Level 3 Acquires IBM’s CDN Patents

Are patents the coin of the realm in the content delivery business? If so, the game has just gotten more interesting. Akamai Technologies (AKAM) has prevailed in three different patent infringement cases against rivals in the content delivery markets, most recently with a Feb. 29 court victory over Limelight Networks (LLNW). But even as Akamai was gaining the upper hand in its battle with Limelight, a new challenger was beefing up its intellectual property warchest.

On Feb. 28, Level 3 (LVLT) signed a cross-licensing agreement with IBM involving thousands of patents owned by the two firms. But that’s not all, according to Dan Rayburn, who discovered that Level 3 acquired 20 IBM patents on content delivery and streaming technology.

Level 3 bought the Savvis CDN network in January 2007, and has since launched CDN caching and streaming media services priced at the same rate as its high-speed Internet access service. In January Level 3 CEO Jim Crowe said that “content distribution is where we are focusing our effort.”

Executive Exit Sends Level 3 Shares Lower

There’s been a shakeup at Level 3 (LVLT) in which president and chief operating officer Kevin O’Hara is stepping down and leaving the company. O’Hara is a co-founder of Level 3, and CEO Jim Crowe said his departure was “obviously a difficult decision for both of us. At this time, however, Kevin and I have agreed that a different perspective will be of benefit to our company,” Crowe said in a statement.

Shares of Level 3 are trading at $1.91 a share, down 27 cents, a drop of 12 percent.

O’Hara’s responsibilities will be assumed by Crowe and Neil Hobbs will become executive vice president, operations. Level 3 announced that Sunit Patel, the company’s current chief financial officer, will continue in the role of CFO. The company has terminated its previously announced search for a new CFO.

Crowe: Content Delivery Is Now Our Focus

Level 3 (LVLT) Chairman and CEO James Crowe acknowledges that the company “stubbed its toe” this year but says the emerging IP optical and wireless markets are “what we’ve been planning on and hoping for, for a number of years.” Crowe spoke Wednesday at CitiGroup’s Annual Global Entertainment, Media & Telecommunications Conference. Telephony World provides a summary of Crowe’s presentation, including some interesting comments about Level 3’s ambitions in content delivery:

The content distribution business is the long-term game for Level 3, which is why the company has acquired intellectual property in this realm as well as deployed caching and storage globally. “Content distribution is where we are focusing our effort,” Crowe said. “We believe very firmly that in the longer term, the larger majority of traffic on IP will be large objects, big video-based communications, either file-based or streamed, real-time or batched. It is already almost 50% of the traffic on our network today.”

That attitude is reflected in Level 3’s approach to pricing, which we’ve noted as it unveiled its caching and downloading and video streaming CDN services, which will cost the same as Level 3’s high-speed Internet access. Level 3 owns its own backbone, which gives it a different cost profile than other CDNs who must buy transit. Level 3 expects those economics can help it build a beachhead in the CDN business. But it’s a big beach and getting bigger.

Level 3 Sues Limelight Over CDN Patent

Level 3 Communications (LVLT) has filed suit against Limelight Networks (LLNW), asserting that Limelight is infringing patents that Level 3 acquired when it purchased a content delivery network from Savvis Communications (SVVS) earlier this year. The lawsuit makes more work for lawyers at Limelight, who are already litigating patent infringement claims with CDN market leader Akamai Technologies (AKAM) in a case that may go to trial this year.

The suit was first reported by Dan Rayburn, who noted that Level 3 mentioned patents when it acquired the Savvis CDN network. The news doesn’t seem to have had much impact on shares of Limelight, which have recently been trading between $7 and $8 a share. Limelight went public at $15 a share in a June IPO that saw its shares trade as high as $24. But the stock took a major hit in August when it lowered its revenue guidance, and has traded in single digits ever since.

Level 3 CDN Launches Streaming Service

Level 3 (LVLT) has launched its streaming media service, the latest step in its move into the content delivery network (CDN) business. Level 3 said its streaming service will cost the same as its high-speed Internet access and CDN cache and downloading services, continuing its aggressive pricing strategy. While there may be small premiums for certain file formats due to licensing issues, Level 3 said there will be no additional charges for bursts or large file sizes for any of the streaming formats, which the company said was an industry first.

Level 3 also announced that it is partnering with streaming media specialist Move Networks, which improves delivery of high-definition content by enabling multiple simultaneous streams. Level 3 will distribute Move’s Media Services, and integrate of Move’s technology into Level 3’s content delivery infrastructure. The two companies will also collaborate on future technology development.

Level 3’s streaming service has been in beta for some time, and recently delivered coverage of the finale of the World Cyber Games to 1.5 million viewers around the world. Analysts had expected aggressive pricing, and Level 3 has met those expectations. Grant van Rooyen, the Senior Vice President of Content Markets for Level 3, said that streaming services have historically been priced at a premium to high-speed Internet access, as was the case with caching and downloading services.

“With caching and download we knew that premium was 30 to 50 percent to high-speed IP,” said van Rooyen. “With streaming, we know it’s definitely a premium to IP, and definitely a premium to caching and download. We believe inappropriate premiums have constricted demand. We think unshackling pricing is a key to growth.”

Level 3 CDN Powers Radiohead

Level 3 hasn’t made any new customer announcements for its content delivery network (CDN) since it said last week that it will price its large-file download service at the same rate as its Internet access. But Dan Rayburn at The Business of Video noticed that Level 3’s network is delivering Radiohead’s new headline-grabbing “name your own price” album downloads. Dan says Level 3 (LVLT) is also now delivering videos from Metacafe and live streams from DirectTV’s NFL Sunday Ticket package.

“Clearly Level 3 is already starting to get some traction in the market for large scale delivery of video and static content via streaming and downloading,” he writes. “The CDN industry, which was once a very quiet segment of this industry even two years back, is now the hottest and fastest growing segment of this market in terms of the number of solutions and providers in the space and entering the fray. The next 24 months are going to be a fun ride.”

Level 3 Launches New CDN Pricing

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.”

Level 3 May Raise Stakes in CDN Price War

Yesterday we noted that press releases from Akamai (AKAM) suggest the company is girding for a challenge from Level 3 (LVLT) in the content delivery network (CDN) market. Today Dan Rayburn predicts that Level 3 is about to raise the stakes with a low-cost streaming video solution. When Level 3 launched its CDN offering in May, we spoke with Level 3 execs Bill Wohnoutka and Lisa Guillaume about the company’s ambitions in the CDN sector. Level 3 is closely tracking the Web 2.0 sector, but sees enormous opportunity within its existing base of connectivity customers.

“Many of our customers buy CDN today, and buy it from more than one provider,” said Wohnoutka, VP of Business Development for Level 3’s Content Markets Group. The group’s customers include Internet portals, major broadcasters, sports leagues, movie studios and major advertising agencies, many of whom likely use Akamai or Limelight Networks for their CDN needs.

Level 3 owns its own backbone, which gives it a different cost profile than other CDNs who must buy transit. Rayburn notes this fact in a post today examining Level 3’s likely impact on its CDN rivals:

I expect Level 3 will come to the market with an aggressive marketing campaign talking to competitive functionality and performance at a much lower price. And I don’t mean slightly lower, I mean less expensive by a wide margin. While that would not be a new tactic by a CDN, (remember iBEAM?) it is unique to Level 3 since they own the network and should be able to have lower costs than anyone else. While other CDNs in the past lowered pricing to essentially buy market share, none of them ever succeeded, as in the end, their costs caught up with them. If Level 3 is this aggressive, we’re going to have to wait to see what impact it has on the market and what tactics the other CDNs will deploy to combat Level 3. While we know that customers are not buying on price alone, and Level 3 still has to prove it has a good service, other CDNs will have to decide how to adjust to the shift in the market.

Concerns about a CDN price war have hurt the share prices of Akamai and Limelight (LLNW), the largest public companies in the CDN space.