When it Comes to CDN Patents, Level 3 Is the One to Watch

Over the past few weeks, an ongoing patent dispute has meant most of the focus in the content delivery market has been on Akamai (AKAM) and Limelight (LLNW). In the meantime, however, Level 3 (LVLT) has been quietly expanding its CDN services, adding capacity to its network and signing up one large customer after another. In fact, when it comes to CDN patents, Level 3 is the one to watch. In addition to the 50 patents pertaining to content delivery it has pending, Level 3 owns over 80 patents pertaining to content delivery and streaming media technology — including 20 it recently bought from IBM (IBM).

Level 3 and IBM last month said they’d signed a long-term patent cross-licensing deal whereby Level 3 gets licenses to 42,000 pending and issued patents from IBM and IBM gets licenses for more than 850 pending and issues patents from Level 3. What was not disclosed was that Level 3 also purchased 20 patents pertaining specifically to content delivery and streaming technology.

I’m about to put the finishing touches on a story detailing why Level 3 is not affected by Akamai’s 703 patent, so I’ve been doing a lot of research on CDN patents lately. Sifting through prior court rulings and patent filings, I noticed that the USPTO web site lists IBM as the owner of 20 patents pertaining to CDN and streaming. It also claims they’re in the process of being transferred over to Level 3. I contacted Level 3 and they confirmed this was indeed true.

Most of the patents date back to ‘97 or ‘98 and concern the way video, multimedia or digital content is delivered. Some of the patents have to do with encoding and processing, encryption, load balancing and methods for caching. There are also numerous references peppered throughout the patents regarding the best methods for routing traffic, how the media servers load balance the traffic and the effect that has on the end user experience.

While I still need to read the fine print of all 20 patents before I will truly understand the effect they may have on others in the industry, it’s already clear that Akamai isn’t the CDN its competitors should be worried about. Level 3 when they entered the market made no bones about the fact that for them or any other CDN to be successful over the long term, they’d have to have the intellectual property necessary to protect their investment in the CDN market. And with the acquisition of the SAVVIS assets — including the Sandpiper patent, which predates Akamai’s 703 patent — Level 3 is clearly in the driver’s seat.

Level 3 seems to be taking the same tactic as Akamai, to date filing suit against the only company they view as a competitor — also Limelight. And while some of the other existing CDNs could one day become competitors too, right now none of them are turning in more than 20 percent of Limelight’s total 2007 U.S. revenue. There is a huge revenue gap between the No. 2 CDN, Limelight (Akamai is No. 1), and No. 3. That gap needs to shrink and these smaller players need to start posting CDN-based revenue to the tune of $50 million a year before they will become worthy of concern.

Some don’t give Level 3 a chance. They say Level 3 has too much debt, is having problems integrating some of its acquisitions, or simply maintain that since it’s a telco, it won’t understand content delivery, anyway. But looking past the debt (which most companies have), and the mistakes other telcos made in the past (Qwest (Q) and MCI tried and failed to operate their own CDNs), Level 3 has a real shot at dominating the content delivery market for years to come. And given their massive portfolio of content delivery patents, if I was another CDN whose goal it was to give Limelight a run for their money, I’d be most worried about Level 3.

The numbers of the patents being transferred to Level 3 are: 5996025, 6189039, 6195680, 6226618, 6263313, 6272566, 6398245, 6418421, 6460082, 6463454, 6463508, 6587837, 6763377, 6859791, 6963910, 7103564, 7110984, 7117259, 7188085 and 7206748.

Comments

[ED K]

BASED ON PAST PERFORMANCE LEVEL 3 COULDN'T BE A THREAT TO A FLEA WITH A SLEDGE HAMMER.

[Liverdiefree]

True as to past performance but the Colorado Rockies couldn't beat an egg over most of their history and were NL champs last year. Things can change.

[ratherblucky]

Don't know squat about the profitability of CDNs (apparrently neither do most people) but LVLT is making a big effort to reduce labor costs. Just so they don't cut a life supporting artery.

[607]

I'm at home watching, as a part of the labor cost reduction, and I've seen them throw away other existing revenue looking for something. Could be CDN, but it must be worth many billions.

[Scott Berry]

Dan, the whole telecom industry seems to be moving toward a more horizontal structure (though probably not linearly). I wonder how much--if at all--Level3's prospective customers care about buying their services from the same one who owns the pipes. Especially, as you've said, cost may not be the primer concern for them. Do you have any sense of that?

[Dan Rayburn]

Hi Scott, all depends on who the customer is, what they are buying and how many different services they are taking. I speak to some customers who could care less about buying services from the ones who own the pipes. But then other customers tell me for their needs, it's important to them. It is very hard to speak in general terms about the market for these services when the type of services taken, volume of traffic, geographic reach and the kind of industry the company is from all factor into exactly what each customer specifically needs.

[User 178403]

Dan,

Can you provide additional insight to your comment, "signing up one large customer after another" in your first sentence?

Which customers and how big is the revenue impact?

[Dan Rayburn]

I can't give details on who the customers are and the revenue. When companies give me that info, it is under the assurance that I won't give it out to others until they give me permission or the info becomes public in some way. If I gave out all the info I am told, no one would ever tell it to me again.

[b.dubbu]

Can anyone say Sony?