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?
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.
Victoria Zhang has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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