant way to promote their services.

• CDN players and providers of other tools. If content providers struggle to monetize their offerings, they will either pressure their suppliers to lower prices or go out of business. In both cases, this implies that tool providers are also having trouble establishing clear business models.

In the meantime, new major types of usage are developing on the Internet for business and corporate users around the software industry – the growth of business software delivered as a service over the Internet (SaaS) being one of the most significant changes. Like multimedia content, SaaS requires an advanced infrastructure to operate properly with distributed servers within the Internet, which implies that CDN and cloud computing might be converging. But cloud computing could represent a better opportunity as business users are used to paying for software applications, and can generate savings by switching to web-based operations since cloud computing providers operate profitable businesses. Many CDN players are therefore examining the possibility of shifting their strategy toward cloud computing.



Figure 19: Cloud computing value proposition from Akamai

Source: Akamai

8.2. Technical motivation The Internet’s tremendous development in recent years has triggered demand for new online services. The Internet has become a major technical enabler for software delivery, but it is also radically transforming the industry’s business models (including the growth and adoption of usage-based pricing, development of online advertising). Cloud computing represents the combination of several major trends of other forms of computing, such as utility computing (on-demand allocation of resources), grid computing (distributed computing around a cluster of networked, loosely coupled computers) and applications delivered as service through the Internet.

8.2.1. Cloud computing architecture segmentation Cloud computing covers numerous aspects, and we can break it down into several segments: • Software as a Service, or SaaS – renting software over the Internet, such as Google

Apps, Netsuite, Salesforce. • Platform as a Service, or PaaS – rental of application servers (or tools) over the

Internet, such as Windows Azure, Google App Engine. Both SaaS and PaaS are new ways to monetize and distribute software.

• Infrastructure as a Service, or IaaS – rental of storage and computing power over the Internet. IaaS is an IT infrastructure-related service (hosting, computing power available online) and a key enabler for SaaS and PaaS.

Cloud computing today accounts for just a small fraction of the overall software and services market, but it is growing rapidly and its share of the software market will increase in the next few years as companies have a number of incentives to switch to a web-based solution.



A cloud-computing architecture comprises six major layers (see the figure below):

Figure 20: Typical components of a cloud computing architecture

Application

Services

Storage

Infrastructure

Platform

Datacenters spread over the world, accessible through virtualization and/or parallel computing(eg MapReduce, EC2)

Databases and storage systems (eg S3, SimpleDB, BigTable, …)

Application framework development(eg Django, Ruby on Rails, Microsoft ‘s Azure, Force.com, …)

Remote application, SaaS (eg Google Apps, Salesforce, Skype, …)

Web Services, from the provider or froma third party (eg OpenID, Google Maps)

Client Specific software client for delivery of cloud services (eg Google Gears)

User

« The Cloud »

Application

Services

Storage

Infrastructure

Platform

Datacenters spread over the world, accessible through virtualization and/or parallel computing(eg MapReduce, EC2)

Databases and storage systems (eg S3, SimpleDB, BigTable, …)

Application framework development(eg Django, Ruby on Rails, Microsoft ‘s Azure, Force.com, …)

Remote application, SaaS (eg Google Apps, Salesforce, Skype, …)

Web Services, from the provider or froma third party (eg OpenID, Google Maps)

Client Specific software client for delivery of cloud services (eg Google Gears)

User

« The Cloud »

Source: IDATE

8.2.2. Comparison of architectures If CDN providers are considering the possibility of providing cloud services, it is because the two architectures have several points in common, including but not limited to the following: • data centres/server-based architecture: both architectures are structured around data

centres hosting numerous servers; • distributed architecture: both types of players have multiple data centre locations to

offer mirroring/replication and virtualization in order to offer solutions with strong performance;

• network dependency: both players own a server-based architecture but have to partner with Tier 1 telco for transit connectivity. In that sense, they are network-dependant and generally act as some kind of virtual network operator (a customer buys both service and bandwidth). Some players (such as Limelight) have a small part of a network but also sign deals with telcos;

• mirroring: mirroring is a CDN feature, meaning that content stored on a server is replicated on servers within all data centres (managed by the same CDN provider) worldwide. The same functionality is also available from cloud providers under the “duplication/replication” feature;

• acceleration capabilities: both players provide route optimization and low latency services. Thanks to replication functionality, content delivery is routed to the nearest edge location.



They still differ in a few respects, however: • types of services/applications: Data delivered by CDNs is mainly content (static

images, Flash animations and video), whereas cloud computing services mostly deliver content related to business applications. While the underlying infrastructure used to deliver those two types of applications is very similar, associated technologies (for instance the type of servers) are very different. For example, video requires specific streaming servers and/or specific technologies (such as Flash, even in progressive download);

• virtualization: Unlike computing services, CDN services are not really based on virtualization technology. An entire content item is generally stored on a single server; popular content items may be replicated closer to the user. There is therefore no real virtualization in the case of CDN, as the content is not separated into chunks stored virtually anywhere. Implementing some virtualization technologies into CDN architectures is still possible but has not been helpful for delivering digital content or web pages;

• traffic patterns: CDN solutions are used mainly to ensure proper delivery of traffic. CDN definitely improves the delivery for blockbuster services, but is not more efficient than unicast delivery for one-to-one personalized traffic. CDN is therefore mainly used for the delivery of the same data (web page, video) to numerous users. On the contrary, this is not the idea behind IaaS and cloud computing, which are mainly enablers of personal software and data and unaffected by network aspects as they require less bandwidth. Yet, especially within large corporations, users are working more and more collaboratively on the same shared applications and are therefore requesting the same content at the same time.

8.3. The cloud computing opportunity The IaaS market landscape comprises numerous players without a clear structure. Some of the key characteristics associated with this market are: • fragmentation: IaaS is still a very recent market and is therefore very fragmented.

Amazon and more recently Google have gotten a lot of press overage but are challenged by many other providers. There is therefore no clear leader on this market, on which no company is giving clear revenue figures;

• concentration around huge players: except for a few pure players, most IaaS players are huge companies. To be able to offer some IaaS services, players need to develop an expensive and advanced infrastructure that only large players can afford. This is only valid for IaaS and not for other market segments of cloud computing like PaaS or SaaS on which there are numerous small players positioned on the different sub-segments of the software industry.

The major features of the IaaS market are: • end-to-end and indirect solutions: Customers looking for IaaS solutions will not

necessarily assemble the different building blocks themselves; they will generally buy something fully packaged. Most of the end customers will, in fact, buy SaaS services built on top of IaaS rather than IaaS services. A significant share of IaaS customers should therefore be SaaS providers themselves;

• dominance of U.S. providers: Most of the players are U.S. based and their offerings are therefore sometimes U.S. focused. Some of them do not even have data centres outside of the States. For instance, GoGrid only has a unique data centre in San Francisco;

• price differentiation: Business models are largely similar, based on a pay-as-you-go model. Pricing typology may vary, however. For instance, some offer reduced rates (depending on the volume) while other provides fixed rates (regardless of volume);



• competition with IT outsourcing: Cloud computing can be seen as the Internet version of the traditional IT outsourcing market, with similar commercial propositions, as well;

• security requirements: As the main challenge is clearly data security and protection, value propositions tend to focus on security aspects;

• moreover, players who have a global coverage (at least one data centre per continent) adopt different pricing typology. For instance, Amazon, which operates globally, charges higher rates for European clients and even more for Asian clients.

Even with the current global downturn, cloud computing is still growing quickly, with a compound annual growth rate close to 20%. IaaS is already a much bigger market than CDN, totalling $4.5 billion in 2008 and close to $9 billion in 2012. IaaS represents around 40% of the total cloud computing market.

Figure 21: Worldwide cloud computing market (In million USD)

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

SaaS PaaS IaaS

IaaS 3662.7 4594.0 5579.7 6669.0 7849.8 9052.5

PaaS 29.9 40.8 63.0 111.6 224.1 381.1

SaaS 4574.7 5401.6 6239.8 7328.5 8741.5 10506.7

2007 2008 2009 2010 2011 2012

Source: IDATE & PAC, based on their current study for the European Commission “Future of the Software and Software-Based Services Industry”



Implications for market players For traditional CDN providers, even if the growth of the CDN market is stronger, IaaS offers better growth prospects in the short term. Traditional CDN providers are making the logical step of expanding into online software delivery by enhancing their platforms. At the same time, traditional IaaS providers can capitalize on the fact of having to beef up their infrastructure to handle a greater influx of traffic to start offering video and webpage delivery services as well.

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