Seeking Alpha
Dan Rayburn, StreamingMedia (158 clicks)
Research analyst, streaming and online video
Profile| Send Message| ()  

When Verizon (VZ) announced the news of its intent to acquire EdgeCast, naturally a lot of outlets picked up on the story and published their thoughts on the proposed deal. While some will have different options on what they think it means for the companies involved, the competition and the industry, there were too many pieces published that got many of the basic facts wrong. Some might chalk that up to the fact that many who covered the news simply don't know the CDN space well enough, but that's no excuse.

Multiple media outlets got revenue numbers wrong and even some research analysts and money managers who cover the CDN space did a poor job in their coverage of the news. I don't know how some analysts can try to get CDN vendors to use their services when they don't truly understand the market and can't get many of the basics right. My goal of this post isn't to point out who did a bad job, but rather make sure the industry is working off of the facts and making decisions based on real-world intelligence. I read about three dozen posts and multiple analyst reports on the news, and here's what I found that was inaccurate.

When it came to reporting on EdgeCast's revenue, many got it wrong saying:

  • "$135m annual revenue that it expects to have by year-end"
  • "has estimated 2012 gross sales of $103 million"
  • "last year reached more than $100m in revenue"
  • "has made most its money off of lucrative telecom partnerships"

In July of 2013, EdgeCast confirmed for me, on-the-record, that it will end 2013 with about $100M in revenue and estimated it would do $140M in revenue for 2014. It reconfirmed these numbers again the day of the Verizon announcement. It also stated that less than 25% of revenue comes from telco based CDN services. So many analysts simply did a lazy job of reporting on the numbers and didn't check with EdgeCast or even talk to them about the deal. One person got the numbers wrong, and many seemed to follow suit.

When it came to reporting on the size of the valuation that Verizon gave EdgeCast, many referenced the size of the deal wrong:

  • "Three of the four largest acquisitions in the CDN market have come during the past two years"
  • "The enterprise value of the deal is at $395m, making it the largest acquisition of a CDN vendor"
  • "It's the largest price ever paid for a CDN vendor in the market"

Statements like this about the size of the deal clearly show the lack of knowledge some have on the history of the CDN market. Verizon's intent to acquire EdgeCast for about $400M is not the "largest acquisition of a CDN vendor," not even close. Akamai (AKAM) bought Intervu for $2.8B and Digital Island acquired Sandpiper Networks for $630.5M. If you are supposed to be an industry analyst covering the CDN market, know your history.

In addition to revenue and valuation numbers that were wrong some also wrote things regarding competitors that weren't accurate, among other misleading statements. One person wrote, "Verizon revealed that it has completed the purchase of leading Content Delivery Network company EdgeCast." How someone could get that so wrong is beyond me, but no deal has yet to be "completed." Another report said, "Akamai has made a significant push to license or manage CDN services for telcos such as Orange, Swisscom and others." That's not accurate when it comes to Swisscom as that is a reseller deal, not a licensed or managed CDN deal, something Akamai has confirmed. I don't know why so many people can't understand the difference between licensed, managed and reseller CDN deals between CDN service providers and telcos and carriers.

When it came time to discuss the impact on Akamai, a few wrote statements that were simply so far from reality it shows their complete lack of understanding of the market and competitive dynamics, with some saying:

  • "Verizon's motivation is not to compete head-to-head with Akamai."
  • "I do not believe that Verizon is already keen on going head to head with Akamai over the CDN business."
  • "The key here is whether Verizon continues to resell Akamai's enterprise services."

It's clear that many who wrote about this deal didn't speak to Verizon and EdgeCast about it or didn't ask the right questions. Both companies made it clear to me they plan to continue to compete in the CDN market. Verizon isn't interested in buying EdgeCast to bring the technology in-house for their own needs, they already have a CDN for that. They are going to buy EdgeCast to get into the services business, hence why EdgeCast's offering will fall under Verizon's Digital Media Services group. Verizon will be going head-to-head against Akamai and other CDN providers in the market, just like EdgeCast does right now.

On the topic of Verizon no longer reselling Akamai's value-add-services to enterprise customers, Verizon would not comment on that. But let me make it clear that Verizon will stop reselling Akamai's services as soon as they can once the EdgeCast deal goes through. All you have to do is have insight into how Verizon has been working with Akamai and it's clear to see what will happen. For now, some can say this is debatable since Verizon hasn't gone on record to discuss it, but it's one of the reasons why Verizon wants to acquire EdgeCast.

There was a lot of different numbers given out on how much reseller revenue Akamai will get from Verizon this year and I've heard the range to be as low as $50M and as high as $100M. We don't know for sure, but so far this year, resellers have made up 21% of Akamai's revenue. So even at the low-end of the range, $50M would account for about 20% of all of Akamai's 2013 reseller revenue, providing numbers in Q4 similar to the ones they had last quarter. Having one-fifth of their reseller revenue in jeopardy is not what I would call a "limited impact" or "not meaningful revenue" as some wrote.

There was also a lot of comments made that "telecom companies have historically had difficulty selling content delivery network services," so Verizon will be in that same boat. I find it interesting that of all those who wrote comments like that, not a single one mentioned which telcos have tried to sell CDN services. The reason for that is that almost no telcos have actually tried to sell CDN as a commercial service, but those writing about this topic don't know that. The only one they know about is AT&T (T) and comparing Verizon to AT&T just because they are both telcos is flat-out wrong.

AT&T never acquired anything to try to get into the CDN services business and never truly tried to make it work, with any real strategy. Verizon is committing serious dollars to buy a well proven vendor in the market and investing a lot of money after the sale to further build out services. AT&T talked a big game but never backed it up and never made a real financial commitment. Verizon is doing the opposite, not to mention, is also spending additional dollars to buy other pieces of the ecosystem that tie into EdgeCast's platform. Verizon still needs to prove they can execute on their game plan, but don't compare that to AT&T which had no real strategy or product offering of any kind when it came to CDN services or a video ecosystem for broadcasters.

My whole point of this post, and it's not the first one I've done on this topic, is that the media and some analysts, not all, do a very poor job of covering the CDN market. A lot of what you read is crap, they don't take time to research what is truly taking place and they don't speak to the companies and more importantly the customers involved.

Disclosure: None.

Source: The Verizon And EdgeCast Deal: What Analysts And Media Got Wrong