CDN Consolidation Poised to Begin

Written by Ryan Lawler

Monday, September 29. 2008 at 11:55 AM EDT Post a comment

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Consolidation in the content delivery space could be imminent, according to attendees at Streaming Media West last week. 

Given the more than 40 or so companies in the content delivery business, it seems inevitable that market consolidation would be on its way. But attendees at say merger and acquisition activity may begin sooner rather than later.

There was clear talk of term sheets being passed about, which led one CDN exec at the show to quip, "Half the companies here are shopping themselves."

Another said that strategic talks between attendees dramatically could change the face of the conference in the next 12 months. "The big question, if you look around the room, is how many of these companies will be here next year," he said.

While there's no shortage of M&A rumors, what's less clear is which companies are looking to buy, and what value they see in acquiring the competition.

Some companies, like Mirror Image Internet Inc. , were very open about being in acquisition mode. According to Jim Hart, vice president of sales and marketing, Mirror Image is looking at several possible acquisitions, which could include adding new value-added services or adding assets in strategic markets, like Asia Pacific.

Others say they'd prefer to remain on the sidelines while the market shakes out.

Mark Hayes, vice president of business development for Highwinds Network Group Inc. , says he expects the majority of companies that are for sale to end up being sold in fire sales or asset sales. "We'll wait for deals to fall into that bracket."

For now, execs say buyout prices being sought by competitors are too high, some in the range of 4x to 6x revenues. Compare that to Limelight Networks Inc. (Nasdaq: LLNW), which is currently trading with a market cap of about 2.5 times its 2007 revenues.

Also, it's not clear what a CDN might actually gain by making an acquisition. Most aren't looking to buy technology and would prefer to partner with companies that provide value-added services.

Highwinds, for instance, is wary of making a technology acquisition -- say, in the encoding, content management, or video distribution space -- knowing that such a buy could interfere its channel-centric business model. By buying technology that competes with partner offerings, it would risk alienating some of those partners.

"We're being real cautious about moving up the stack," Hayes says.

As for the idea of buying a competitor for its customer base, most say that's a non-starter.

"We don't see the value in buying a business that can't sustain itself," says Robert Gribnau, vice president of sales for Europe and the U.S. at CDNetworks Co. Ltd. Gribnau posits that his company has gained more business in the last eight months growing organically than he could have gained by buying out a competitor.