Why Yahoo! Bought a Content Delivery Network

Yahoo!'s (NASDAQ: YHOO) latest acquisition is content delivery network -- CDN -- start-up PeerCDN, which promises a completely new kind of CDN service, by relying on peer-to-peer traffic between users to lower bandwidth costs. The move is surprising for the media-focused company, which earlier this year spent more than $1 billion to buy microblogging platform Tumblr.

The CDN industry is famous for its scale advantages. Akamai Technologies (AKAM +2.83%) dominates the market thanks to its more than 95,000 servers inside 1,900 networks. At the same time, several smaller companies such as InterNAP Network Services (INAP +0.00%) are struggling to remain competitive. Given the nature of the CDN business, why did Yahoo! acquire a small CDN company? More important, how does Yahoo! plan to use this company to improve its top line?

Source: PeerCDN

A special CDN company
Unlike CDN leader Akamai Technologies, which in order to serve as much as 30% of all web traffic needs to operate thousands of servers over 70 countries, PeerCDN does not rely on infrastructure to provide its services.

Instead, the company uses software -- pure JavaScript -- to reduce bandwidth costs by up to 90%. The company uploads the client's site -- images and other downloads -- over a peer-to-peer network made up of the visitors of the client's sites. This system allows PeerCDN to work without operating heavy infrastructure. Furthermore, because PeerCDN only takes over when it can provide better site performance, it can work together with traditional CDNs, such as Akamai and InterNAP.

Inside Yahoo!'s mind
Yahoo! may not be interested in using PeerCDN to enter the business of speeding up third party websites. This industry is very challenging, due to Akamai's predominance and to the fact PeerCDN isn't a complete substitute to traditional CDN services.

Yahoo! seems to be aware of the fact that dozens of start-ups have tried to compete against Akamai in the CDN sector during the last fifteen years, with many of them failing. For example, with 77 network service points all over the world, InterNAP has struggled to compete against Akamai for the past three years, with very little success. According to the latest earnings call, although InterNAP's total revenue is experiencing positive year-to-year growth, its IP services business unit -- which includes CDN solutions -- is down 7% compared with the third quarter of 2012.

Instead, Yahoo! CEO Marissa Mayer may be willing to use PeerCDN's technology internally. For example, according to TechCrunch, PeerCDN could help Yahoo! to deal with some mail outages that affected some of its users for a lengthy period of time.

Yahoo! is strengthening its media business

The start-up could also help Yahoo! to reduce bandwidth costs associated to audio and video content. Yahoo!'s recent focus on media and exclusive content -- as evidenced by some major industry hires, including former CBS News anchor Katie Couric and New York Times' David Pogue -- suggest the company will be delivering more media-rich content, and PeerCDN could be effectively used to minimize loading time and bandwidth costs.

Yahoo!'s emphasis on video

Clearly, Yahoo! is preparing more media offerings, from tech articles to videos. According to David Pogue himself, the company may be planning to launch a consumer tech website pronto.

However, Yahoo! seems to be particularly interested in video. It tried to acquired Hulu early this year. It has grown its menu of original video programming by buying the rights to the archive of Saturday Night Live and Burning Love TV programs. Two weeks ago it acquired QuikIO, a cross-platform streaming video start-up. The acquisition of PeerCDN fits well with Yahoo!'s video strategy.

Final Foolish takeaway
The latest Yahoo! acquisition is a CDN start-up. However, a deep look into the acquisition context, and Yahoo!'s media strategy, shows the company may not be interested in entering the CDN industry. Instead, Yahoo! may be acquiring all the tools it needs to create an innovative video platform.

Why Yahoo! Bought a Content Delivery Network

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