Another Limelight/Level3 Possibility: Federation

The recent rumors and speculation about some sort of combination of the CDN assets of LimeLight and Level has perhaps neglected an intermediate possibility.  The two companies could be exploring a federation of some sort that would allow both companies to move in the differing directions each wishes to go.

Limelight’s body language says they want to move deeper into managed services and spend less of their resources on scaling the commodity side of things.  But that doesn’t necessarily translate to leaving the space entirely.  Suppose they wanted to transition their infrastructure toward serving the high end, while offloading the commodity heavy lifting to a company that actually likes that sort of thing.  Some sort of interconnection agreement could serve that purpose without going through the trouble of an M&A or joint venture.

Consider IP transit networks.  It takes major investment to be a top backbone and the rewards are sparse, but that doesn’t mean thousands of companies don’t run smaller IP backbones that fit their technical and economic needs while peering and buying transit for what doesn’t.  The CDN world is filled with plenty of smaller players that have other plans than to replace Akamai, and whose infrastructure reflects that.  Limelight has been moving up the food chain, but their CDN infrastructure is still focused much more generally.  That doesn’t require them to sell that infrastructure, but perhaps simply to re-tune it so that it serves the niches they want to serve and perhaps not try to do it all.

Level 3, on the other hand, owns the underlying network and its whole approach is based on its ability to use that fact to scale its CDN infrastructure better, faster, and larger than anyone.  The niche managed services stuff has always been less interesting to them, and they’d be just as happy helping Limelight get there while enhancing their edge at the lower end.  An evolution of the CDN space in parallel with the IP transit and peering space with them at the center of both… well it has its attractions.

So perhaps something of this sort is what the two are talking about – a federated solution that would let Limelight get out of the commodity side of things.  They’d still be selling CDN services of all types, but their own infrastructure would be more limited and focused on what they do best while they can offload the rest to Level 3’s lower cost structure.  Level 3 gets more bits, greater scale, and less competition, while Limelight gets to reconfigure its business to something more sustainable.  No need for M&A or JV – both of which have substantial downsides IMHO.  Thoughts?

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