CDN Pricing Ramblings

July 30th, 2008 by · 1 Comment

Dan Rayburn reports that CDN pricing was essentially stable this quarter.  That is certainly good news for the CDN’s out there, since if traffic grows but the price does not fall, healthy revenue growth must follow.  Yet in parallel, Raymond James reduced its estimates of Akamai’s (AKAM) growth on the grounds of increasing pricing pressure from Level 3 (LVLT), saying also that Limelight’s (LLNW) growth is at even greater risk.  Which is it?

On the one hand, there are some who are expecting that increasing competition will lead to a price war just as happened (and continues to happen) in the IP transit business after the boom.  But the situations are much different.  In the transit business during the boom, the problem was tied to overspending on infrastructure years in advance of traffic, which led to a glut and a 5 year collapse in pricing.  That sort of thing can’t happen in the CDN business because there is no overbuild of infrastructure, and the business should behave more rationally – pricing pressure would lead to fewer servers being bought and capacity growth being reduced, and a lack of pricing pressure would lead to (or had led to) a proliferation of new entrants in the market, all until balance is reached.  Since the lag time is much shorter for CDN infrastructure buildouts than it was for bandwidth during the boom, any overcorrections are also likely to be shorter and less bumpy.

However, the stability of CDN pricing has to be a temporary thing, the long term trend has to be downward.  Why?  Because in the end CDNs are still just another way to deliver bits.  The improved user experience a CDN provides over IP transit is important, but choosing CDN services is still an economic decision and thus there must generally be a balance between performance and pricing.  Because IP transit is, according to most sources I have seen, likely to decline at 20-30% per year for the foreseeable future, it follows that CDN pricing must eventually follow a similar trajectory.  Not necessarily right away, and not necessarily in tandem, but the overall trend has to be there.

That doesn’t mean revenue growth won’t be there, that depends on relative changes in traffic growth and the cost of delivery, and for now it looks as if the pie is growing fast enough to offset anything else.  I only mean that actual pricing stability is something the CDN industry should savor while it can while planning for the sector’s evolution.   It’s a nice place to be right now.

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  • morton dick says:

    Mr Crowe has stated that he expects CDN pricing to behave in a similar fashion as IP . Not saying they will move together, but he believes we will see the same type of downward movement in pricing .
    It will be interesting to see if the competition can compete with cos that own their own networks [LVLT & T]

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