Concern About Prospect of CDN Price Wars

New entrants in the CDN market are raising concerns about pricing and margins.

There are several posts in the blogosphere about new entrants in the content delivery network (CDN) market and their likely impact on competition and pricing. The concern is framed by the recent slide in shares of CDN market leader Akamai (AKAM) and yesterday's press release from EdgeCast, a startup that came out of stealth mode promising to "change content delivery forever."

This is heightening existing concerns about pricing and margins in the CDN business. "We have heard from various sources that there is a price war going on, with some players being more aggressive in luring business away from Akamai," reports Om Malik at GigaOm. Om cites the rise of Limelight Networks (LLNW) and entry of Panther Express (which touts its "aggressive" pricing) and EdgeCast as signs that the CDN market may be getting crowded.

These concerns about pricing and profit margins have whacked shares of Akamai, which had been one of the high fliers of Internet 2.0 but has seen its stock price collapse from $50 on July 19th to just $33.09 at Monday's close, a 33 percent decline.

Are things really that bad? Dan Rayburn doesn't think so, and says the early buzz about EdgeCast's debut was a triumph of PR over substance. EdgeCast claims that it will disrupt the CDN market, but offers no data or details to back up its statement, Rayburn notes. An excerpt:

I would think that by now, these new companies entering the space would realize that you can't win business or market share simply by using a lot of buzz words and marketing terms with no data behind them. And you can't enter a market by making broad statements about how all the CDNs today are crap and you are going to revolutionize the industry.

I was struck by a headline on EdgeCast's web site: "Independent test results are in: EdgeCast proven faster then other leading CDNs." But when I followed the "learn more" link ... nothing. No data. No independent test results. Just repeated claims that Edgecast's network is superior.

Since CDN companies typically lease data center space in multiple cities, the growing number of CDN providers would appear to be a positive trend for facility owners and operators. Online video has definitely boosted demand for data center space, and CDNs are part of that equation. But data center owners are also likely to be scrutinizing the financial stability of start-ups, particularly in market niches that are experiencing turbulence.

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