How Verizon Plans to Conquer the CDN Market

Verizon Communications (NYSE: VZ  ) wants to conquer the content delivery network market, a space currently dominated by Akamai Technologies (NASDAQ: AKAM  ) . A content delivery network, or CDN, is a large system of servers deployed in multiple data centers. Internet giants -- such as Facebook or Yahoo! -- rely on CDNs in order to make their websites and applications load faster.

As the amount of downloadable objects -- such as media files, graphics, and documents -- increases on the Internet, CDNs will remain vital. E-commerce players without CDNs are prone to lose market share, as end-users are becoming increasingly intolerant toward slow sites. Aware of this situation, Verizon bought CDN provider EdgeCast on Dec. 2013. Now, seven months after the acquisition, the telecom giant is rolling out a new CDN service aimed specifically at e-commerce merchants. This clearly isn't good for Akamai. How exactly does Verizon plan to steal market share from Akamai? 

Source: Verizon.

The plan
Roughly seven months ago, Verizon bought EdgeCast Network. Although no official price tag was given, TechCrunch reported that Verizon payed more than $350 million for the company.

The acquisition allowed Verizon to gain more than 6,000 customers. But more importantly, it allowed Verizon to get direct exposure to the CDN market, which is expected to be worth almost $13 billion by 2019.

The EdgeCast deal
EdgeCast appears to have been the best choice for Verizon to gain CDN exposure, as the CDN provider tried to differentiate its service by providing additional value to its customers, such as providing a CDN just for e-commerce companies, or launching its own DNS routing service. Such a strategy was working well for EdgeCast. It was rated the third-best CDN player in the industry in 2009, and it turned EBITA positive in the second quarter of the same year.

The new service
Seven months after buying EdgeCast, Verizon is finally rolling out its own CDN service aimed specifically at e-commerce players. The new service appears to have been built upon Transact, which was EdgeCast's e-commerce offering.

To differentiate its service, Verizon is providing special features, such as analytics services. It provides a feature that reduces potential interruptions during the busiest times of the year, such as holidays. More importantly, it provides a suite of advanced content protection solutions, which include SSL encryption technology and geo-filtering.

The release is consistent with Verizon's plans to gradually gain more market share in the CDN market. Since the acquisition of EdgeCast last year, the telecom giant has undertaken a major expansion of its CDN network, adding extra presence in more than 20 cities around the world. 

Competing against Akamai
To date, Verizon has had a relatively small CDN customer base compared with Akamai. But this could change as Verizon continues to aggressively target online retailers.

Performance is essential in the e-commerce world, because customers do not tolerate slow sites. This is why online retailers are spending millions to create fast-running sites. The CDN budget of online retailers is likely going to continue increasing together with the size of the overall e-commerce industry.

Verizon's service threatens the dominance of Akamai, which owns one of the world's largest distributed computing platforms and is responsible for serving between 15% and 30% of all web traffic. Akamai is also one of the world's most profitable CDNs. Its relatively high operating margin has so far proved to be sustainable, as Akamai has been traditionally regarded as the fastest option among CDNs because of its huge network size. If Verizon decides to use an aggressive pricing strategy to capture market share, Akamai could eventually be forced to offer more discounts to retain key clients, which could hurt the company's profitability. 

Final Foolish takeaway
Aware of the continuous increase of web traffic, and the need of online retailers to provide a super-fast service to their end users, Verizon is releasing a special CDN for e-commerce applications. It is too early to predict if Verizon will be able to conquer this segment. So far, its strategy appears to be based on providing added value, rather than using an aggressive pricing strategy, to capture market share from Akamai. 

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Comments from our Foolish Readers

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  • Report this Comment On July 08, 2014, at 1:02 AM, CDNGuru wrote:

    Victoria, home much is VZ paying you to write this? Every CDN has come out to "conquer Akamai" in the last 10 years. None have succeeded.

    Level 3 has/had a nice relationship with StrangeLoop and they were going to take over e-commerce and put Akamai out of business. They managed to sell a dozen or so deals and made no dent in the market. Today, LVLT is selling mostly super low margin Media and Entertainment (video) deals. They fired most of their CDN employees in the last couple of years and now only a handful of specialist know anything about it.

    The features you mention are not revolutionary and certainly won't shutter Akamai. What makes Akamai powerful is it's ability to scale (over 160K servers) and to do ANYTHING. There's never a situation where a customer needs something specific that Akamai can't figure out a way to do it. It's because of this, companies like BestBuy, HomeDepot, Walmart, etc will never leave Akamai.

    Sure someone can take a few bites out of the SMB/Mid Market of $20M/year or less. But that's OK, Akamai doesn't really want that business anyway. If anything, I think CloudFlare is more of a threat than Verizon/Edgecast is.

    In my opinion, VZ will mess up their CDN business just like Level 3 did. Give it a couple of years and the once "independent" department will be brought into the mainstream. They will start forcing their sales people to have a CDN quota. They will have CDN overlay sales specialist (who were former Edgecast Sales People). The regular Telco sales people won't understand CDN and won't want to sell it. It will be seen as difficult activations and support will suffer.

    How long will VZ want to sell a commodity with very small margins which is quickly racing to be sold for free? Amazon is already giving away free CDN services to it's smallest customers.

    And by the way, VZ is still a very large Akamai customer and will continue to be for quite some time. What does that tell you about VZ's confidence in their own product.

  • Report this Comment On July 08, 2014, at 8:36 AM, 5574tjh wrote:

    I think the issue Verizon is going to have is TRUST.

    If you were any of the other ISP's would you trust Verizon?

    Also the issue of security plays big with the other ISPs and e commerce.

    Not sure this is the treat to Akamai you make out. Why is Verizon still using

    Akamai .

  • Report this Comment On July 08, 2014, at 11:52 AM, CDNGuru wrote:

    @5574tjh VZ is a large Akamai reseller. VZ customers demand Akamai, not Edgecast. So they will continue to sell VZ to enterprise customers and Edgecast to everyone else.

    For a lot of VZ customers, it's just a check box for them, they REQUIRE Akamai and they have a contract with VZ so they buy it that way.

    I don't see that changing.

  • Report this Comment On July 08, 2014, at 11:49 PM, DanRayburn wrote:

    Re: "CDNGuru" comments.

    "Level 3 has/had a nice relationship with StrangeLoop and they were going to take over e-commerce and put Akamai out of business"

    Says who? Level 3 never came out and said they were going to "put Akamai out of business". Not to mention, the Strangeloop solution wasn't targeting commerce customers as much as other verticals.

    "Today, LVLT is selling mostly super low margin Media and Entertainment (video) deals."

    It's not "low margin" to Level 3 as they own the network and have much better margins on those kinds of deals than someone like Akamai can have.

    "They fired most of their CDN employees in the last couple of years and now only a handful of specialist know anything about it."

    That's not accurate at all. There are more than a "handful" of employees at Level 3 selling CDN who understand their product offering.

    "Sure someone can take a few bites out of the SMB/Mid Market of $20M/year or less."

    Combined, Level 3, Limelight and EdgeCast will do almost half a BILLION dollars in CDN revenue this year. That's a lot more than the "20M" you mention.

    "In my opinion, VZ will mess up their CDN business just like Level 3 did. "

    Level 3 didn't mess up their CDN business, in fact, last year they passed Limelight to become the #2 CDN in the market, based on revenue:

    http://blog.streamingmedia.com/2013/10/level-3-surpass-limel...

    "And by the way, VZ is still a very large Akamai customer...."

    No they are not. Stop making statements when you don't know the details. For all of last year, Verizon re-sold about $60M in Akamai services. That's about 4% or less of Akamai's total revenue. That's not a "very large" customer and that number will go down this year as Verizon plans to rely more on EdgeCast's portfolio.

    "VZ is still a very large Akamai customer and will continue to be for quite some time."

    No they won't. Verizon's re-selling of Akamai services in 2014 will be 2% or less of Akamai's total revenue. Next year, it's expected to be zero.

    Stick to the facts and the numbers.

  • Report this Comment On July 09, 2014, at 11:02 AM, CDNGuru wrote:

    Dan, who's to say your numbers are right? Where are your facts?

    Did you see Internal memos from marketing and management at LVLT talking about the big push to enterprise and taking marketshare away from Akamai? Did you know the whole team of sales and engineers going out to sell e-commerce and enterprise? Personally? I doubt it.

    Do you know that just in the last 2 weeks Akamai added MORE people to their VZ support team? I doubt it? Why would they ADD people to support a customer going away?

    Compared to other Akamai resellers, VZ is one of the largest. So what if VZ doesn't contribute much to the bottom line. AKAM is smart not to put all their eggs in one basket. So I say they are a very large Akamai reseller.

    I can count on 2 hands the people at LVLT who are out selling CDN deals. That sure sounds like a HANDFUL to me. Do you know them personally? I doubt it?

    Dan how many times did you say Limelight was going to be sold? Imminently? It's gonna happen any minute now! How many times have you been right about that?

    Listen you have your opinions, I have mine. LVLT may sell a lot of CDN dollars. But their ability to innovate and take marketshare is limited. What's going to happen to LVLT when Netflix and Apple finally go away? All that CAPEX spent building custom servers for Netflix. **POOF**. That's ok LVLT is the king of hiding bad money, they learned it from Global Crossing.

    They had a prime opportunity 2 years ago to really make a huge difference. But management started slashing employees so they could turn a profit (for the first time in 15 years). Now Wall Street loves them. But it's a ghost ship. Ask any sales person over there. They all struggle getting internal resources. Their ops guys are working double-time because they don't have people to fill the shifts and won't hire. Travel was cut back, you have to get VP approval for a lot of things.

    Unlike you Dan. I OWN/OWNED stock in these companies and get pissed off when management makes stupid decisions.

    So again, you have your opinion (which has been proven time and time again to be wrong). And I have my opinion. I stand by it.

  • Report this Comment On July 09, 2014, at 11:15 AM, CDNGuru wrote:

    @Dan Rayburn.

    ""Sure someone can take a few bites out of the SMB/Mid Market of $20M/year or less."

    Combined, Level 3, Limelight and EdgeCast will do almost half a BILLION dollars in CDN revenue this year. That's a lot more than the "20M" you mention."

    To clarify my comment. They are going after companies who do $20M/year or less which is what Akamai considers "small companies".

    So added up, they sure do a lot of business, but individually, they are "small".

  • Report this Comment On July 09, 2014, at 9:25 PM, DanRayburn wrote:

    "Dan, who's to say your numbers are right? Where are your facts?"

    Ask the companies involved. Read what the companies have said to those who report on it.

    After the Verizon deal, Akamai's management was telling many people the size of their reseller deal with Verizon. It's not a secret. Wall Street knows it well, it's detailed in many reports.

    The numbers are what they are.

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