Report: Delivering Content in the Cloud

1. Summary

The growing ubiquity of the Internet is having a major influence on the video and software industries, which are using it to enable delivery of their products online.

Advanced infrastructures are required to deliver those contents efficiently. The Internet has been built on a best-effort model, but is under increasing pressure as traffic skyrockets. To speed delivery times, web pages and video content are being served through content delivery network (CDN) technologies, which optimize the network usage through different techniques, including primarily caching servers and, increasingly, P2P technologies for hybrid approaches. Software is delivered through cloud computing and its infrastructure offered as a service (IaaS).

In the cases of both CDN and IaaS, end-users benefit from third-party providers’ infrastructure investments, which are shared among the providers’ clients. End-users, therefore, can operate more rapidly and transform most of their capital expenditures into more variable operating expenditures. They can also be more flexible and are able to scale more readily in the case of traffic spikes or rapid growth.

The objectives and benefits of CDN and IaaS solutions are therefore very similar, even though they address generally very different types of services and applications. CDN and IaaS have therefore many common points, both on technology and business aspects, and could converge at some point as they have developed expertise on some complementary elements of the infrastructure. The overall architecture is very similar, as well, with both operations relying on similar building blocks, such as distributed data centers. However, CDN focuses mostly on network aspects to ensure efficient delivery, while IaaS is primarily about virtualization and software abstraction of the hardware layer. But both assets may become useful for providers (telcos, etc.) and in the context of rising Internet traffic that could bring some congestion and impede the quality of service, they are likely to converge.

CDN and IaaS also have many common points in terms of their value chains (such as server vendors and network deployment) and business models, although pricing mechanisms (sometimes inherited from the respective telecom and IT industries) remain different. The main uncertainty for both solutions is the ability for end customers to build a safe and sound business model on those infrastructures. A few markets can clearly afford to pay for efficient delivery, such as e-commerce (web pages), premium video-on-demand (VOD) or advanced SaaS solutions. But some potential applications for both CDN and IaaS, especially those representing the most important share of the growth in volume, are not profitable or exhibit very low margins. Many users will turn to SaaS only for non-critical data on which they will expect nothing more than low-cost pricing. Meanwhile, video service providers struggle to generate revenue from advertising.

In the short term, even with notable growth levels, the CDN market is still small in terms of revenues, dominated by Akamai, which was almost in a monopoly situation in 2005. That has intensified competition in this market, and a few players are diversifying into cloud computing, either directly or through partners. The IaaS market is already much bigger and offers numerous opportunities, due to a paradigm shift to SaaS in the software industry. This market is also less concentrated than CDN, with no clear leader, even though Amazon is a reference player. IT services players should become market leaders in the long term, as cloud computing is just a new way of outsourcing IT operations.

Convergence of both CDN and IaaS markets can also be seen at the ecosystem level, when looking at the players involved. CDN pure players are indeed not the only ones looking at the opportunities offered by both CDN and IaaS. Internet giants (especially Amazon and Google), whose data-driven services require an advanced infrastructure and who were leading the way in the IaaS space, are going the opposite way and starting to develop CDN solutions (mostly for internal purposes to date) to deliver their video content.

A few other key players of both value chains are also active. Hosters can leverage both markets to sell their services around data centers and are even trying to position themselves as direct providers in those markets. Telcos have finally entered both markets, realizing that their infrastructure assets should not remain underutilized. Telcos can benefit from those two markets not only in terms of revenue generation but als0 (and most importantly) in terms of cost savings, as they will have to handle the traffic anyway.