Over the past week or so, I've seen a few reports regarding Akamai's (NASDAQ:AKAM) valuation in the market, with some suggesting that the "growth in OTT business models" will be a "catalyst" for Akamai's revenue. Let's take Akamai out of the picture as the point I'm making isn't about what Akamai's valuation should or should not be, but rather the incorrect argument that some are making with regards to the impact of OTT services on CDNs revenue.
The term OTT is used to describe just about any kind of video these days, but in reality, most on Wall Street define it as a premium video service. The problem is that none of those services that have a large subscriber base, other than Hulu, rely on third-party CDNs to deliver their content. And the ones that do like CBS All Access, HBO Now, Showtime Anytime, WWE, Sling TV, DirecTV Now, PlayStation Vue, etc., all have small numbers. Most are around 1M total subs (WWE has almost 2M) with many like PlayStation Vue and DirecTV having far fewer.
It's OK to suggest that as OTT services grow over the years, there will be a positive impact to the CDNs, but the problem is that many are suggesting that positive impact will come in the next few quarters. It won't. All of these OTT services that don't have their own CDN use more than one third-party CDN to deliver their content, with many using three. So even if traffic grows, the percentage of traffic any one CDN gets is small. For instance, DirecTV Now uses Akamai, Limelight (NASDAQ:LLNW) and Level 3 (NASDAQ:LVLT), as did MLBAM, which did the NFL streams for Twitter. So any growth is tempered by the fact that traffic is usually not exclusive to any one CDN.
And none of this is a secret, it's just math and it's easy to figure out. So why is it many on Wall Street still don't know what the real impact of OTT growth is with real numbers? If one person to any of these OTT services watched two hours of video a day, for a total of 60 hours a month, with 50% viewing on a small screen and the other 50% on a large screen, the total number of bits delivered would be about 54GB per month. And with the average price per GB delivered on these sized deals being around $0.005 per GB, the revenue to a CDN would be $0.27 per user, per month. And if the service has 1M subs, which again most don't, the total value to a CDN would be $270,000 per month. Except that they aren't getting 100% of that traffic and typically are getting 50% or less. Total revenue to a CDN would be $90,000 if the OTT provider was using three CDNs. (Note the revenue per user to a CDN would be higher/lower depending on the number of hours they watch, but the average high/low in the industry, outside of Netflix, is around 40/80 hours per month.)
Another data point no one wants to acknowledge is how slowly these OTT services are actually growing. CBS said they want to have 4M subs to CBS All Access by 2020. If they make that target, they will have gone from 0-4M subs in seven years. That's no "catalyst" on any third-party CDNs revenue, that's slow organic growth. I've also seen a few reports that suggest that content providers "risk subpar subscriber/viewer experience by utilizing in-house CDNs." That could not be further from the truth and anyone who writes that sounds like they are listening to someone who works in the marketing department of a CDN provider. Just look at how many live events and OTT services have had quality issues and failures in 2016, all while being delivered from third-party CDNs. Some do say that OTT services won't move the needle for Akamai or other CDNs with regards to revenue, but then also say in the same sentence that it provides "growth opportunities." Without defining the size of the opportunity, or how fast it is growing, "growth opportunities" means nothing.
Updated 4:28 pm ET: Here's a statement from another report I saw today that said "AT&T's (NYSE:T) DirecTV Now, targeting +20M cord never households is a positive catalyst." It's not a "catalyst." AT&T hopes to have 1M simultaneous streams a year from now. If they get that many, which I don't think they will, and Akamai get's one-third of that traffic, it's only worth about $1M per year to each CDN. For a company like Akamai that's doing over $2B a year in revenue in 2016, an extra $1M or even $2M a year is not a "catalyst" at all.
The growth of OTT and all video services is having a positive impact on the CDNs, but the growth of these services is tempered by the fact that the actual rate of growth is small, pricing for the services is low, traffic is split out amongst multiple CDNs, and the number of bits need to view on mobile and tablets is two-thirds smaller than what's needed to a TV screen. I wish Wall Street would rely on actual data, numbers we have in the market that show what people are consuming, how often, at what bitrate, and what that value is, in revenue, to the CDNs.