CDN triggers a second revolution: from transmission services to edge computing

In the list of "Top 20 Technology Companies with the Highest Pay in the U.S." released by Glassdoor, an American employer evaluation website in mid-April, Akamai, a company that many people are not familiar with, was listed. Its employees' average annual salary is $121,000, more than twice the average salary in the United States.

Akamai is the largest CDN company in the United States and the world. In 2016, its total revenue reached US$2.34 billion and its profit was US$310 million. Among the 24 brokerage analysts, 14 gave buy recommendations, 9 recommended investors to continue holding, and only one recommended selling.

Professional CDN vendors are still at the peak of development. Wangsu Technology, which dominates the Chinese market, is also growing rapidly. Wangsu Technology released its annual financial report in March, showing that its annual operating income exceeded RMB 4.4 billion and its net profit exceeded RMB 1.2 billion in 2016, with overseas business accounting for more than 14% of the total.

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01. The winner-takes-all industry secret: three major barriers build a wall of profitability

When netizens enjoy the smooth Internet experience brought by CDN technology, they rarely imagine the fierce competition in this industry.

Globally, Akamai and Wangsu Technology are probably the only two professional CDN companies that are profitable. ChinaCache, the second largest company in the Chinese market, lost 230 million yuan in 2016. In the United States, no CDN company other than Akamai is profitable.

Unlike many technology companies that have one trick to dominate the market, CDN is an industry with a high entry barrier. Only industry leaders with a certain scale, technology and operational capabilities can achieve large-scale profits.

From the perspective of scale, with less than 5T bandwidth reserves and less than 400 high-quality CDN nodes, it is basically difficult to achieve scale effects and provide services to large customers, and can only become a marginalized company;

From a technical point of view, CDN itself is a service based on technology. It needs to continuously deepen its technical capabilities according to market demand, otherwise it will not be able to provide good services.

From an operational perspective, CDN business needs to provide continuous operations and services, and needs to provide customers with 24/7 reliable services. Without a good team and operating platform with four to five years of operating experience, it will be difficult to achieve healthy operation.

The high scale, technology and operational thresholds have led to a high concentration of business among leading companies, thus forming a winner-takes-all market where "there is no point in being second or below."

Sun Jingze, general manager of Wangsu Technology's marketing center, said at the Asia-Pacific CDN Summit held in April this year that the price war that has been going on since 2015 has caused most companies in the industry to operate at a loss and compete for customers by taking a negative gross profit. At the same time, it has also pushed the CDN market to mature. With full competition among market participants, we expect that this year and even next year, the amount of self-built services will gradually decrease, and outsourcing will become a more mainstream choice, so the market share of third-party CDNs will expand instead.

02. Cloud computing, IoT, AR/VR: New changes in edge computing in the second half of CDN

Today, CDN is undergoing a second transformation: from focusing on transmission services to relying on edge computing.

Especially at the moment when cloud computing is booming, CDN itself is a natural distributed cloud platform. Its nodes can be upgraded to cloud computing nodes with storage, computing, transmission and security functions after transformation, forming the ability to process high-frequency, high-interaction massive data.

Competition in CDN will undoubtedly become more intense, but fortunately, the market pie is still getting bigger and bigger. With the commercialization of the Internet of Things, AR/VR, and the advent of the video era, the market demand for CDN will show geometric growth.

Data from Markets and Markets shows that the global CDN market grew at a compound annual growth rate of 26.3% from 2010 to 2014, reaching US$3.71 billion. It is expected that the global CDN market will reach US$15.73 billion in 2020, with a compound annual growth rate of 26.01%. The domestic CDN market is developing rapidly, with an annual compound growth rate that is almost twice that of the international CDN market.

In the next wave of market growth, video and live streaming will become an important driving force.

At the end of April this year, NASA, in cooperation with Amazon AWS, first realized 4K ultra-high-definition resolution (UHD) live broadcast from space. The video stream was encoded on the International Space Station through AWS Elemental encoding software and then transmitted to the Johnson Space Center on the surface of the earth, thus realizing this ultra-high-definition video conversation. This space live broadcast indicates that 4K will become the biggest trend in the video industry in the future.

According to Cisco's research and forecast, by 2020, each user will consume 93.9GB of monthly traffic, a 135% increase from 40GB in 2015. Video is an important factor in promoting the explosion of traffic. Cisco predicts that IP video will account for 82% of the total network traffic in 2020, a 70% increase from 2015.

This may help improve Wangsu Technology's future market position. Currently, nearly 80% of live streaming websites in China use the acceleration service provided by Wangsu Technology. A report released by Minsheng Securities in March this year said that live video streaming has gradually become a popular Internet application with broad prospects. For the live streaming business, Wangsu Technology has seized the opportunity. New technologies such as edge computing have been applied to live streaming solutions.

Taking the most popular barrage as an example, barrage distribution has become a major concern of live broadcast platforms. To some extent, the quality of barrage presentation directly determines the conversion rate of live broadcast platforms. Based on edge computing, Wangsu has successfully developed edge barrage distribution technology. All barrages are distributed directly on the Wangsu platform without returning to the source, which solves a major pain point of high barrage pressure on live broadcast platforms.

With the popularity of high-definition video, VR\AR, big data, the Internet of Things, and artificial intelligence, the demand for transmission has increased dramatically. It is difficult to undertake the storage, calculation and interaction of all data solely through centralized large-scale cloud computing centers, which will put great pressure on network bandwidth. This requires CDN to evolve from a traditional IO-intensive system centered on cache business to an edge computing system and build a content computing network to solve the connection challenges brought by the future Internet of Things. In this process, the CDN industry will also inevitably complete a second iteration.