Is the CDN Market a Bubble?

Written by Ryan Lawler

Wednesday, May 21. 2008 at 04:45 PM EDT 1 comment

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NEW YORK -- STREAMING MEDIA EAST -- In a panel yesterday, experts in public and private equity discussed whether or not the current content delivery network (CDN) market is a bubble. The verdict?

It depends on who you ask.

Ray Conley, a CFA at Palo Alto Investors, wasn't optimistic about the state of the CDN industry, saying, "There are too many of them and most won't survive." He added that the amount of money going into the CDN space "is the function of too many VCs with too much money."

Not surprisingly, Panther Express Inc. founder Kevin Ryan disagreed, citing the size of the market and the growing opportunity in it. "This is a billion dollar industry, and it's growing 25 percent per year." Despite that opportunity, he points out that there are only two companies -- Akamai Technologies Inc. (Nasdaq: AKAM) and Limelight Networks Inc. (Nasdaq: LLNW) -- making more than $100 million per year.

Analysts generally agreed that the CDN industry would be driven by growth in video being pushed over the Internet, but there was some question as to how many CDNs would ultimately benefit from it.

Colby Synesael, analyst with Merriman Curhan Ford & Co. , believes there will be a "big step function" in the amount of bits that will be delivered when the video market moves to HD. Even so, he wondered: "How many can survive to get to that point?"

Conley questioned the sustainability of the overall CDN market based on the sustainability of their customers. "The part that feels like 1999 is that you have a plethora of Web 2.0 dotcommers. Some will succeed but most won't."

But Ryan said consolidation in the video startups won't necessarily reduce the amount of video being viewed online. "Right now, you have 20 sites all serving the same Jon Stewart video," he said. But when one fails, he posits, viewers are still going to watch the video -- but on a surviving site.

While the money going into the CDN industry has increased, those on the panel see positive signs for investors. For one thing, former Wall Street analyst Brian Essex said that unlike the bubble days of the late '90s, CDN companies being invested in today continue to innovate.

Also, the businesses that investors are looking at are more likely now to have a sustainable business model. Neil Sequiera, partner at General Catalyst Partners said, "If you want to build a company today, you have to build businesses that are built to last."

While the panelists were wary of calling the market a bubble, most agreed that there would be consolidation. Most also agreed that mergers would probably be driven by companies in adjacent industries looking to get into the content distribution business.

Telcos and ISPs were the most likely buyers, according to panelists. "Every ISP is looking at the CDN market," due to the value that they are taking from ISP networks by providing value-added services riding on their networks, said Ryan.

Perhaps more importantly, CDN is a market that ISPs won't be able to enter on their own. "They can’t do it themselves," Ryan said. "ISPs don't have the engineering talent to build a good CDN."