Apple Has Plans to Bring CDN In-House; To What Extent Is Unknown

With Apple (AAPL) having already announced plans to build its new $1 billion data center in Maiden, North Carolina, folks I have spoken to inside Apple told me that once the new data center is completed, Apple plans to have a more active role in doing their own content delivery.

While this won't be happening anytime soon, since the data center won't even be completed this year, it does indicate that over time, third party CDNs like Akamai (AKAM) and Limelight (LLNW) could very well lose a large portion of Apple's business. While it's way to early to speculate what kind of content Apple will deliver and in what volume, this strategy is nearly identical to what we've seen Microsoft do over the years.

In 2007, third party CDNs delivered more than 95% of Microsoft's traffic. But only three short years later, Microsoft (MFST) projected that third party CDNs will only account for about 40% of their traffic. While this might scare some investors into thinking that a new trend is taking place, whereby content owners start building their own CDNs for delivery, that's not the case. There are very few companies the size of Apple, Microsoft and Google (GOOG) who can spend hundreds of millions of dollars to build out a CDN with the scale and performance that they need, especially when it comes to video.

It is however something to keep a close eye on as we know that Apple has been a long time customer of Akamai and recently, started using Limelight as well. What we don't know is how much business is potentially at stake with these companies since neither of them will comment on their business with Apple or the size of their deals.

But it's also something to keep an eye on for another reason. We keep hearing the CDNs talk about Blu-ray quality streaming and more HD quality video coming online and how it will help fuel the growth of their business. While I agree with them that it will help fuel the growth of the CDN industry, I disagree with them that it will be a catalyst anytime soon.

But what happens if Apple and Microsoft start producing higher quality content, like they will, yet start doing a lot of that delivery of it themselves? What impact will that have on the CDNs? While Microsoft and Apple clearly aren't the only two content creators who can help fuel the growth of the industry with higher quality content, they are two of the largest.

It's something to keep an eye on and I expect we'll know a lot more details around this come next year.

Comments

[Macbeutling:]

I am very sure about the meaning of this big data-center:

Live-streaming of all the Apple-Keynotes in the future.

Aug 20 11:21 AM

[MikeSX:]

The fastest and least expensive way for apple to have all of the infastructure required for their CDN bandwith over the next ten years is for them to buy level three (LVLT). This would provide the biggest bang for the buck with LVLT trading at $1.23.

Aug 21 01:55 PM

[Nom De Plum:]

MikeSX....what does "$1.23" mean? How much equity value is that? How much debt does LVLT have? A stock price is only a placeholder for value. What return would AAPL extract from this acquisition in terms of reduced bandwidth costs? What would AAPL do with all of LVLT's other customers? Please stick to watching Cramer and Fast Money and not commenting on intelligent blog's such as Dan's.

Aug 24 10:04 AM