CDN, Compute And IP Data Vendors Extend Infrastructure Scale As Red Hot Competition And Delivery Volume Surge Ignites Sector Consolidation

CDN, Compute And IP Data Vendors Extend Infrastructure Scale As Red Hot Competition And Delivery Volume Surge Ignites Sector Consolidation

  • July 2017 •
  • Report ID: 5058576 •
  • Format: PDF
CDN and adjacent compute platform and IP Data vendor marketplaces, including AWS/Cloudfront, are forecast to reach $33.1 billion in 2017 revenues, rising to $39.8 billion in 2018, framing a 15-year CAGR (2003 – 2018) of 31%.

Excluding AWS, the sector is primed to produce a $16 billion business, growing at a 15% run-rate for the year, including Level 3 where CDN and IP/Data service units contribute 47% to topline revenue.
A nuts and bolts business ops analysis of the sector: CDNs, Compute Platforms and IP Data Services 2017 – 2020, examines industry players, value –added service offerings, bandwidth price changes, benchmarking performance metrics, revenue, revenue per account, total accounts, server infrastructure, CapEx, R & D, augmented by insightful briefings with key executive talent.

Operations analysis for each services vendor date from 2003 through 2016, with market projections cast out to 2020.
The opportunity for CDN and related telecom, networking and compute platform service vendors remains large, as geographical and operational economies of scale compel industry players to get big or get bought out.
Throughput volumes, particularly video, continue to swell across the globe, including China and India, and account win competition remains red hot, thrusting the sector into another round of consolidation in 2016, with CenturyLink, ChinaNetCenter and StackPath stepping up as major consolidators.

Akamai Technologies has been one of the most aggressive acquisitors in the sector, buying across a wide range of product solutions (from pure play CDN, to security, acceleration and OTT software), augmenting its internal development stack.
A spend/cost analysis associated with digital video hours delivered in 2016 though CDN and self-hosting platforms (i.e.; Facebook, YouTube, Netflix, Hulu, Instagram and Twitter) based on gigabytes transferred and Mbps pricing (retail and backhaul) leading to total available commercial market value is included.

CDN gross margins range from 40% to 65%, while the largest components to COGS continue to be bandwidth and co-location fees, even as bandwidth prices continue to fall at the retail level, reaching as low as $0.01 per gigabyte for an aggressively priced volume-based contract signed this year.

A total of $8.3 billion in CapEx was invested in infrastructure updates/expansion, including Amazon in 2016. The self-hosting giants, including Microsoft, invested $16 billion in infrastructure in 2016.
CDNs also benefit from growth in the self-hosted part of the market, and provide network redundancy/failover, hosting, transport, IP services and multiple backend services support to OTT operators like Netflix.
CapEx investments are aimed at scaling the network and cost control/efficiency improvements. Upgrades include servers, faster chips, better memory and capital software developed in-house or acquired. CDNs report that improving the quality of end user experience is a high priority.

EXECUTIVE SUMMARY
CDN ANALYTICS AND OPERATIONS BENCHMARKS 2017 – 2020
CDN REVENUE FORECASTS THROUGH 2020: DOUBLE-DIGITAL SECTOR GROWTH
• The total market, including AWS, is forecast to reach $33.1 billion in 2017
• The comparable for 2018 is estimated at $39.8 billion, including AWS, compute platforms such as Internap and Level 3’s IP Data and hosting services
• Excluding AWS, the sector frames a $16 billion business growing at 15% for the year, including Level 3
• CAGR (2003 – 2018) is forecast at 31% over that time frame (see below)

CDN REVENUE AND MARKET SHARE BREAKOUT: HISTORICAL PERFORMANCE 2010 – 2016
Get big or get out: StackPath acquires revenue and operations scale in 2016/2017
• AWS, Level 3 and Akamai captured a combined 76.8% of the sector’s revenue
• The analysis below breaks out CDNs acquired by StackPath in 2016/2017, including Highwinds and MaxCDN
• Our estimate for StackPath 2016 pro-forma revenue is $283.5 million, with a total 600,000 global customers (see SECTION TWO for details)
• StackPath would have pro-forma 2016 market share of 1%, when including Amazon AWS and Level 3

THE U.S. CAPTURES 60% OF TOTAL CDN REVENUES IN 2016
• European markets for CDN services contribute 24% to the global total
• China/India 6%, and growing rapidly
• AsiaPac/ME/SA at 8% of the global total
• Latin America is at 2%
• International revenues generated by domestic CDNs average between 28% - 30+% and captured an estimated 60% of global CDN revenue in 2016

EFFICIENCY: CDNs OPERATE AT SCALE ACROSS THE GLOBE
Filling unused capacity across time zones and geographies does not require additional CapEx

Delivery peaks and valleys: Content delivery that can be scheduled (i.e. game downloads, software updates) is a popular file format and business segment

BILL AGAINST GIGABYTES DELIVERED
MEASURED UNITS FOR VALUE-ADDS
• Bandwidth pricing at the retail level continue to edge downward
• Volume pricing contracts may dip into the $0.01 per gigabyte range, or range up to $0.10 per gigabyte transferred
• Pricing for value-added applications from media processing to security may be based the number of minutes processed, transformed or stored
• Pricing units of units of measure for value-add services are cloud-like, as customers are billed against what they need or want to buy

AS THROUGHPUT VOLUMES INCREASE, RELENTLESS FOCUS ON MARGINAL INTEGRITY, OP EX COST CONTAINMENT
CDN segment MRR averaged $17,699 for 2016, up 5.4%
Akamai is a pure-play CDN that has evolved its business model and suite of services to grow topline and MRR
Limelight Networks’ MRR performance was at the average benchmark level for the segment
• Average MRR across the segment was $17,669 for 2016, an increase of 5.4% over 2015 (see table below)
• CDN segment MRR includes compute platform AWS and the Cloudfront CDN
• CDN segment MRR also includes Level 3 (with about 1,000 total accounts) and StackPath, which has hundreds of thousands of customers
• Akamai MRR during the year averaged $29,149

CDN COGS ANALYSIS: WHERE THE MARGIN BATTLE IS WAGED AND DIVIDENDS WON
As throughput volumes increase, CDNs must aggressively manage bandwidth and co-lo expense
CDN is a business with healthy gross margins
• CDN gross margins range from 40% to 65%
• The largest components to COGS are bandwidth and co-location expenses
• Bandwidth prices continue to fall at the retail level, and while volume increases add to the topline, the bottom line is where cost management efforts pay dividends
• Akamai is one of the best in the segment at grinding down COGS
• Akamai’s 2016 revenue was derived from services and solutions the company did not offer in 5 – 7 years ago