Nigel Regan Randicoot CEO and IP video expert (or at least I like to think so…)

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Network Status 2009: The European CDN Market

Our annual assessment of European content delivery network market finds that it is not yet commoditised but remains innovative and highly localised.

Mon., Sept. 28 2009, by Nigel Regan

This report looks at the current state of the European CDN market. Consolidation, failures, and write-downs in the IP video delivery industry have been making headlines for months. The real story is the shift from the creative and unprofitable supplier pricing models to distinct services with clear and realistic pricing models providing a solid foundation for a profitable online video publishing industry. This is an area that is quietly being dominated by the content delivery network (CDN) industry through innovation, strong management, and aggressive but sustainable economics.

CDN volumes and revenues are growing (see Figures 1 and 2 for Frost & Sullivan’s assessment of the global CDN market). The market leaders and the smaller, nimble, and innovative players alike are gunning for a similar goal, albeit at different strata of the market. This goal is to capitalise on historical high-investment levels to leverage growth and future revenue in online video and gaming. They each have clear target markets and operating regions and defined business and technological road maps; they are largely being creative to meet the diverse needs of customers. This report will discuss this in some detail and provide insights into a market that has been incorrectly categorised as commoditised.

A Commodity? Far From It!
The key findings of this report may surprise you. The CDN market in Europe is not the commodity market one may expect. Commodity describes a market where no qualitative differentiation is evident between the providers. This does not describe well the innovation, creativity, range, and quality of services that I have found to be present during the research for this report. While some players continue to define themselves successfully as commodity players to address specific corporate and market needs, the activities of these few do not in themselves create a commoditised market place.

The “price war” is also a myth and, perhaps, a U.S. phenomenon. A few key regional accounts may be seeing some very competitive renewal negotiations, but this is confined to those largely national or public sector broadcasters whose justification for the continual collection of public funds relies on such metrics as volumes, reach, and quality and less so on fiscal constraints. These accounts provide significant revenue to the big three—Level 3 Communications, Akamai, and Limelight Networks. While these key accounts represent significant volumes and a high percentage of the overall volumes of the market, they also represent very few contracts and are really only able to be serviced by the big three, although Akamai is in the small asset delivery market rather than medium to large asset delivery, which is the focus of this report.
Economics

It is natural to see markets invest behind revenues when the capital markets dry up; there are a few exceptions such as Nokeena with its recent $6.5 million successful fundraiser. Although I am not able to quantify this, it would make an interesting article in its own right, as I suspect that a significant percentage of industry historical “revenue” has been the movement, internal to the industry, of capital raised over the past 10 years in zero net gain “mutual” or “ghost” deals creating false buoyancy in our market. Now that this has ended, the industry is highly focused on external revenues with sustainable margins. The surviving CDNs fall into this camp, as do most of the platform operators and periphery service providers. Clearly, the future revenue in the European CDN will be directly or indirectly from advertising-related revenue and telecom companies investing in CDN infrastructure to address demand created by realistic advertising revenue opportunities in their markets.

The CDN industry was the first to take this seriously and to recognise that aligning the delivery costs with industry growth and revenue is key to both driving the volumes and profitability for publishers and protecting the future of their businesses. The platform providers and other suppliers in the video publishing and monetisation stack are or will be forced to more closely address this cost sensitivity if they are to survive. Those CDNs that invested heavily are often able to price slightly ahead of the market and bet on volumes with controlled risk management in their calculations. This is useful as the online video industry still needs a sliver of subsidy.

Figure 1. Video Content Delivery Networks MArket: Dual Scneario Revenue Forecasts (World, 2007-2013). Source: Frost & Sullivan.

An interesting aside is that co-location space is now a premium; in the key European territories this is at near 100% capacity. Adam Smith would tell you that this means a shift in the supply curve, so ceteris paribus, prices will rise—something to consider in contract negotiations. Outside traditional economics, it is also encouraging ISPs and telecoms operators to evaluate the value of data-centre real estate and the allocation of resources to peering- and edge-network services on behalf of third parties seeking to deliver into their networks.

Sunk Capital Investment

IP networks in Europe have seen two key investor categories: pure IP international networks (usually U.S. networks) and local or regional telecom operators (usually the national incumbent). Level 3’s $14 billion of investment, both capital and acquisition, has resulted in a very significant network capacity in Europe that is being re-engineered to provide high-volume, high-bitrate streaming. Limelight’s largest investment is in private networks followed by co-location and peering arrangements in Europe; this is again significant, and this gives both operators the ability to offer market-leading pricing in order to fill their networks. It is strongly arguable that the investment of these two players (and Akamai to a lesser degree) is acting as a catalyst to long-form content delivery in 2009. This is pulling the entire industry up 200Kbps and improving the quality of professional content legally available to consumers.

Both companies are seeing significant growth. Level 3 quoted an interesting observation that only once a market reaches more than 40% of broadband penetration does it see significant investment in content and marketing by the national broadcaster, which results in services such as iPlayer, ITV, ProSieben, and the TF1 WAT player driving very significant volumes of long-form, high-bitrate, free-to-consumer content. Once you fall outside these markets, the picture is very different.

In the end, the European market falls into three clear tiers, with each provider servicing one of these tiers.

• Major pan-European players

• Regional operators

• CDN Technology enablers

Major Pan-European Players
Level 3 is really the only commodity CDN in the European market, although I understand that Highwinds is also operating on this model. When Level 3 CEO Jim Crowe committed $14 billion of his investors’ money to capital infrastructure investment, he had a vision. And one key aspect of this vision is playing out in the small and highly capable CDN team in Europe. The stated goal by Level 3 is that the future of TV is HD over IP, and the company is very clearly positioning itself to influence and be in the path of this trend.

Figure 2. Content Delivery Networks Market: Revenue Forecasts By Geographic Regions (World, 2007-2013) Source: Frost & Sullivan.

The focus of Level 3’s CDN team is “large asset delivery”, a phrase Joe Trainor, Level 3’s senior director of broadcast and content offer, used repeatedly, and something he is keen to deliver in very high volumes. The company is achieving this by providing the media and it’s entertainment and enterprise market place with CDN for video and software download at between €0.05 and €0.09 per GB shipped for clients shipping 500TB of data each month. I strongly suspect there is downward flexibility on the quoted volume commits, making it even more aggressive and reinforcing their aggressive market position. Trainor stated to me that he is seeing an acceleration of high-quality TV content being delivered over Level 3’s network and an increase in software downloads, but he declined to put numbers to this. The Obama inauguration on Sky.com delivered in HD was a clear demonstration of activity, and Sky’s belief that the future of TV is HD over IP, and its network capacity, pricing, and market positioning all talk to this goal.

Level 3 content delivery network is really the only “commodity” player in the European market to offer a pan-European footprint with very aggressive pricing and to have a strategic advantage in that its supplier is the parent who owns the pipes. According to Trainor, Level 3 frequently turns down small-volume business and does not operate in the same market as Akamai or Limelight delivering (or having the desire to deliver) small assets. If you’re looking for a streaming provider for a niche content or UGC site, don’t call Level 3; if you’re a national broadcaster thinking of giving 1Mbps-plus free to consumers with an HD option, then you should have the phone number of Marc Sze, sales director, indirect channels at Level 3, in your address book. Innovation is also not alive at Level 3. But intelligently, the company will openly adopt third-party software that aids the delivery of large assets (such as Move Networks) at the client’s request.

Limelight is clear about its ambitions of moving up the value stack into Akamai territory by offering storage, security, and object and appliance acceleration, again with the focus of keeping costs aligned with client revenues. George Fraser, Limelight’s head of international, is using his deep experience to extend Limelight Europe from the pure streaming business into the more profitable software as a service (SaaS) and software hosting with deeper integration into clients’ digital media services. This naturally brings the client and the provider closer together for a longer time as more client services become reliant on Limelight services. I couldn’t determine if revenues are currently flowing from these services or whether this is a stated desire of future revenue generation. Fraser wouldn’t reveal his pricing, but I understand that significant volumes of more than 50TB per month will get pricing of about 8 cents per GB, close to Level 3 and Streaming Media executive vice president Dan Rayburn’s CDN findings in his U.S.-centric report on volumes (www.cdnpricing.com).

Local Operations With Local Operators: Sprechen Sie Deutsch?
Outside the big three, there is a very different story—and for me, this is the real story of Europe. What has become apparent in my research, and has been of the greatest interest to me while writing this report, is 1) the significant creativity that is evolving to squeeze the most out of existing networks and 2) language that is highly regionalising the European CDN market in a way that I hadn’t expected. Both these factors differentiate Europe from the U.S., and they are invigorating local markets.

Europe’s many distinct languages create highly localised production, demand for content, and monetisation opportunities. This local content in local languages has close to zero demand outside its own region. Stats from comScore demonstrate this trend clearly in France, Germany, and the U.K. (the three countries its research currently covers). Excluding Google, Microsoft, Facebook, and Yahoo!, local video sites account for all of the top 20 video sites in terms of volumes. For example, France features Kewego, Piximedia, TF1, PagesJaunes, Orange, and France Televisions. Not one of the top 20 local sites ranks highly in either of the reports for the other two countries. This translates directly and unequivocally into demand for local CDN operators with the majority of this traffic going over highly localised networks. It follows logic and challenges the global CDN model, which has no demand from these operators. Local publishers are simply not willing to pay for sparse global infrastructure when dense local infrastructure exists and can be easily and economically enabled.

Figure 3. Online video viewing statistics for France, Germany, and the U.K., May 2008-April 2009. Source: comScore

Velocix chief marketing officer John Dillon even went as far as to say that his company had spotted and positioned itself for this megatrend. He went on to cite the Coca-Cola logo on the judge’s cups on American Idol being blurred out in postproduction before the show was released online as an example of content not travelling well and requiring an extra layer of production, cost, and management.

The best case study of the many I have found that demonstrates the model well is KPN’s network enablement by Jet Stream’s VDO-X (VideoExchange) CDN Software. KPN has 8 million broadband subscribers in the Netherlands and had a need to improve its video delivery services. VDO-X empowered KPN to enable its network to CDN capability in just 2 months, including 2 weeks of testing. The efficiencies introduced by the CDN capability have significantly reduced the need for capital investment in upgrades in KPN’s network. The Jet Stream-enabled KPN network carries 50% of KPN’s CDN volumes today.

London-based Astream.com and Global-MIX, whilst small (each with revenues just under £1 million per annum), also benefit from being local. Astream competes less on price and more on services, going as far as having its streaming pricing published openly on www.astream.com and giving users the ability to set up an account on the site, a policy that has served the company well for nearly a decade. Thirty percent of Astream’s business is small B2B streaming, which is a market it values greatly. And like other players in the market, it is seeing bitrates rise to an average of 500Kbps with 30% going out at 750Kbps. Global-MIX has a more aggressive pricing stance that is facilitated economically by its long-term investment in the evolution of its widely recognised multicast network and technology. Global-MIX CEO Dom Robinson is an industry veteran in the truest sense. He and his company build and maintain a very strong, technical relationship with their customers at a local level. He shows local customers the kind of love they do not get from a U.S. or remote operator.

The CDN market in Europe is clearly a jigsaw puzzle of services divided by language; it’s a market with clear national boundaries and demand for local service providers.

CDN in a Box
Looking closely at the IP fibre network in Europe, as I alluded to earlier, there are big regional players, usually the incumbent telecoms operators, who have invested significantly in laying IP networks to service the requirements of national telephony networks, including IP for xDSL. These networks do not necessarily have the topology or data-flow management systems required for delivery of high-quality-of-service video data, but they are very significant in capacity and depth, often reach right into homes in the region, and already carry internet data. Recent innovation or initiatives from EdgeCast, Jet Stream, EdgeStream, Velocix, and Flumotion has enabled these IP networks to operate as CDNs and at relatively low cost, in Jet Stream’s case with zero cost upfront and sleeping network deployments activated on demand.

Jet Stream, Velocix, Flumotion, and EdgeCast have developed their own CDN management software that optimises the flow of video traffic around the network and manages storage, cache, load balance, reporting, and monitoring of network activity. All of these companies offer this as a managed instance licence on clients’ networks, in addition to offering their own CDN infrastructure. In the case of Velocix’s Metro product, this allows its clients to benefit from the economics that an in-house CDN brings using vested infrastructure whilst having the global Velocix CDN as overflow/backup for the delivery of international traffic.

EdgeCast enables Global Crossing and Deutsche Telekom with its Wholesale CDN solution, which the company positions against Akamai and Limelight. However, I did not get an opportunity to speak with Deutsche Telekom to get a direct confirmation; I hope someone at the company can comment and elaborate on this for me. I think this could promote an important trend and is worthy of further investigation.

Almost without exception, the local CDNs and software vendors cited their ability to do business without having to compete on price with the big three; most even stated that they rarely if ever meet them in tenders. Local knowledge, local deployment, and bespoke development teams are valued highly in the European market, and a premium is almost always paid for this local attention.

Global-MIX is also bringing to market a product that gives network operators multicast capability, capitalising on its investment and multicast patents. If I understood this right, I believe this could have a major impact on the cost efficiencies of operating live streaming online, especially as Global-MIX will support Flash.

EdgeStream (in which I will disclose that I am an investor) deserves a mention as it has also developed a product offering that is the same model of network empowerment. Vinod Sodhi, EdgeStream CEO, is actively seeking strategic partners in Europe. It has patented technology that allows propagation of high-quality video over very long distances from one or two server locations, which is ideal for providers with existing infrastructure seeking to stream more than 1Mbps. For practical and high-availability requirements, implementations with just a handful of server locations are needed for European coverage. Like Jet Stream and Global-MIX, this results in a solution with very low cap-ex and op-ex fitting the trend in Europe well.

Other trends to note include the general high interest in variable bitrate technology such as Microsoft Silverlight’s Smooth Streaming and Adobe’s Dynamic Streaming for Flash. With services such as BBC’s iPlayer raising the bar of visual and production quality and quantity, the industry is motivated and encouraged to move up the average by 200Kbps–300Kbps.

Mike Shaw of comScore points out that the rise in long-form content is not cannibalising the consumption of short-form, YouTube-style content and that trends are seeing growth across all metrics. Figure 3 shows an abbreviated set of data provided by Shaw that clearly demonstrates this trend. A continued and sustained move to web-based video players and more support for multiple platforms and browsers are also contributing to the growth. Channel 4 in the U.K. is a good example, seeing a clear uplift following Mac support and a move almost entirely to browser-based delivery.

The Future

I think we are just at the beginning of trends that are clearly empowering existing IP network operators and telecom companies at a highly localised level. Look out for more creative technology enabling delivery directly to web browsers with services increasing their bitrates to take advantage of lower CDN video delivery costs. Jet Stream, Velocix, and others are doing the empowering, and I’m sure we’ll see more activity from CDNs and other new European entrants offering a mix of empowering software as a service and global CDNs for international delivery.

Global-MIX’s Robinson mentioned something that I immediately found obvious but interesting, that I would like to share as a final thought. The internet in Europe is centred around three key public Internet Exchange Points: AMS-IX, DE-CIX, and LINX. This provides Europe with a topological advantage and efficiencies to the European networks that the U.S. doesn’t enjoy, a point Robinson makes to illustrate the potentially lower demand in Europe for “global” CDNs, compared to the U.S.

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And here it is…

Vividas has always puzzled me. Today I met one of their investors, Mark Smith, (a Mayfair based investor in technology and other industries). It struck me that Vividas is a cat like with many lives but always retaining a strong desire to succeed and a willful ability to convince others that their technology is valid, relevant, compelling and commercial. Why then have they never been successful and why has the technology never gained popularity? Is it because they are reliant on Akamai to deliver their bits and bytes and are therefore uncompetitive? I think this is a factor. Another factor is that the technology, no matter how good, will never compete with the simplicity of Adobe’s flash player. I couldn’t for example get it to work on my Mac, when I flicked tabs during the loading screen the Java app kept flicking back so I just closed cursing the poor development that spoiled browsing. I’ll try again later on a PC but the 40% of Internet cafe users on Mac’s will not be using Vividas powered websites any time soon. Poor job chaps!

This lead me to another conversation with myself, why do people invest in companies developing technology to compete head on with the world’s leading technology companies with huge adoption? I believe it’s because there is no perfect information in our industry. Take this example, if someone asked you to invest in an engine manufacturer that ran on a third liquid fuel, such as rice wine, would you invest? No, of course not, you’d encourage them to invest their skills and talents in building petrol or diesel engines to take advantage of the global refining and distribution network that already exists. To run on rice wine may be staggeringly efficient and cheap but you can’t get the stuff. Therefore it’s best to focus on adding efficiencies to existing fuels where a 20% improvement in efficiencies will have a huge net global impact and make the investor a handsome reward.

Why is our judgement misted when presented with unimaginable growth and returns that are going to emerge from new technology that is really rather average? Why do we not apply some simple processes and basic investment rules in these circumstances? Well, I’m not sure and having been on both sides I probably should know. What I do know is that Vividas is not a groundbreaking technology and is probably on, or near it’s last cat’s life.

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