Service Provider

This morning Akamai announced they have reached an agreement to acquire privately held Verivue Networks, which providers a transparent caching and licensed CDN platform to service providers. Akamai expects the deal to close by the end of this year and said they will pay all cash for the company, but has not disclosed any other terms of the deal. Verivue doesn’t have a lot of paying customers and has a small number of customer deployments with 2012 revenue in the $20M-$25M range, so I don’t expect Akamai to be paying much for the company.

While many are calling this a licensed CDN acquisition by Akamai, it’s also a transparent caching play. Verivue has two technologies that will benefit Akamai, a licensed CDN platform, and transparent caching technology, which is where Verivue gets a lot of their revenue from. Over the past year, many vendors have been working to combine the two technologies into one platform for service providers. PeerApp, the leader in the market has teamed up with EdgeCast, Juniper teamed up with Tata and Cisco is also working with PeerApp. For a better understanding of how transparent caching fits into the CDN market, read my previous post entitled “An Overview Of Transparent Caching and Its Role In The CDN Market“.

For those not familiar with the term “transparent caching” the idea is simple. Transparent caching platforms make intelligent decisions about which content can and should be cached inside a carrier’s network. By deploying intelligent caches strategically throughout their networks, operators can cache and deliver popular content close to subscribers and reduce the amount of transit traffic across their networks. CDNs like Akamai are good at what they do, serving content to subscribers quickly, and in the process alleviating peering costs for service providers. But there’s an enormous amount of traffic that CDNs do not serve, and that’s where the value of intelligent caching comes in.

Deployed throughout a carrier network, transparent caching improves subscribers’ experience and reduces carriers’ peering costs, but only if it delivers the features and intelligence required to adapt to constantly changing user behavior and content patterns, and most importantly, scales economically to tens or hundreds of gigabits per second. Akamai’s plan is to take the best of both technologies, licensed CDN and transparent caching and combine them into one platform, sold to service providers.

When Akamai announced their licensed CDN product in February, the company didn’t mention anything in their release about it having any transparent caching functionality. But in a briefing I had with the company when they announced it, Akamai divulged that their licensed CDN product would have transparent caching functionality build in. That was an interesting piece of news because Akamai’s platform would then offer all three services to an operator, those being on-net services/software, off-net delivery and transparent caching. At the time, Akamai said that 100% of the technology for their managed and licensed CDN product had been developed in-house and that they did not plan to licensed any transparent caching technology from any third-party. Clearly the company has changed their mind and acquiring Verivue will help them get to the market faster.

Since Akamai’s announcement of their licensed CDN product nine months ago, the company has yet to mention a single customer by name that is using their platform. This morning they mentioned to me that they have “three customers in trial” for their licensed CDN platform, which is still in beta but that they have “some paying customers today” for their managed CDN product. While we don’t yet know how much money Akamai is paying for Verivue, clearly they aren’t making too big of a bet on the licensed CDN business, otherwise they would have acquired EdgeCast, the leader in the licensed CDN market. But with expected revenues of around $70M this year for EdgeCast, coming from both regular CDN services and their licensed CDN platform, realistically, Akamai would have had to spend a few hundred million for EdgeCast, something I doubt they are paying anything near for Verivue.

As a stand alone business, the transparent caching market is expected to be $142M this year and the licensed CDN market is even smaller. So there is not a lot of revenue here – yet. Also, the market is crowded with transparent caching vendors including PeerApp, Qwilt, Juniper, Huawei, Fortinet, Conversant, BTI Systems, Brocade, Blue Coat, VidScale and Allot Communications who just acquired Oversi. Add to that all of the licensed and manged CDN vendors in the market like EdgeCast, Limelight Networks, Jet-Stream, Cisco, Alcatel-Lucent, XDN and others and it’s a very crowded market. But many of the players in the space are small, some are having trouble growing revenue and it’s only a matter of time before the market consolidates even more. No one truly knows what the size of the licensed CDN market is today, or what it can grow to because it’s only just getting started and we need to see a lot more customer deployments before we have enough data in the market to see how service providers use these platforms. But there is a real opportunity with the right kind of licensed CDN platform and it’s a market that is going to grow nicely over time. Acquiring Verivue should allow Akama to help get deployments in the market much faster.