Level 3 (LVLT) today introduced a new pricing structure for its content delivery network (CDN) services, which will now be priced at the same rate as its high-speed Internet access service. Aggressive new pricing from Level 3 had been widely expected. Analysts have been concerned that a pricing war in the CDN could erode market share and profit margins for Akamai (AKAM) and Limelight Networks (LLNW), the two leading providers. Level 3 said it believes its strategy "has the potential to fundamentally reshape the content delivery markets."
Level 3's pricing takes advantage of the scale and efficiency of its network to offer caching and downloading at the same cost as Internet access (transit). Level 3 owns its own backbone, with more than 75,000 metro and intercity route miles in North America and Europe, which gives it a different cost profile than other CDNs who must buy transit. Level 3 bought the Savvis CDN network in January.
Grant Van Rooyen, the Senior Vice President of Content Markets for Level 3, said that CDN services have historically been offered at a 20 to 30 percent premium to transit. "We have a unique advantage in this market space, and we intend to take that advantage," said Van Rooyen, who said the new pricing structure is "founded in cost, as opposed to anything else. This isn't a pricing promotion, but for the long-term."
The Level 3 content group's customers include Internet portals, major broadcasters, sports leagues, movie studios and major advertising agencies, many of whom now use Akamai or Limelight Networks for CDN services.
"Most of our targets in the space are existing customers of ours," said Van Rooyen. "They know level 3 and our services. We have found a warm reception in the marketplace. Operationally, a CDN is less than half step away from what we already do, and our customers were asking us to move into the space."
Akamai has sought to differentiate its CDN infrastructure, which positions thousands of caching servers at the edge of the network, from that of Level 3, which uses fewer, larger clusters in high-traffic areas. "We have intimate knowledge of the linkage between eyeballs and files," said Van Rooyen. "We've been able to observe traffic flow. What we're developing and deploying is all built around that knowledge."
"We are early into the CDN business," he added. "In the context of Level 3's overall portfolio and revenues of $4 billion, it's still a fairly small business. We're really focused on building the business right. We're not shackled by expectations of overperformance."
That was an indirect reference to Akamai, which saw its stock price plummet in July after an earnings report met expectations, but disappointed some stock watchers who were hoping for an upside surprise.
Van Rooyen said Level 3 believes the amount of Internet traffic from online video and other large files will grow enormously in coming years. "What we are experiencing today is exactly why level 3 was built in the first place," he said, noting CEO Jim Crowe's vision of a future based on IP-enabled services. "We're not doing anything different today than we did when we started the company. We continue to invest and upgrade with a team high toward managing the greatest amount of traffic with the lowest possible rate."