Canaccord Genuity is keying in on what we saw yesterday as a threat to content delivery network players. Its telecom analyst Greg Miller has shown that the new effort from Netflix, Inc. (NASDAQ: NFLX) intending to launch its own version of a content delivery network called OpenConnect is a threat to players like Akamai Technologies, Inc. (NASDAQ: AKAM) and even to Level 3 Communications Inc. (NYSE: LVLT).
Miller said that Internet Service Providers can now choose to interconnect with Netflix at one of eight settlement-free peering exchanges or potentially cache content more locally that might help minimize the flow of individual video streams on the ISPs network.
More specifically Miller said, “Although it is not perfectly clear what the intent of Netflix is with this new service, at the very least it should help reduce the friction between ISPs such as Comcast Corporation (NASDAQ: CMCSA) and CDN providers such as Level 3 Communications that are sending increasingly large asymmetrical traffic loads to the ISPs.” The report shows that this could be a negative event for the content delivery network providers. Miller has said that Netflix’s own CDN is unlikely to replace commercial CDN providers immediately, but he believes that this effort will likely impact the share price of Akamai and Level 3 as they are both primary CDN service suppliers to Netflix and because the market values of both benefit greatly from the perception that accelerated growth might result from the adoption of over-the-top video applications such as Netflix that would require the expertise and networks of those two respective companies.
Akamai has recently seen a reacceleration of volume-based revenue growth driven by online video traffic growth, and the Netflix move will likely bring some incremental headwind against Akamai. Level 3’s total revenue is only about 3% from content delivery networks, but Canaccord Genuity thinks that Netflix was likely one of the key drivers for the 70%+ CAGR of CDN revenue at Level 3 and the company invested heavily since it landed the streaming contract with Netflix in late 2010.
Netflix’s third primary CDN service supplier is Limelight Networks, Inc. (NASDAQ: LLNW) where Netflix accounted for 11% Limelight’s 2011 revenue. Limelight lost close to 10% of its value on Tuesday’s news release.
Level 3 held up fairly well on Tuesday, and while Akamai recovered to end up down only 3.2% on the day its shares had been down over 8.5% at one point on the day.
JON C. OGG