Level3 (LVLT) tries very hard to appear hip with the Web 2.0 vibe, and today’s WSJ article cites content distribution (namely video) as the reason for a resurgence of investor interest in carriers. Simultaneously, investors continue to flood liquidity into content delivery networks (CDNs) like Akamai (AKAM), trumpeting them as key enablers of the Web 2.0 content rage. It is impossible for both to be right, as each business is designed to eliminate the need for the other.
Om Malik has his take on the WSJ article here, filled with lots of good linkage to previous Level3 articles.
The CDN business model is about taking content and storing it close to the consumer. Whether it be Apple’s (AAPL) iTunes, Microsoft (MSFT) software patches, or the latest silly video (my favorite), geographically distributing the data achieves the following:
Hence, every time your computer fetches data from an Akamai server, it’s essentially robbing a carrier like Level3 of the right to carry that traffic, and reduces the overall demand for carrier transport services.
There are very valid technical arguments for NOT using distributed caching. Some would argue it’s better to centralize the distribution of content for all but the most popular files, and use techniques like SIP to ensure QoS. There are big economies of scale when it comes to building datacenters (example: Google (GOOG)), and others would argue that core bandwidth will be so cheap there is no need for the hassle and expense of caching at the edge.
I’m not trying to say one approach is better than the other. Experience has shown me that Akamai investors are second only to Apple and Google investors in their rabid devotion. I think it’s an excellent technical debate and far too early to call it one way or the other.
However, I don’t think there is any way that companies like Level3 and Akamai will both profit in an outsized way from the distribution of digital content. It is a zero-sum game; either cached at the edge or transmitted from far away. Not both.
This type of market paradox exists in other areas, and leads me to believe we are in a Web 2.0 equity bubble, albeit localized to a handful of stocks I like to call the ‘Web Twenty’.
Full Disclosure: I hold shares in Akamai but am market neutral