Start-ups look to bulk up video bandwidth

These nimble start-ups satisfy today's demands for quick load times and uninterrupted streaming.

"Until about a year and a half ago, CDNs were used primarily for pictures on Web sites," explains Tier 1 Research vice president Dan Golding. "But video requires exponentially more bandwidth. Even with light loads, it would be otherwise impossible to provide video using older CDNs."

Enter the start-ups, including Limelight Networks, a profitable 5-year-old company that recently raised $130 million from Goldman Sachs and other investors. Limelight chief strategy officer Michael Gordon expects the company to generate at least $50 million in revenue during 2006.

Limelight and a handful of smaller players, such as BitGravity and CacheNetworks' CacheFly, are challenging publicly traded incumbent Akamai Technologies, formed in the mid-1990s to commercialize a system developed at the Massachusetts Institute of Technology. While Akamai's rise continues, Limelight has outpaced its growth rate by creating a network specifically suited to high-bandwidth sites.

The difference lies in network architecture. Akamai's distributed network consists of more than 20,000 servers in 71 countries, providing access points that are in proximity to users worldwide. Its distributed architecture suits low-bandwidth sites, while a more centralized architecture such as Limelight's, which features clustered servers at fewer access points, delivers video more quickly.

Limelight's architecture also has driven down the price of content distribution, making the company a favorite of customers, which have included YouTube and MySpace.com. Both YouTube and MySpace are building their own CDNs now, though YouTube will remain a customer of Limelight's for some time.

BitGravity, which is still in stealth mode, is apparently attempting a different approach, though it remains quiet about the details. The start-up's only known customer is video production house and distributor Revision3.

Bootstrapped by its founders, BitGravity is already profitable but is considering a single, substantial round of funding in the coming months. While BitGravity's early returns have come from video distribution start-ups, the company is targeting a broad spectrum of content sites, software distributors and service providers as potential customers.

Legal challenges possible
CDNs that become large enough could face legal challenges from Akamai. As the holder of key patents in the industry, Akamai has been willing to pursue upstarts in court, and it has initiated proceedings against Limelight for patent infringement. Although Limelight's Gordon dismisses the suit as "fundamentally without merit," pledging to fight it, observers speculate that Akamai could pursue the suit long enough to drive Limelight's price down, then acquire the company.

Earlier this year, Akamai settled a suit against Speedera Networks by acquiring it for $130 million. Apparently in acquisition mode, Akamai agreed in November to buy streaming-media tools developer Nine Systems in a deal valued at nearly $160 million.

Analyst Golding pegs Limelight's valuation at close to $1 billion. Beyond Akamai, other potential suitors for Limelight include Microsoft and Google.

Even losing YouTube as a customer isn't expected to hurt Limelight in the long run, Golding says.

"You never want one customer to account for more than 10 percent of your revenues, so having specific large customers isn't necessarily helpful," he explains.

Any of the CDNs could make an attractive acquisition target for a larger company seeking to buy, rather than build, its own network.

"Building these networks is very hard," says Golding. "It requires a lot of intellectual property development. You can't just buy a bunch of servers and call it a CDN."

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