When Level 3 (NYSE:LVLT) officially announced last week that they had signed Netflix (NASDAQ:NFLX) as a new customer, some on Wall Street have started speculating that a new pricing battle amongst the CDNs is going to ensue. As a result, Akamai (NASDAQ:AKAM) and Limelight's (NASDAQ:LLNW) shares are down this morning on the news that Oppenheimer has downgraded the companies based on the fear that, "the recent NFLX news could generate renewed CDN price competition."
While Oppenheimer is not the first to suggest or worry about CDN pricing, you can't use the Netflix deal as an indication of anything taking place on a wider scale. Netflix is the largest customer of video delivery on the Internet today across third party CDNs. Their traffic is so unique and so large that no one else even comes close to their volume. As a result, the pricing Netflix receives, the volume they commit to and the terms of their contract are not like any other video customer the CDNs have.
In order to predict or worry about a change in pricing industry wide, you need more than one data point from one customer, especially when the data from that customer can't be counted towards the industry norm. For 2010, based on all of the data I collected, pricing on average for video CDN services fell 20%-25%. I presented all of this data two weeks ago at the Streaming Media West show and will publish it on my blog this week. By contrast, CDN pricing for video fell on average of 40%-45% last year. And next year, I also expect the decline in pricing to be along the lines of this year with no major declines.
It should also be noted that Level 3 is using the new deal with Netflix as a catalyst to spend at least $14M in CAPEX in Q4 to add capacity to their network. Limelight, on the other hand, isn't spending any CAPEX to support the additional Netflix traffic they expect to receive. Some have suggested to me that the CDNs will have to slash pricing in the market to help get more volume to make up for the money they just spent on upgrading their network, which would really only apply to Level 3. And since Level 3 owns the network, they should have a much lower cost to operate it, which means that they should be able to offer lower pricing to begin with. But that's a difference in their core business versus the other CDNs, and has more to do with their direct costs and how they are setup as a company as opposed to it being any kind of sign that they are starting some sort of pricing battle.
So for those that may be worried that Netflix's new deal with Level 3 is the start of some widespread and renewed pricing competition amongst the CDNs, it isn't. Of course pricing will always be one of the many elements that all of the CDNs compete on, and while I am not a financial analyst and I don't know why stocks go up and down, I don't see how Level 3's contract news with Netflix's is any reason to predict that Akamai and Limelight's core business will take some sort of negative hit as a result.
Disclosure: No positions