Analyzing CDN Pain: What's Next For Akamai (AKAM), et al?

More pain.

Limelight's Q2 results, released this morning, confirm what Akamai investors learned last month: big content delivery networks (CDNs) are feeling serious pricing pressure from upstarts like CacheFly, EdgeCast and NY-based Panther Express. (Our chairman is a Panther investor and CEO; lest you think we're just shilling for him, though, plummeting prices are bad for Panther, too.) And it's going to get worse before it gets better.

Perhaps the most alarming statistic from Limelight's results was that despite the addition of 149 net new customers last quarter, a 20% gain, revenue fell, dropping to $21.2 million from $22.9 million in Q1. Limelight's losses ($10.8 million Q2 operating loss) were expected: every CDN has to build out a complex network infrastructure. But the big CDNs, primarily Akamai, are seeing significant margin pressure. Industry sources say that to compete with cut-rate CDNs, Akamai has had to lower its content-delivery rates by as much as 30%-50% for some customers.

No matter how low prices go, Akamai, the 800-pound gorilla, will do fine (it will get great bandwidth rates and will use its brand to attract the biggest customers, like Apple, Fox Interactive, and Microsoft).  The content delivery business is only going to expand as more video goes online and more people use broadband. And leaders Akamai and Limelight can grow by focusing more on complex services that small CDNs won't bother with.

But the current price wars, which will likely continue until some of the current crop of start-ups are driven out of business, will likely lead to more margin pressure. 

(Reminder: SAI chairman Kevin Ryan is Panther's CEO and an investor.)