According to Dan Rayburn today, those rumors swirling around Limelight Networks (NASDAQ:LLNW, news, filings) a few weeks ago have coalesced into serious talks with Level 3 Communications (NYSE:LVLT, news, filings) about somehow combining their CDN efforts. That could mean anything from an outright purchase of Limelight by Level 3 to a purchase of the Level 3 CDN business by Limelight with Level 3 maintaining an ownership interest. Here are a few rambling thoughts:
On the outright purchase of Limelight by Level 3: I have always been a skeptic of this idea. It’s harder to derive savings from a content delivery network integration without shutting one down and migrating the customers, and given the overlap and resulting revenue churn – for the price to make sense it would have to be low. Limelight’s stock price is definitely low these days following their earnings miss, but is it low enough for this make sense? Actually, maybe it is. But is Limelight really that desperate following one bad quarter after all they’ve gone through to get this far? I’m not sure I believe that.
On the spinoff of Level 3’s CDN into Limelight: This is an intriguing idea because it seems to solve one of the core issues underlying the company’s ongoing interconnection dispute with Comcast. Having their CDN tied so closely to their transit network distorts peering and transit relationships, and might be causing them some difficulties with parallel negotiations with other last mile providers. Separating the businesses while maintaining a [presumably large] ownership interest in the CDN segment might change that dynamic. Level 3 has always operated its CDN business with a bit of separation, so it probably wouldn’t change that much.
Still skeptical though: Despite the simplicity of the joint venture idea, I’m still quite skeptical because I think that Level 3 sees CDN as an increasingly important aspect of the network as a whole and I don’t think they want to lose control over it. On the contrary, it is my feeling that Level 3 sees the eventual evolution of CDN services into an integral piece of IP network design. Even if moving its CDN capabilities into a joint venture makes sense on paper, strategically it might reduce their options in handling a more tightly integrated future. And the whole Comcast thing is still non-material and doesn’t seem to be boiling over – Level 3 doesn’t seem to need to do anything here except grow organically.
The last word: Hence, my guess for Limelight’s future is that any theoretical deal with Level 3 is going to find plenty of willingness to discuss but perhaps too much ambivalence to finalize in the near future. Above all else, Level 3 needs to close the Global Crossing deal – it is of far more importance to them strategically right now to introduce any random factors. Seems to me that Limelight’s best bet might come along when CenturyLink or Windstream are ready to take the next step beyond copper.
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