Today, Netflix (NASDAQ:NFLX) announced that they have been actively working to build out their own network of caches inside ISP networks and have officially launched the "Netflix Open Connect Content Delivery Network". With this offering, Netflix aims to lower their CDN costs, rely less on third party CDNs, provide higher quality streaming and most importantly, give network operators more control over the video that flows through their pipes. While their blog post doesn't give out too many details, I had the chance to speak with Netflix earlier today to get some more information on their announcement.
To support the launch of their CDN, Netflix has a new website at openconnect.netflix.com which gives ISPs more details on the hardware and software design of Netflix's caches, details on how ISPs can peer with Netflix and access to a deployment guide. While many might compare what Netflix is doing with their cache deployment to what Google has been doing for years, the big difference is that Netflix is giving ISPs control over the caches, allowing them to adjust the volume of traffic flowing through their network. This is a smart move on Netflix's part as many ISPs don't view Google (NASDAQ:GOOG) caches as being friendly because once placed inside the operators network, they can only be controlled by Google.
Under a typical scenario, one Netflix cache can handle about 8.5Gbps of throughput and can support about 25,000 subs. While Netflix is going after the major ISPs for partners, they did say that for any network with more than 100,000 subs it would make sense for them to deploy caches. Netflix said the caching technology they are using was all built in-house and they haven't licensed any content delivery technology from any third party. Netflix said that based on the caches they already have deployed, about 5% of their global video delivery is already being delivered via their Open Connect Content Delivery Network, with some locations like the U.K., seeing as much of 50% of their traffic coming from their new CDN platform. Netflix plans to serve nearly all of their video globally via this new CDN, but estimate it will take a few years for them to build it out. I would compare this approach to a similar one Microsoft had, which saw them bringing the majority of their CDN in-house over a few short years.
While some might suggest this is a new trend in the market, content owners delivering video themselves, it's not. There are maybe half-a-dozen content owners who are delivering enough volume of bits, have the technical expertise and have the money to build out their own CDN. Only companies the size of Google, Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Netflix and Facebook (NASDAQ:FB) can take on such a task. Netflix would not say exactly how much money they would save from using their new CDN over third party CDNs, but even a small fraction of savings per Mbps would be substantial to Netflix since they peak at multiple Tbps of video every day.
Something that's pretty unique to Netflix's cache deployments is that they are not demand driven caches. Unlike most content owners who see maybe 80% of their traffic come from only 20% of their content, Netflix gets traffic from all of their content. So instead of someone having to request the content before it is fetched and placed on the caching server, which is how most CDNs work today, Netflix is actually pre-populating the caches inside the ISP's networks. During peak hours, Netflix's caches are in read only mode and during off peak hours, they get populated with content.
Naturally, this news is going to make a lot of people question what impact this will have on Akamai (NASDAQ:AKAM), Limelight (NASDAQ:LLNW), Level 3 (NYSE:LVLT) and Amazon (NASDAQ:AMZN), now that Netflix plans to do video delivery themselves. For starters, this news does not impact Amazon in any way as Netflix has built a bunch of their non-video platforms on top of Amazon Web Services (AWS), which won't be impacted. For Limelight and Level 3 who have the majority of Netflix's video traffic, they will lose most of this traffic over the next eighteen months, if Netflix deploys their caches as expected. About eighteen months ago, Netflix signed three year contracts with Limelight and Level 3 and Netflix said their don't plan to break any contractual commitments with the CDNs.
While some might take this as negative news for the CDNs, it's actually the opposite. In particular for Limelight and Level 3, they have spent a lot of money to build out their networks to support Netflix, and most of the revenue they get in return simply offsets their costs. Netflix's video traffic isn't really profitable to the CDNs and it's one of the reasons you have seen Limelight announce they would cut back their CAPEX spend by nearly $15M this year, when compared to 2011. With Netflix doing their own delivery, the CDNs can now spend money to build out services where they can actually see good margins and don't have to compete so hard on price.
Of course vendors like Limelight and Level 3 are going to have a lot of revenue to replace in the next 18 months as Netflix contributed to just over 10% of Limelight's total revenue in 2011, but they have been through this shift before with YouTube and Microsoft. If the CDNs don't have to spend the money to deploy services that are about break even, it means they can spend their time and effort towards more profitable business, which is good for their bottom line. So for anyone who thinks that by Netflix bringing their video delivery in-house means doom and gloom for the CDNs, it doesn't.
Building out their own content delivery network is a smart move for Netflix as over time it will reduce their costs, enable them to help ISPs have more control of Netflix's content going over their pipes and also improve their streaming quality to consumers. This is good news for everyone involved.
Updated: I've gotten a few emails already asking me which ISPs are participating in Netflix's Open Connect Content Delivery Network. While I know of a bunch, I can't mention them by name since so far, none of the ISPs have given me permission to make that info public.