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Netflix to slowly dump outside CDNs

By PETER WHITE

Published: 8 June, 2012

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Netflix has just begun telling the world about its experiments with its own CDN called Open Connect and how it plans to change its delivery mechanism and move away from independent CDNs such as Limelight Networks, Level 3 Research and Akamai, all of which it currently uses.

Has it told the world about this shift now just to re-assure them that Netflix will continue to be delivered, without penalties, by most ISPs, right to the door of its customers, or has it told the world in order to leverage negotiating power over these 3 CDN players - not for the future, but for its here and now profitability?

The Netflix move was widely interpreted as a direct threat to the CDN players, as indicated by falls in their share price, with Limelight hit hardest, down 12.5%. Netflix suggested that it would continue to use alternative CDNs alongside its own for the time being, not least because it will take a while to get its Open Connect up to capacity to carry all of its considerable mountain of traffic. This amounts to about 30% of all US Internet traffic, and currently Open Connect is only taking 5% of that. It is likely to take a few years to scale up to anywhere near 100% , and we recall that Netflix has tried to set up its own CDN before, deciding then it was too specialized a business. But now it considers it to be too strategically important to leave to others.

Last year Akamai derived only 1% of its $1.16 billion 2011 revenue from Netflix, while Level 3 only got 1.5% of its $3 billion. Limelight did rather better, getting 11% of its overall $171 million, which this explains its greater share price dip on the Open Connect announcement.

As with the dedicated commercial CDNs, Open Connect is providing ISPs with two routes of access, either delivering the Netflix content at no cost to locations specified by the ISP, or via common internet exchanges. In the peering case, ISPs are issued with a Netflix Open Connect appliance, which enables them to direct the flow of Netflix content across their networks.

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