Verizon: EdgeCast Acquisition Solidifies Video Strategy

Dec.12.13 | About: Verizon Communications (VZ)

Verizon Communications (NYSE:VZ) recently revealed that it has completed the purchase of leading Content Delivery Network (CDN) company, EdgeCast . Verizon is estimated to pay between $350 million and $400 million to acquire control of the privately held EdgeCast. This development confirms my suspicion that Verizon is intent on becoming one of the big players in the surging demand for video streaming.

Unlike other writers here on Seeking Alpha, I do not believe that Verizon is already keen on going head to head with Akamai (NASDAQ:AKAM) over the CDN business. Yes, EdgeCast is one of the top five leaders in content distribution network services and the Los Angeles-firm has the expertise and experience to give Verizon a strong technology platform to go toe to toe with Akamai.

EdgeCast has a strong clients list - the firm provides CDN services to big name companies like NTT DoCoMo (NYSE:DCM), TeliaSonera, and Deutsche Telekom (OTCQX:DTEGY). This CDN player, according to 451 Research, has estimated 2012 gross sales of $103 million which pales to Akamai's 2012 revenue of $1.37 billion. Akamai's widespread servers around the globe make it more successful in attracting big enterprise accounts. Verizon, if it really intends to make a big play for CDN, will have to spend lots of money to upscale EdgeCast.

I see no compelling reason why Verizon will immediately go this path. Aside from Akamai, Amazon (NASDAQ:AMZN) is already joining an already crowded CDN marketplace. The new CDN product from Amazon Web Services is a major threat given Amazon's proven track record of providing top caliber cloud hosting services. Verizon, in my opinion, will take more time to build a global CDN network to be at par with Akamai or Amazon.

EdgeCast Complements upLynk

Verizon's purchase of EdgeCast is a tactical complementary move after it acquired upLynk last November 11. EdgeCast's technology will support the video streaming capability of upLynk. Verizon Digital Media Services opted to purchase upLynk because of its unique architecture and approach to cloud-based streaming video.

upLynk is the company behind the widely applauded Watch Disney apps and the affiliate-drive Watch ABC. Disney's decision to trust upLynk is also one major reason why Verizon bought it. The architecture of upLynk's cloud-based video streaming is cost-efficient for Verizon and customers.

While upLynk is already good at minimizing the cost for streaming videos, its method of streaming content still needs a CDN service to allow it to meet every unpredictable demand associated with video delivery. Right now, Verizon is retaining the upLynk's cloud backend dependence on Amazon Web Services.

The purchase of EdgeCast gives Verizon more pipelines to deliver high-definition videos to its customers. The intense rush towards ultra-broadband fiber optics technology for video delivery requires major capital expenditures. EdgeCast's already existing CDN servers helps Verizon deliver faster video content without huge outlays.

Video Streaming: Tremendous Growth

According to a report published by Alcatel-Lucent's (ALU) Bell Labs, "Metro Traffic Network Growth: An Architecture Impact Study," video traffic will see an increase of 720% by 2017. This tremendous growth for video streaming is clearly why Verizon is aggressively positioning itself as a major video content delivery company.

VZ is already a great investment play. It is a dominant mobile phone operator and I like it more now that is making all the right moves towards the lucrative video streaming market. Verizon's FiOS TV is steadily gaining customer acceptance in the U.S. Fios TV sales is already generating 7.7% of Verizon's gross revenue.

The video business is further strengthened by upLynk's creative targeted ad placement technology. upLynk's video streaming solutions allows replacement of broadcast ads on the fly. Two people may be watching the same Disney TV show but they can actually be seeing different advertising loads.

Both big and small video content providers also will be catered to by Verizon's upLynk video streaming. They can just pay for the bandwidth resources they consume. Small customers with no deep capital can benefit from this. There's no huge up-front fee commitment to be made.

Conclusion

The purchase of EdgeCast and upLynk gives Verizon stronger weapons to help it penetrate the lucrative video content delivery/streaming business. Verizon may also expand its CDN business gradually to compete with Akamai. It is smart to focus first on video and then maybe in the future, it can start building a global-wide hardware setup for a content distribution network service.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.