While Netflix (NASDAQ:NFLX) has always had a dual-vendor approach for their streaming delivery by using CDNs Limelight (NASDAQ:LLNW) and Level 3 (NYSE:LVLT), in the beginning of the year Netflix continues to move away from Level 3 and will be taking just over half of their traffic to Akamai (NASDAQ:AKAM). While this is clearly good news for Akamai, the price point at which Akamai is charging is the lowest price I have ever seen the company offer.
We've all known that for the past two quarters, Akamai has been getting aggressive on pricing with their M&E business and lowering pricing to win or retain customers. But this latest round of Akamai pricing shows just how much they are now willing to compete with Limelight and Level 3, and in many cases, are looking to price business at levels they know the other CDNs can't or won't match.
While they are finally acting like they now want to own the CDN market outright and keep their competitors from growing, the flip side is they are now the single biggest company driving down CDN pricing in the market. What used to be Limelight and Level 3 driving pricing down has now been replaced by Akamai offering pricing well below what the others offer, on many large deals.
Lately, Akamai has been giving some large companies like Netflix a very discounted rate if the customer agrees to give Akamai at least 51% of their traffic. In exchange, Akamai offers the content owner a highly discounted rate for three of four months as an incentive. In this case, Netflix is paying Akamai about one and a half cents per GB delivered for a couple of months before Netflix's pricing goes back to about six cents per GB delivered. At a penny and half, that's about 3x cheaper than what Limelight charges Netflix and is at a price that Limelight simply can't match. While I'm hearing that Netflix just renewed their contract in the new year with Limelight, one has to wonder what Limelight would do in 2011 if Akamai keeps their pricing at this level.
One way to look at this is that Limelight has a little less of Netflix's traffic, but at a higher price, which should mean they can make more money from it. Akamai on the other hand has more traffic, but at a greatly reduced price point, which means they can only make money from getting a lot more traffic, or by having a lower internal cost than Limelight, something we don't know when it comes purely to their CDN business. Akamai's thinking has to be get the M&E business in the door at all costs so they can drive volume on the network and have a chance at upselling customers to higher margin products. Essentially, CDN can be a loss leader for Akamai if it had to be in order to act as the catalyst to grow their value ad services business. The real winner in this case is Netflix, which continues to drive down their cost of streaming movies.
Akamai is clearly making some really aggressive moves in the market right now and is looking like a company that really wants to once again dominate the CDN space. While many have been talking for the past 18 months about all kinds of other companies that are going to enter the CDN space, or compete with the leaders in the CDN space, it's very clear that the race is still between Akamai, Limelight and Level 3 for the largest portion of the CDN market.
Disclosure: No positions