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CDNs: A Logistics Service for the Digital World

One of the key lessons of our current research activity is that Telcos (fixed and mobile) and CableCos need to better understand CDNs (Content Delivery Networks): in particular how they can improve operator economics and help enable a better service for customers (upstream and downstream). Here is your CDN primer (it builds on our previous article):

In the global economy, physical goods are usually produced in one country and consumed in another. The transportation which delivers the goods from the producer to the consumer is becoming an increasingly complex affair especially as the producers and consumers tend to be on different continents. There are a multitude of possible routes whether by road, sea, rail or air and a number of borders to cross. Today, most physical goods companies operating in a global company will buy in third party services from a logistics expert to assist in delivering goods in a cost-effective and timely way.

In the digital world, content is produced in one place and consumed in another with more and more the transportation system being the internet. The problem is that the internet itself contains no guarantee of quality and therefore the user experience is extremely variable and the even bigger problem is that it is horribly complex to deliver an improved user experience. Furthermore, as any large scale content producer will attest it does not require a single skill set to fix, because the problem is both computing and networking. Just as in the physical world, experts are around to help and in the information world they are called “Content Delivery Networks” or CDNs.

In the physical world, most logistics companies don’t own any of the big shipping containers or ports, they do however book capacity on the ships, have agents operating in the ports and occasionally own warehouses providing temporary storage for goods in route. In the digital world, most CDNs book capacity on the major internet routes and have servers, providing temporary storage, located at strategic points which are determined by using the intelligence of its agents.

The key to success of any CDN is applying its intelligence to deliver digital content faster and cheaper than the content owners could do themselves. This is in effect the same as most wholesale services in the world expect of course in the digital world the maths is more complex.

Akamai is the Grandfather of Content Delivery Systems and for anyone thinking that they are new phenomena should remember that the seed for Akamai was planted in 1995 when Sir Tim Berners Lee, who invented the World Wide Web, foresaw congestion would be a problem with the internet and challenged colleagues at MIT to invent a better way of delivering internet content. The company and technology has survived the bubble era and in fact today is more important now than ever as the internet itself become more complex and the more content than ever is delivered.

ak_2.PNG Source: Akamai SEC Filings
*Operating expenditure exclude goodwill amortization and write-offs in 200 & 2001
** Cashflow equals Cash Provided by Operations minus Cash Capital Expenditure, both plant & property and internalized capitalised software
*** The 2007 estimate is based upon actual 9 months results to Sept-07 and the estimate for 4th Quarter based upon actual 3rd Quarter Results.

In 2006, Akamai had a turnover of US$429m and Operating Profit margin of 19.4%. This year my estimate is US$614m turnover and margin of 21.1%. Turnover and Margins do not seem excessive especially as it is considered that Akamai deliver 10-20% of the daily world internet traffic. The business does display scale properties, but not excessively so. The feature of 2007 is that growth is still strong, but also fixed asset investments have increased as Akamai is obviously building its platform out to cope with the increase in demand coming from traffic increases.

Akamai is actually considered the premium CDN and accordingly charges a premium for services. Dan Rayburn of streamingmedia.com provides frequent estimates of CDN pricing. For example on August 2007, he estimated that prices ranged from US$2/GB for a 1TB/month commitment to US$0.12/GB for a 100+TB/month commitment. Of course, prices vary according to contract length and additional services purchased, but pure content delivery and traffic offload from your existing datacenter is easily affordable for many content providers.

Current “Dan Rayburn” Prices:

Cost and Volumes based upon common CDN objects:

The growth of Akamai has led to an influx of new industry entrants. Some entrants have focused on specialized needs within a particular industry eg CacheLogic looking at software updates and others have focused upon leveraging their downstream assets eg Level3 developing a CDN on top of their of their fibre network. We expect other specialist CDNs to appear focusing on regional market challenges eg a CDN for Africa. This exactly mirrors the market structure of logistics companies in the physical world.

The current key ingredient for success is the cost and quality of delivery of every bit and this is purely reliant on the quality of each operator platform. Most CDN platforms effectively rewrite some of the internet protocols, for example the notoriously imperfect BGP protocol, for intra-platform communication. The main service from Akamai has evolved over the years and is now a complete platform which is typically integrated into the core content provider applications.

The closer the platform is to the end-user the better the performance to the end user. Most CDNs try to be hosted deep within networks. This has a three fold benefit to the network operator: first they get revenue for the hosting, secondly it reduces their backhaul costs and finally end-user experience is improved.

In summary, we like CDNs at Telco 2.0 and think all network operators, including mobile, should be looking at integrating them into their networks for the following reasons:
* they deliver a benefit to everyone: users, networks and content owners
* they offer an perfect example of how people can innovate on the internet and build and offer services on a wholesale basis
* some advanced CDNs, such as Akamai, provide a glimpse of the future as services evolve into platforms.

There is much more detail around internet delivery systems and their relative economics in the forthcoming Broadband Business Model 2.0 report, including pure P2P systems such as the BBC iPlayer, topology aware systems such as Joost and iptv systems such as the BT Vision service. We also look at non-internet delivery systems such as the hybrid satellite and p2p Sky Anytime service and the cable network based Virgin Media Video on Demand service.

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Why would CDNs continue to do well since they have an inherent cost disadvantage to peering and DIY CDN combos? Ultimately transit providers will need to add internal CDNs for QoS thus the days are numbered for providers like Akamai/Limelight/etc, no?

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