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Explosion in Internet Traffic Expected to Power the Content Delivery Market
• Industry checks indicate that volume growth and a more stable pricing environment could lead to upside for the
industry. Discussions with Content Delivery Network (CDN) and content providers and ecommerce companies indicate that
traffic volume growth should meet or exceed expectations. While we still expect some ASP erosion, pricing appears more
stable compared to mid-2007 trends. We believe the growing traffic volume combined with a more moderate pricing
environment could translate into revenue and EPS upside.
• We believe the industry growth rate may prove conservative. For 2008, IDC forecasts CDN service revenue to grow 32%,
surpassing $1 billion. While IDC expects the CDN market to grow at a 25% CAGR through 2011, we believe this growth rate is
conservative given expected growth in traffic (bit) volume and bitrates. While broadband penetration rates have reached an
inflection point in many countries, worldwide Internet penetration remains only ~20% according to recent studies. We believe
the deployment of increasing bandwidth speeds, now up to 50Mbps, could serve as an important catalyst for volume growth as
the higher bandwidth enables the consumption of higher bitrate intensive, dynamic websites, including high-definition video.
We believe the increasing Internet and broadband penetration should drive growth of basic Internet services, such as web
browsing, email, instant messaging, and audio. However, we believe video (including the emergence of high-definition), mobile
data, online gaming, and Voice over IP are the engines of future volume growth. We also expect the continuing shift of
advertising and retail spending to the online channel should layer on additional growth, as well as the relatively small, but
growing adoption of application acceleration by enterprises. We believe these trends could propel traffic volumes 2-4x 2007
levels. Two growth drivers that we believe are under appreciated are the doubling of bitrates and the proliferation of Internet
connected devices. We believe these two additional trends could push traffic volume growth even higher.
• Akamai’s (AKAM, BUY, $45) game to lose. Akamai is unquestionably the dominant CDN provider with 60-65% of the
market. The company’s closest competitor, Limelight Networks, is a distant second with 10-15% market share and the
remaining competitors have 6% or less market share. We believe Akamai attained its leading market share not only by being
one of the first companies to enable burgeoning Internet companies to delivery and monetize their content back in 1998, but
also due to its proven network, broad solutions portfolio, tier-1 customer base, and key strategic partners. The company has
near 2,700 customers, including many top Internet, media and entertainment, Fortune 500, wireless, advertising, commerce
and retail companies, as well as government agencies.
• Expecting a constant ebb and flow of competitors. While the number of competitors has ebbed and flowed through the
years, the CDN market is at or near a record high 40 CDN and peer-to-peer providers. According to StreamingMedia, venture
capitalists have been busy over the last 18 months, funding more than 15 CDN and P2P providers with ~$300 million.
However, we expect consolidation in the market within 12-24 months as the private companies realize that they cannot
compete on price alone and must introduce a broader range of solutions to compete effectively. Additionally, Akamai won its
patent infringement lawsuit against its closest competitor, Limelight Networks, which if given historical precedent could lead to
it being acquired. However, Limelight has plenty of cash and intends to appeal the verdict. Public and private companies we
would highlight for 2008 are Akamai, Level 3, Advection.NET, BitGravity, EdgeCast, Panther Express, and Velocix.
• Distributed or centralized architecture makes little different to the customer as long as it performs. We expect the
ongoing debate on whether a distributed or centralized CDN architecture is the best to rage on indefinitely. However per our
industry checks, customers are less concerned with the network architecture, and more about whether the content will be
delivered as promised. While difficult to build a high performance, scalable and reliable CDN network, switching costs are
relatively low except for the content providers offering large volumes of video streaming and live broadcast events. Therefore,
if a CDN provider does not deliver on its promises, switching to a competitor is relatively easy.
TABLE OF CONTENTS
Market Overview .................................................................................................3
The Market Drivers..............................................................................................8
The Market.........................................................................................................14
Public Company Profiles..................................................................................16
Private Company Profiles ................................................................................24
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