Will Carriers Dominate the CDN Market?

Without a doubt, 2008 was the year that service providers moved forcefully into the content delivery network business. That movement is likely to continue in 2009 — and continue to dramatically change the CDN space.

Three major carriers made initial CDN moves last year: AT&T reorganized internally and announced content delivery as a strategic initiative; Tata Communications invested in BitGravity and partnered with that CDN player to launch a 300-point-of-presence global CDN network; and Verizon teamed with Velocix to deploy CDN locations at key places within its U.S. backbone network. But this is just the beginning, said David Vorhaus, analyst with Yankee Group.

“Of the biggest things we see happening in CDN right now — carrier encroachment into this market is the very top of the list,” Vorhaus said. “Tata, Verizon and AT&T all moved this year. But pretty much every large global carrier that I speak to has the idea that this is something that has to be on their strategic roadmap. If they don't already have a content delivery strategy, they know they need to be thinking about what one should be. They are either looking to do it internally, actively white-labeling someone else's service, or looking for a partnership or acquisition.”

It only makes sense for large ISPs to get into CDN to more effectively handle their own traffic, said Melanie Posey, analyst with IDC. In her research note on Verizon's Velocix partnership, Posey said that ISPs are under pressure to beef up their network infrastructures to deliver richer services, such as video, which consume large quantities of bandwidth. “ISPs have limited scope to recoup these costs by charging more for broadband access or by charging content providers to deliver content to their subscribers,” Posey added.

This bandwidth conundrum has led some, such as AT&T, to explore tiered pricing and others to consider network management technologies, which will allow them to prioritize traffic.

“However, the explosive growth of online video and other bandwidth-hungry applications — including ‘legitimate’ [peer-to-peer]-delivered services — requires collaborative arrangements among multiple parties to fix the economic disconnect between content owners/publishers, ISPs, CDNs and broadband subscribers,” Posey said.

Using CDNs helps alleviate the bandwidth crunch by moving video traffic off the network backbone and caching it in sites nearer to end users. That's why carriers getting into the CDN business makes sense, Vorhaus said. “They are using CDN first to deliver their own content or content riding internally over their own network,” he said. “The first benefit is better management of scarce network resources by caching content locally and getting it off the backbone.”

In Verizon's case, the next step is to then go to content owners and offer to treat their traffic the way Verizon treats its own “for a nominal fee,” Vorhaus said. “Most of these carriers aren't looking at this as a huge money-making opportunity. It's more a matter of lowering their cost basis rather than having to continue to build up capacity. AT&T has put [its] foot in the ground and said this is important. Do they see a revenue opportunity there? Sure they do. They are not going to create a revenue unit and try to corner a market that is about $1 billion. That's small potatoes. They see it as having benefits to their own network.”