CDN price war ends, with Wangsu, Alibaba and Tencent taking over the market

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Image source: Visual China

The CDN price war, which was once in full swing, seems to be coming to an end.

At the "Cloud + Future" summit in May this year, Tencent Cloud announced a maximum CDN reduction of 20%. However, almost three months have passed and the other two major players in the market, NetEase Cloud and Alibaba Cloud, have not followed suit.

At the Yunqi Conference held in June, Alibaba Cloud significantly reduced the prices of a considerable number of cloud products. However, this did not include CDN. The "abnormal" performance of Alibaba Cloud, the "price butcher", was also interpreted by the outside world as a key signal that CDN prices had bottomed out.

The last time Alibaba Cloud slashed the price of its CDN service was at the end of November last year. At that time, Wangsu Technology Vice President Li Dong told the media: "In the CDN field, this price war will only eliminate companies that are not strong enough to cope with the competition... We believe that the basis for winning the market and influencing customer choices is still quality and service."

1. What will change the CDN industry is definitely not the price

Except for the case of Tencent Cloud, the price of CDN industry has not dropped substantially since July 2017. The price drop has changed from being measured in yuan to being measured in cents. The real reason behind this can be analyzed from the perspectives of CDN service providers and users.

First, let's look at the service provider. The cost of CDN services is mainly composed of management costs and bandwidth costs. The former is more flexible and has a certain room for optimization due to the different management levels of each company, while the bandwidth cost is more rigid and has very limited room for reduction.

After more than a year of price war, some professional CDN companies with poor management capabilities are facing increasing cost pressure. For example, ChinaCache and Dilian have fallen behind. However, companies with strong strength and fine management, such as Wangsu Technology, have further expanded their market share in the price war. At this time, the competition in the CDN market has entered the bottom of bandwidth cost.

In the Chinese CDN market, Tencent Cloud and Alibaba Cloud, as super-large cloud computing platforms, can take advantage of scale synergy and use profits from other businesses to cross-subsidize CDN business, so the price reduction is often double-digit. However, when CDN revenue is getting bigger and bigger, the price war also brings about the expansion of losses. No company is willing to accept continuous huge losses. The business characteristics of CDN also determine that losses due to strategic investment are meaningless.

Secondly, from the user's perspective, some price-sensitive users have migrated from professional CDN vendors to large cloud platforms such as Tencent and Alibaba, while the remaining companies that are unwilling to expose their data to AT still choose to stay with professional third-party CDN platforms.

For those companies that aspire to become the fourth pole, whether it is cloud computing or CDN, they prefer to maintain more independence. After the third quarter of 2017, the performance of professional CDN leader Wangsu Technology began to turn around, and its performance has returned to the growth channel for two consecutive quarters, which is a good proof of this fact.

Overall, for new entrants, price is usually a stepping stone that is effective in the early stages of entering a market and can help them enter the market in the shortest possible time. However, market share is not determined by a single price factor, but is also affected by multiple factors such as product technology and service capabilities. In B2B business, customers will not only choose the lowest-priced service, but also pay more attention to the reliability and stability of the service.

At the 2018 Asia-Pacific CDN Summit held in the first half of this year, one of the consensuses reached by the participants was that the key words for the development of my country's CDN in 2018 are cooperation, profitability, and service. It will be an inevitable process for China's CDN market to move from competing on price to competing on quality and service.

2. Wangsu, Alibaba and Tencent have formed a three-way competition

In the latest "Market Guide for CDN Services" released by Gartner not long ago, 18 leading CDN companies in the world were selected, of which five are Chinese companies, namely ChinaNetCenter, Tencent Cloud, Alibaba Cloud, ChinaCache, and Baishan. However, compared with the first three, ChinaCache and Baishan are smaller in scale and business coverage.

While the price war was in full swing, Wangsu Technology, which had retained its leading position, began to accelerate its global layout, deploying edge computing to help the smart society. In addition to building its own overseas nodes and developing overseas markets, in 2017, the company acquired 97.82% of the shares of CDNetworks (a Korean company and the world's third largest independent CDN company) and 70% of the shares of CDN-video LLC (a Russian local CDN company) through capital.

Akamai's development path does provide guidance. As the level of Internet security continues to improve, CDN nodes, which are a must, have become a top priority, and CDN-based cloud security and edge computing have also seen development opportunities.

As the second tier, Alibaba Cloud and Tencent Cloud face the awkward identity of being non-third-party independent CDNs. However, as data value becomes more prominent today, competition among giants also gives independent third-party companies room to survive. After all, Alibaba Cloud and Tencent Cloud have clearer exclusive service goals.

In other words, Chinese CDN players are splitting into professional CDNs serving enterprise customers, represented by Wangsu Technology, Alibaba industry chain CDNs, Tencent industry chain CDNs, and other niche CDNs. China's CDN market has also changed from Wangsu Technology being the only one two years ago to a three-way competition among Wangsu Technology, Alibaba Cloud, and Tencent Cloud.

According to the "2017 China CDN Market Size and Industry Analysis Report" released by CCIDnet in March this year, in 2017, the leader of China's CDN market was still the long-established professional CDN service provider Wangsu Technology, with a market share of more than 40%, followed by Tencent Cloud and Alibaba Cloud.

In the foreseeable future, China's CDN market will be dominated by professional manufacturers and cloud computing vendors, but each side will have its own focus in division of labor.

The CDN services of Tencent Cloud and Alibaba Cloud present a typical "differential order". Since their CDN business is expanded in the order of "core business - invested companies - other companies", in special cases, for example, Tencent will give priority to maintaining the access speed advantage in many content areas such as WeChat, video, and news, while Alibaba will also strive to ensure smooth access to Taobao and Tmall. For AT and AT, CDN services are more of a part of the complete cloud service package provided to small and medium-sized Internet companies.

For professional CDN vendors such as Wangsu Technology and Akamai, there is no distinction between their own business and other customers. They also provide services to some technology giants. The neutrality, stability and security of an independent third party make Wangsu Technology the preferred CDN service provider for more than 3,000 enterprise-level core customers.

For example, at the end of July, Azure officially used the CDN service provided by Akamai. Sudheer Sirivara, partner of Azure Multimedia and Azure CDN services, mentioned in his blog that 90% of Internet users around the world get "network jumps" from Akamai's CDN service.

From a global perspective, in addition to the typical AWS CloudFront CDN service, a subtle cooperative relationship seems to have been formed between professional third-party CDN service providers and cloud services. The "cloud + CDN" business model seems to be driving each other's profit models towards maturity in a win-win cooperation model.

However, it is not clear whether Tencent and Alibaba will follow the example of Microsoft Azure and Google Cloud Service and integrate third-party CDNs as partners in their cloud services.

3. The real change will come when 5G and the Internet of Things become popular

At present, after the entry of giants, the Chinese CDN market has grown into a highly mature industry with sophisticated operations and management level, which almost determines success or failure. The price war has already carved out a moat and a stable echelon position. Therefore, the price war itself has not completely changed the industry, but has once again helped cloud computing vendors clarify their main channel and helped professional CDN vendors consolidate their moat.

The real changes in the future will come from the true arrival of China's era of great traffic navigation.

The first priority of the Age of Traffic is the growth of traffic itself. Especially with the advent of the 5G era, the popularization of high-definition video, and the true networking of the Internet of Things, the demand for traffic has exploded again. Under the premise of the growth of both sources and terminals, whoever can withstand the rounds of qualifying competitions will be the winner and take all of the cake of this place where big data must pass through. At that time, perhaps there will be a real reshuffle.

It is estimated that the size of China's CDN market is only 15%-20% of the global market. China's current per capita traffic consumption level is far lower than that of the United States. A research report recently released by Huatai Securities believes that the domestic CDN market still has great potential and it is expected that the CDN industry will maintain a compound growth rate of about 35% in the next three years.

The second essential thing in the Age of Exploration is how to ensure traffic security.

According to Experian’s 2018 data breach industry predictions, “The vulnerability of Internet of Things (IoT) devices will cause massive chaos, leading to new security regulations. In 2018, we will see cybercriminals causing real-world chaos by hacking into the Internet of Things. The interconnectedness of IoT devices makes them a prime target for advanced hackers and ransomware. Imagine what people would pay if their smart thermostat or connected vehicle was taken over?”

It can be seen that in the future, what will change the CDN industry will not be just the price, but the reliability and security of the service. Only companies that create greater value for users and bring users a sense of security will go further.