ATLANTIC-ACM's CDN Survey 2011
22 November 2011 |
The CDN market is a game of margins, vertical plays and network attributes. ATLANTIC-ACM surveyed 140 buyers of global CDN services to discover just what they want from these three areas.
Evolution in the global CDN market is accelerating, with buyers seeking greater diversity in solutions and providers aiming to compete on more than just price.
This hunt for specialisation on both sides of the buying line led ATLANTIC-ACM to survey 140 buyers of global CDN services to determine marketplace opinions and needs, and to generate fresh demand data. We found that buyers are optimistic, and why wouldn’t they be?
Internet content and applications continue to seep into every crack and crevice of modern society, driving retail demand that requires ever-greater capacity and new, customised services.
These marketplace realities are allowing CDN market leaders like Akamai, Limelight, EdgeCast and Level 3 to maintain strong growth rates as they simultaneously scale up current offerings and diversify their customer bases as well as product offerings.
However, market share is always up for grabs in sectors coloured by rapid innovation and emerging competitors directly competing for core services as well as looking to meet niche market demands. Amazon, Verizon and Contendo represent some of the better-known entrants with home-grown solutions looking for a piece of the CDN pie.
Carriers with resale arrangements are getting into the game as well, including AT&T, TELUS, Deutsche Telekom and other players attempting to meet customer demand – especially as part of enterprise vertical solution offers.
Vertical plays and the relentless pursuit of margin
Technology-driven industries sit at the forefront of technology adoption. The media and entertainment vertical, which itself has undergone its own digital technology revolution, remains a strong growth channel for CDN providers as multimedia content migrates online. In ATLANTIC-ACM’s research, media and entertainment represented the largest pool of vertical respondents at 35%. The tech sector itself represented the second largest group at 27%.
With new competition coming in many forms, today’s players need to sync product placement, traffic demand and network build-outs in order to profitably compete in tomorrow’s CDN landscape. Historically, buyers based the bulk of demand and spending on ‘core’ CDN products that facilitate the delivery of web-based content services.
This concentration of demand remains strong. On average, buyers reported that total CDN spending on core products, such as video delivery, represented an average of 43% of total CDN spending, while business applications and software delivery represented 23% and web page acceleration/improvement represented 22% (see figure 5).
Overall, nearly 60% of respondents purchased ‘caching: object delivery services’ and/or ‘video streaming’ (see figure 1). These offerings form the basis of a simple CDN product offering and strong demand for these basic services continues, particularly as demand for online streaming services skyrockets. However, the simplicity of these offerings has led to price emerging as a key differentiator among providers.
With demand for ‘plain vanilla’ CDN services and price compression on IP transit rates placing added pressure on CDN pricing, providers are pursuing higher-margin, value-added services in order to gain – or stabilise – overall margins. These services include mobile delivery optimisation, content protection and security and web application performance enhancement.
Survey data indicates that each of these products have a minimal CDN market penetration of 22% or less, although some represent substantial near-term growth opportunities driven by external forces (see figure 1). Demand for products like mobile delivery optimisation, for example, benefits from the massive growth in mobile device and application adoption and usage.
In fact, increasing market penetration of smartphones and skyrocketing consumption of mobile data are driving multiple avenues to growth as end-users access multiple types of content. Cisco’s Visual Network Index estimates that global mobile data traffic will grow by a CAGR of 92% from 2010 to 2015. Whereas smartphones represented 15% of data traffic in 2010, they will represent 27% by 2015.
In the US alone, ATLANTIC-ACM forecasts revenue from wireless post-paid data customers to grow by a CAGR of 10% from 2010 to 2016, and by 2016 represent an $88 billion market. Sticking with the mobile delivery optimisation example, this service represents the most underpenetrated CDN product (see figure 1) in ATLANTIC-ACM’s new study.
Media and entertainment customers represent the vertical with the highest penetration rate at 20%, which is not surprising given mobile video after demand (see figure 2). In total, 80% of all respondents plan to spend more on mobile optimisation (see figure 6), signalling widespread future adoption.
Strong interest exists in other services as well, including ad delivery – a demand point driven by buyers’ ongoing efforts to monetise their content. Work with vendors is evolving to determine the best way to approach ad delivery. While the jury is still out regarding CDN providers’ ability to optimise ad delivery, interest in this area demonstrates why providers are diversifying their product portfolios. All in, across all products, more than half of the buyers surveyed for each product plan to increase spending next year, indicating an environment ripe for innovation and niche solutions (see figure 2).
CDNs and the shrinking planet
The geographic expansion of web-based content continues to ring through the market and drive global CDN requirements. Content providers that historically have been regionally focussed are expanding their operations in order to offer content in new regions. For instance, hosted music provider Spotify recently entered the North American market after establishing an initial presence in Europe. US-based Netflix launched its streaming services in Canada last year and is currently expanding its service region to Latin America and the Caribbean.
Many other content providers have followed similar patterns as our proverbial ‘shrinking planet’ continues to drive demand for globalised content and services. These expansions necessitate wider distribution networks and greater infrastructure development.
ATLANTIC-ACM’s study of regional demand points from North American buyers finds they plan to increase spending across international regions by an average of 11% (see figure 4). In fact, North American buyers plan to increase spending more in the Asia-Pacific region than they do in North America and the lowest projected average spending increase in any geographic region is 9% (see figure 4), indicating expected growth across all regions of the world.
ATLANTIC-ACM expects that, with the continued globalisation of the internet, today’s CDN providers will have to hold a global delivery presence in order to continue to compete successfully for customers’ business in the long term, signalling consolidation and scope-driven mergers and acquisitions on the horizon.
Buyers are increasingly looking at network performance as the key driver of CDN purchasing decisions. ‘Network up time’, ‘throughput and speed of network performance’ and ‘first byte delivery’ – all network-related attributes – ranked as the top three drivers of CDN purchases in the study (see figure 3). Hence, even though the CDN space is heavily coloured by price compression, and the fourth leading driver of purchase is price, providers are paid for network performance, and the lack of a high-quality network should be viewed as a barrier to entry by any would-be CDN player.
This said, price becomes increasingly important as provider network quality stabilises, often becoming the chief purchasing driver. True to form, over the past several years, as CDN competition has ramped up, price has become a much more prevalent factor in buying decisions.
This is particularly the case for regional plays, as networks that share regions often deliver comparable levels of performance. In the end, a provider playing in this space that can differentiate an offering based on network services is capable of generating considerable demand and meeting buyers’ expectations while avoiding – or at least minimising – the extreme price compression that is prevalent throughout the market today. The strength of this play can be enhanced when best-in-class network performance is paired with high-margin, value-added service offerings.
Any carrier entering or expanding in this space needs to recognise that many other carriers are making the same assessments, which translates to greater numbers of players and even faster market evolution.
Carriers evaluating investments in the CDN space must weigh the costs of developing solutions versus driving partnerships with existing players. If the potential provider is able to come to market with a unique solution that deals with more than the simple delivery of web-based content, the investment becomes more attractive.
As potential customers are willing to pay up to tackle specific issues such as mobile device delivery optimisation and many other niche needs that have emerged with widespread adoption of multiple channels of content delivery, revenues will increase. On the other hand, if the provider is looking to focus simply on video delivery or caching, scale becomes paramount, as customers will require providers to have global solutions to compete with major market players.
While growth is still prevalent in today’s market, potential providers that don’t already have solutions deployed or in development today would be wise to recognise that the field is becoming crowded and specialised, and current pricing trends present the potential for diminishing return on investment.