The news that Netflix (NASDAQ:NFLX, news, filings) is building its own CDN infrastructure gave the markets a chance to do what do best: overreact. There's always a company or two out there at any given time whose every action gets obsessed over like this, and for the past two years Reed Hastings and crew have had that honor, such as it is.
Limelight's stock took a 12% tumble in response to Netflix's move, while Akamai's was off a bit over 3%. Level 3 managed to shrug off the news, but then their stock had fallen 7% last Friday rather inexplicably. But if Level 3 is in fact helping them build the new systems as stated in a blog post yesterday, a lot of people who follow them surely already knew in advance that Netflix was preparing to talk about its new CDN plans. Yet as Dan Rayburn and a few others have said, it's an important event but this has been way out of proportion.
Akamai's revenue will be barely scratched by the eventual tailing off of Netflix traffic over the next couple years. Akamai already got punished by the market for losing much of this traffic once to Limelight and Level 3, now we've got to punish them again? What they still have is mainly Netflix's more exotic international traffic that will probably not get in-housed for many years if at all. I'm sure a few over at Akamai's HQ are if anything chuckling now about how smart it was to not further lowball pricing just to get traffic they'd have lost anyway.
Meanwhile, Limelight is already trading for peanuts - their net cash balance is now more than half the company's marketcap. Certainly they are the most vulnerable here, but they weren't getting credit for much if any benefit from the Netflix traffic as it was. Punishing them for merely having their current contracts fulfilled over the next couple years while they transition further away from commodity CDN stuff anway makes little sense. If anything, Netflix's news just makes it more likely Limelight will be looking for a buyer, which ought to drive the price up not down.
Thus far, we at Ramblings here seem to be the main voice talking about actual positive benefits to Level 3. In fact, one could argue that they will make more from helping Netflix operate all of their in-house CDN via core high margin products than from delivering a fraction of the same traffic - which many have suggested was sold at what is surely the lowest bulk CDN pricing in the sector. They shift low margin loss-leading revenue to core high margin revenue, while freeing up capacity for additional growth and reducing future CDN capex requirements for a while.
But markets are like that, what's more grating on the ears is the strange conclusions being drawn. For instance, there's this bit from the Motley Fool:
This spring, Netflix CEO Reed Hastings sparred with Comcast ... over Netflix streams counting against the cable giant's data caps while Comcast's own Internet video services didn't. These cache servers could do an end-around run to gain the same cap-free status. I love trick plays.
Say what? How exactly does building your own cache convince Comcast's systems that your OTT traffic is now part of their cable video service not delivered over the public internet (as Comcast describes it)? Quite simply, it doesn't. Maybe the author was thinking of a bypass round the LVLT/Comcast interconnection dispute? Lots of other weird statements going around as well, which Dan Rayburn does a good job of debunking.