Will Carriers Dominate the CDN Market?

“The Velocix-enabled internal CDN is an important component in Verizon's broader consumer broadband value-added strategy,” Posey said. Verizon earlier announced that it would deliver Starz Entertainment's Starz Play video download service to its FioS TV, FiOS Internet and DSL customers via the internal CDN, “and Verizon plans to pursue similar arrangements with other media content owners and distributors,” Posey added.

“As such, Verizon's objective is not to break into the CDN market and take on the likes of Akamai and Limelight,” she said. “Rather, its approach is to position its ‘telco TV’ and broadband Internet customer base as an attractive audience to video content providers, with the added benefit of the internal CDN to improve the end-user experience.”

That doesn't mean the arrival of AT&T and Verizon in the CDN space won't cause an industry shake-up — quite the opposite, Vorhaus said. The immediate impact would be on revenues, as the “nominal pricing” of carrier services dampens industry pricing as a whole.

“The big danger here for the CDN players is not just that the carriers come in and cannibalize the market,” he said. “It's that, from a revenue perspective, the market may taper off, and that can happen concurrently with CDN becoming more important in transport networks. In other words, if the CDN market were to start to decline, it wouldn't be because content owners said, ‘We don't need a dedicated network for content delivery.’ It would be because large carriers come in and offer these services at a lower price or use CDN to do their own traffic regardless of whether they would sell it. That takes away profitable opportunities for Akamai and Limelight.”

Pure-play companies already are responding. Akamai is diversifying its service portfolio, Vorhaus said, and he expects other CDN companies will look to partner with larger service providers or even be acquired. “That's not a bad exit strategy,” he added.

The first carrier into the CDN business — Level 3 Communications — probably is the only one looking to CDN for its revenue potential, but even Level 3 is combining CDN capabilities with its other backbone, hosting, co-location and transport offerings, Vorhaus notes.

And Level 3 will continue to relish its status as a “neutral provider,” said Lisa Guillaume, vice president of product management for the content market for Level 3.

“Our belief is that content providers are most interested in a neutral provider,” Guillaume said. “We provide a portfolio of solutions to broadband access and provide a portfolio of solutions to content providers. And we have a two-year head start on the companies just now getting into the CDN market.”

That need for neutrality will increase as more video is delivered over broadband, said Graham Williams, senior director of product management for Level 3's content market group. As there become more ways for Internet video to reach the TV set, consumers want to look beyond walled gardens of content from specific providers, such as telcos and cable companies, and directly choose their content over the Internet.

“End users expect to be able to go to the general Internet and pull down whatever they are interested in,” Williams said. “Content providers are interested in over-the-top delivery because it gets to the broadest reach, and we think that plays into having a neutral CDN provider.”