I get many calls from financial analysts and many of them ask about the rate of traffic growth amongst the CDNs. It's a good question and one that is hard for them to really put a number on since nearly all of the major CDNs don't give out any data about the traffic on their network from quarter to quarter. While most CDNs always say it is growing, we don't know at what rate, even when they say it grew by x percent. Without real baseline numbers to base those percentages on, it's hard for anyone to really know what kind of traffic growth the CDNs are seeing.
We hear all the CDNs say they are seeing traffic growth, but is it at the same rate as previous quarters? How much of that growth is coming from video? And what percentage of traffic passed on the network comes from video? These questions and more are things we all want to know so we can have a detailed screenshot of exactly what trends are taking place in the market with online video delivery. Since CDNs aren't breaking out these numbers for us, that leaves many financial analysts looking for traffic growth estimates from transit providers like Cogent Communications (CCOI) and XO Communications [XOHO.OB] as an indication of what the CDNs are seeing.
The problem with this approach is that companies like Cogent will have one or two quarters with lower traffic growth and then next quarter, show a spike in traffic. This is typically due to the rate at which they were selling their transit that quarter and not a direct result of how much transit the CDNs bought in the quarter. Using transit providers' growth as a barometer for the growth of traffic on CDNs really does not give us any guidance, especially since we typically have no details on how much transit the CDNs are buying and whom they are buying it from. Since the CDNs all buy different volumes of transit from multiple providers, it still leaves us guessing.
The way I judge traffic growth on content delivery networks is by speaking to their customers. The content owner is the only accurate barometer on how the CDNs are doing and if you speak to enough large customers each month, you can start to see traffic trends. The good news is that I still have yet to speak to any major content owner who says their traffic growth rate is declining. Content owners are still putting more content online, at higher bitrates, for more devices and in many cases, more long form content as well.
While some are speculating that next year we will see a real surge in video traffic on the CDNs, I would argue that we are seeing that today. The surge is now. Devices like the XBOX 360, Roku, TiVo and others are creating continued traffic growth on the CDNs. Online video offerings from those like MLB, NFL, NHL, Hulu, Netflix (NFLX) and others are giving us a surge right now since the quality of their video offerings are encoded at such high bitrates.
But today's surge does not seem to be enough for many financial analysts. The question they really want to know the answer to is when does the next tipping point take place in the market that results in the CDNs seeing tremendous traffic growth? While that's a question we all want to know, it's pretty easy to see from what is taking place in the market that the next real tipping point does not come this year or even next year.
While there are a bunch of devices out in the market today, it will take a few years before the install numbers are large enough to make a real impact. New offerings like broadband enabled TVs and Blu-ray players show promise, but are really only just being offering by multiple manufactures in the second half of this year. HD video is starting to gain some traction, but is still far off from being thought of as a "default" setting in your video window.
The good news is that it's all on the way, but let's be realistic and not expect it to happen overnight. While many talk about the surge of 05' when YouTube started to take off, keep in mind that didn't happen overnight as many make it seem. It took a few years before YouTube and Flash video really started to impact the market and it will take a few more years before devices and HD video impact the market in a big way again. In the mean time, traffic growth on the major CDNs is good, is still ticking up and content owners say that they see no signs of it slowing down.
Disclosure: No positions