So the Recession Is Indeed Punishing CDNs

When Akamai (NASDAQ:AKAM, news, filings) announced another sequential revenue decline with its quarterly results two weeks ago, I wondered whether they were losing share or if the malaise was a general one.  Well, it’s a general one, as can be seen by the results of the company’s largest competitor, Limelight Networks (NASDAQ:LLNW, news, filings).  Limelight also saw a sequential revenue decline, checking in with $32.3M, down from $33.2M in the first quarter.  Add in the lackluster results of the Content Markets division of Level 3 Communications (NYSE:LVLT, news, filings) and Internap’s final retreat and write-off, and it is clear that the CDN business had a rough quarter  overall.

One can only wonder how this is affecting the dozens of smaller CDNs that were born over the last two years with a little venture capital money and big dreams.  It can’t be long before we start losing a few.  But what’s behind it?  Is traffic growth slowing or is pricing pressure accelerating?  Dan Rayburn points toward a slowdown in traffic growth as the main culprit, although the overall effect is certainly a combination of the two.  Deceleration of traffic growth should only be a short term effect, as companies try to stretch their current bandwidth commitments further in this environment.  When times are good, there is a tendency to throw bandwidth at problems, only when things get tougher do we spend effort tuning things for bandwidth efficiency.  What would really get ugly though is if this effect now triggers a truly destructive price war.

The latest rumor of course is that AT&T (NYSE:T, news, filings) is about to acquire Akamai (NASDAQ:AKAM, news, filings).  What, again?   Well, if you’re going to start a credible rumor about someone buying Akamai, I suppose the only buyer that makes any sense at all would be AT&T.  However this one smells really unlikely to me, if only because AT&T is not at all likely to jump at a chance to attract further regulatory scrutiny right now by acquiring its way into another business where it would hold an 80% marketshare.  Well, OK, they’d do it if they thought they could get away with it, but they certainly wouldn’t pay a premium for the privilege.

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