Crunch Time: Does Video Change Everything?

Is the tipping point near for Internet video? If so, what will the growth of online video mean for the data center industry?

Rich Miller

March 12, 2008

4 Min Read
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This is the last in a five-part series examining supply and demand in the data center market, and how it may be affected by the credit crunch and economic slowdown. See the introduction and parts one, two, three and four for more.

Oprah is delivering 90-minute webcasts to 500,000 viewers, the BBC's iPlayer is devouring UK bandwidth and the joint NBC/News Corp. video service Hulu launches tomorrow in beta. Is the tipping point near for Internet video? If so, what will the growth of online video mean for the data center industry?

Business and delivery models for online video are still maturing, but it's clear that online video will boost some providers and bedevil others. For data center providers, the revenue impact is most clearly seen in two areas: fees for 10 gigabit Ethernet ports to support high-volume traffic, and leases for colocation space to content delivery networks (CDNs). Carrier-neutral facilities with interconnection businesses and meet-me rooms are best positioned to benefit from these trends.

But with online video and content delivery heavily populated with start-ups and new entrants, the credit crunch will make life interesting. Flush with venture capital, CDN providers have built out extensive delivery networks in peering centers. But 2008 is shaping up as a year of both opportunity and consolidation, with a landscape featuring intensifying competition and tighter credit - which is already creating challenges for some Silicon Valley startups.

Both the CDN and video businesses have been good for data center companies focused on peering, especially Equinix (EQIX) and Switch and Data (SDXC).

Equinix says online video is "in the early stages of significant growth." Chief Business Officer Margie Backaus says traffic in the company's Equinix Exchange public peering is up 90 percent year-over-year, with the bulk of that growth due to video.

"With the CDNs and Limelight and Akamai, we are the place where video traffic is getting distributed on the Internet today," said Backaus. "So you're going to see it not only in public exchange, but on the (private) cross connect side as well.

"I think over the next 12 to 24 months you'll see a necessary technology upgrade to probably go to 100 gig (Ethernet) switches off the current 10 gig switches," said Backaus, who reported a "significant amount" of 10 gig upgrades, primarily to video companies. "We're really seeing that crank up. Video is a major driver of that, so that will be another kind of flash point I think we'll see as you continue to see video rollout on the exchange."

Switch and Data (SDXC) saw the number of cross connects in its 34 data centers increase 10 percent in 2007, from 17,755 to 19,577. "Right now we're seeing very consistent demand from CDNs and Internet content companies," Switch and Data CFO George Pollock said in the company's recent earnings call. "We are seeing media and content companies increase the scale of their services as one of the accelerators."

But even as some video-focused data center tenants experience growth, newer players may face challenges as they try to scale, particularly if credit conditions restrict access to capital - including money they've already raised and invested. TechCrunch reported today that many Silicon Valley startups have invested their spare cash in auction rate securities, one of the markets hit hardest by the credit crunch.

"Now, that money is frozen, and startups are scrambling to find a way to free up the cash," TechCrunch reports. "VCs that backed many of these private firms are apoplectic this happened," Silicon Valley Bank (SVB) President Adam Dean told the Wall Street Journal. SVB has been warning against the risks of auction rate securities for years. VentureBeat reported today that "venture-backed companies with Comerica money market accounts have had their accounts frozen," and when offered the chance to respond, the bank didn't deny it.

Is the CDN sector crunch-proof? In the midst of the credit crunch, content delivery providers continue to announce new funding, like today's $55 million in financing for Highwinds. In 2007 and early 2008, funding has flowed into the content delivery business. But some competitors - like Navisite - have found it difficult to scale and are reducing their focus on the CDN market. With more than 30 content delivery providers, some industry observers are braced for a shakeout. Here's Dan Rayburn's analysis:

While it is great for the industry right now, over time, the market can't sustain 30+ providers. I fear that 18-24 months from now we're going to see quite a consolidation in the CDN market and only about half the providers will be left standing. The CDN market keeps going in the same cycle every couple of years.

What would this mean for the data center market? Any consolidation in the CDN market will create winners and losers, with the winners positioned to reap the benefits of the coming online video boom.

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