This morning Level 3 (NYSE:LVLT) announced it had expanded the coverage and capacity of their content delivery network. While all CDN vendors are always increasing the reach and capacity of their networks, it's nice to see a vendor put out some real numbers for a change. Level 3 says it has increased its globally available CDN capacity to more than 5.6 Tbps, which is a little more than double the 2.15 Tbps capacity they had in late 2010. In addition the company also announced expanded CDN offerings into multiple countries in Latin America as well as locations in Saudi Arabia and Canada.
While CDN pricing has remained pretty stable in the market, a trend I expect to continue in 2012, there is no question that Level 3 has a distinct advantage over most of the other CDNs in the market since Level 3 owns their own network and has a lower cost of delivering the bits. At a time when their competitors like Limelight Networks (NASDAQ:LLNW) are slashing their capex costs from around $40M last year, to about $25M this year, Level 3 is still able to spend more money on capacity while still having higher margins, thanks to owning the network.
Capex, space and power are cheaper for Level 3 and they run on a very predictable capex cost decline. Commodity servers, like the ones Level 3 users, as well as some other CDNs, decline at 20-30% per annum. The throughput is then what drives Level 3's cost of that capex on a unit basis. If Level 3 doubles the throughput of their servers they just halved that element of the cost. Since Level 3 has been very focused on a particular segment, broadcast and media and entertainment, the right sort of library and traffic actually improves Level 3's cost base the more they get, as in the case of Netflix (NASDAQ:NFLX).
Some have suggested that Level 3 is spending a lot of money to support Netflix's continued expansion, which is a bad business model due to Netflix having such a low price per Mbps sustained. While it's true Netflix's price is low, it's not as low as some think and the entire CDN business is about the economics of scale. Even with Netflix having a very affordable price, the rate of volume growth means that Level 3 can make money on their Netflix business. While some might want to debate this, Level 3 did go on record with me in 2010 to say they make money on their Netflix contract and would continue to do so, even if Comcast charged them more money for every port Level 3 turned up on their network.
Some still want to debate whether or not owning the network is an advantage when it comes the CDN business and I think we've seen enough evidence to show that it is. This should not be something that's debated in the industry any longer. Other data in the market confirms this and it is one of the reasons we have seen MSOs like Comcast and Time Warner build out their own CDNs. They have stated it is cheaper for them to keep the delivery in-house because they own the network, have a lower cost, and they get the added benefit of QoS and the potential to try and monetize the video via OTT platforms down the road.
On a side note, Level 3 also announced a deal with Conviva which bundles Conviva's CDN performance measurement tool with Level 3’s MediaPortal, allowing customers to get CDN performance analytics from a third party. Conviva is working with multiple CDNs on this offering, (Limelight also) so that customers can compare the network performance from one CDN to another.