CDN Market (AKAM, LLNW, LVLT) Ripe For Consolidation

Is the content delivery network (CDN) market set for another round of consolidation? Streaming media analyst Dan Rayburn says yes (and so do we). Why? Because the number of companies selling CDN services has almost doubled in the last year, from 15 to 28, and the increase in competition has been bad for everyone. Also, new innovations are coming soon, making it harder for players without a full suite of services to compete.

Much recent CDN industry news has been negative: A pricing war has burned industry giants like Akamai Technologies (AKAM) and Limelight Networks (LLNW), and Limelight bombed its first quarter as a public company. Meanwhile, Rayburn says some good news is around the corner: “The fourth quarter of this year is going to be filled with announcements from CDNs with large customer wins, new buildouts, new types of delivery services, enhanced reporting products and hybrid delivery solutions.”

Will that trigger consolidation? We think it could. After the jump, we lay out three major reasons why.

See Also: Is Level 3 Akamai And Limelight’s Next Nightmare?, analysing CDN Pain: What’s Next For Akamai, et al?

Disclosure: SAI Chairman Kevin Ryan is an investor and CEO of CDN Panther Express.

– Acquisitions for size, scale, and geographic strength. Telecom companies  benefit from scale. The bigger the CDN, the cheaper they can buy bandwidth, equipment, and rack space. And it’s a fast (if not pricey) way to eliminate a competitor. (Example: Akamai bought rival Speedera in 2005 for $130 million in stock, ending a messy lawsuit.)

– Acquisitions for technology. The next great delivery technology or reporting software makes a nice buyout target. (Example: Akamai bought Nine Systems last November for $160 million.) Similarly, if someone figures out better peer-to-peer delivery, which is cheap but still clunky and unreliable, this might make an attractive acquisition. (Examples: Akamai bought P2P CDN Red Swoosh in April for $18.7 million in stock, VeriSign (VRSN) bought Kontiki last March for $62 million.)

– Acquisitions by outsiders. Telecom giants like AT&T (T), Verizon Communications (VZ), small business Web hosting companies like Yahoo! (YHOO), and others may want to get into the CDN business or expand their services. (Examples: Level3 (LVLT) bought Savvis’ CDN assets last December for $135 million, Internap (INAP) bought VitalStream last October for $217 million.)