CDN Market Overview

Last quarter, we saw how Akamai (NASDAQ:AKAM) has been getting aggressive in its pricing. This strategy is paying off, as Netflix chose Akamai as its primary content delivery network (CDN). Online video has been a strong growth driver for the CDN market. Mobile Web is also a strong growth driver. Let’s take a closer look.

Netflix, which has a dual-vendor approach for CDNs, will now be using Limelight and Akamai for this function, taking away business from Level 3. Akamai is charging Netflix an initial price of just one and a half cents per gigabyte (GB), which is three times cheaper than what Limelight charges. However, Akamai will be getting more than 50% of Netflix’s traffic, and it will go back to its rate of six cents per GB after a couple of months.

Akamai is the leader of the approximately 50 vendors in the CDN market. Online video, smartphones, e-commerce, and cloud computing are some of the reasons why the Internet has become ubiquitous and the CDN market has become significant. Greater adoption of consumer devices such as the iPad are expected to further increase the demand for faster networks. According to ReadWriteWeb, iPad users consume five times as many videos as iPhone users and three times as many as Web users.

According to Akamai’s recent State of the Internet report, 96 countries had average connection speeds below 1 Mbps. About a decade ago, the United States ranked third in the proportion of citizens receiving fast Web service. Now it is nowhere in the top ten. South Korea tops the list with average speed of 11.7 Mbps, while the U.S. average speed is 3.8 Mbps. The U.S. Federal Communications Commission (FCC) is proposing to spend $12 billion to 16 billion in the next decade to improve Internet speeds.

Akamai (NASDAQ:AKAM) at the end of April reported strong first quarter results that beat estimates. Revenue was $240 million, up 14%. Net income was $40.9 million, or $0.22 per share, up 10% from $37.1 million, or $0.20 per share last year. Adjusted EPS was $0.35. Akamai ended the quarter with $1.1 billion in cash and repurchased shares worth $21.9 million. Its board of directors authorized a $150 million extension of its share repurchase program. Gross margin was 72%, consistent with last quarter and up one point from Q1 of last year. Q4 coverage is available here.

For the second quarter, Akamai expects revenue of $236 million to $246 million or growth of 15% to 20% and adjusted EPS of $0.32 to $0.34. The company is targeting to cross $1 billion in revenue in 2010. Its 2009 revenue was $859.8 million. The stock is currently trading around $42 with market cap of about $7 billion. It hit a 52-week high of $43.50 on June 3.

I have always been extremely bullish about this company, knowing a thing or two about network traffic routing from my days as a computer scientist. And I continue to be bullish. The iPad has just given a big boost to the company’s prospects.

Limelight Networks, Inc. (NASDAQ:LLNW) last month reported first quarter revenue of $36 million, up 9%. Net loss was $5.8 million or $0.07 per share.

The company recently completed its $110 million acquisition of interactive digital ad company EyeWonder, which has about $35 million to $40 million in annual revenue. Dan Rayburn at Streaming Media blog believes that the EyeWonder acquisition will not be competing with Akamai’s advertising solution. Akamai, with its Acerno acquisition, is into behavioral targeting while EyeWonder provides media rich ads on the Web and within video games. Last year, Limelight acquired video ad insertion firm Kiptronic for about $12 million. Limelight has been displaying an acquisitive streak, and it is likely that it will continue that streak in the near future. The company ended the quarter with no bank debt and approximately $149 million in cash. I am not particularly crazy about CDNs getting into ad insertion, and I see no core competency in Akamai’s bench in this area. They should stick to their real strength: routing vast volumes of traffic and accelerating the Internet.

Limelight’s annual revenue in 2009 was $131.6 million. For the second quarter, the company expects revenue of $41 million to $43 million including two months’ revenue from EyeWonder. The stock is currently trading around $4 .17 with market cap of about $368 million. Its 52-week range is $3.17–$5.78.

Level 3 (NASDAQ:LVLT) last month reported first quarter revenue of $910 million, down from $980 million last year and $924 million last quarter. Net loss was $238 million, or $0.14 per share compared to net loss of $132 million, or $0.08 per basic share last year and $182 million, or $0.11 per share, last quarter. The company ended the quarter with $639 million in cash.

Core Network Services sales orders were up by more than 15% in the quarter over the last quarter. Level 3 expects churn to continue to improve over the rest of the year. The stock is currently trading around $1.26 with market cap of about $2.09 billion. It hit a 52-week high of $1.77 on June 11 of last year.