That's the word according to Dan Rayburn, and it matches what I've been hearing since my post last week about Level 3's CDN push. Multiple sources that are almost certainly independent of Dan's have now told me that the new content customer won in October for whom Level 3 Communications (NYSE:LVLT, news, filings) is spending $15M in capex is in fact Netflix (NASDAQ:NFLX, news, filings). But that Akamai (NASDAQ:AKAM, news, filings) may be the one taking it on the chin is a new one on me, though I doubt we will hear for sure until it's time for Q4 earnings and 2011 projections. I somehow doubt that Akamai is out entirely, but who knows.
The amount of bits pushed by Netflix's streaming business has grown so rapidly that it's easy to forget just how big they are - it seems like just a year or two ago they were giving streaming a try (oh wait, actually it was). In fact, I'll bet that its contribution toward Akamai's fantastic revenue performance this year is not minor at all. And given Netflix's continued subscriber growth, its traffic needs next year will be even bigger. For Akamai this is not the end of the world, they are the giant of the sector with or without this particular contract. But for Level 3 and Limelight, it could mean a very material change to their CDN fortunes in 2011.
One thing we can say is that Limelight and Level 3 may be adding substantial amounts of Netflix business, but whatever it is that they won appears to be asymmetric somehow. Whereas Level 3 is forecasting a huge burst of $14M in capex in apparent response to the contract, Limelight is not expecting anything similar. In fact, Limelight has not spent that much in a quarter on capex in any quarter I have checked, and when it comes to CDN capex alone I suspect Level 3 hasn't either. This suggests to me that either the two were tapped for different things, or that Level 3 is building network infrastructure while Limelight will be leasing it. The two would have similar expenses if it were merely thousands of more servers in similar quantity.
Probably it's a mix of both actually. If, as Dan says, Netflix had issues with Akamai's performance although nobody else has mentioned such problems, then Level 3 may have promised to build its CDN into new geographies to improve that performance whereas Akamai was perhaps not so willing. In other words, Netflix may have wanted better performance into markets that are further out in the internet boonies than most content customers have traditionally cared about. A network operator with both network and colo already in place can do so much more readily for less popular markets where prices for space and bandwidth aren't as competitive. Netflix's traffic needs may now be big enough to make that a worthwhile effort.
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