CloudFlare Business Model

CloudFlare, the successful CDN valued at $1B, has a lot of good things going for it, including 1.5M customers. They are the #1 CDN based on customer count. They handle 5% of the Internet traffic, and continue to grow like crazy. Now that CloudFlare is all grown up, and earned its stripes, it’s time to take a look more deeply into their business model. Our goal is to identify areas that need improvement. Ultimately, we’re all in the same race trying to figure things out, and make out the best we can, for our families and ourselves.

Cost Structure

How many of CloudFlares 1.5M customers pay nothing? Is it 100,000, 500,000, or 1,000,000? Even though these customers pay nothing, someone is paying for it, and in this case it’s CloudFlare. The CDN costs are obvious; bandwidth, servers, colo, power, routers, switches, and so on. The annual cost for supporting the non-paying customers are likely to be in the millions. Let’s do a simple pricing exercise.

In today’s competitive environment, CDNs buy bandwidth from multiple carriers, in order to decrease the overall bandwidth prices. CDNs and hosting companies usually buy the more expensive Tier 1 bandwidth, along with lower priced Cogent type bandwidth. Thereafter, they mix these two types of bandwidth to get a lower blended bandwidth cost. Thus, 1Gbps of Tier 1 bandwidth costing $3,000, and 1Gbps of Cogent bandwidth costing $1,000, ends up being a blended bandwidth cost of $2,000 for 1Gbps. Keep in mind these are ball park figures.

Now let’s do a little math with our $2,000 for 1Gbps pricing. If it cost $2,000 for 1Gbps, than 100Gbps cost $200,000 per month. If the non-paying customers are using 200Gbps of bandwidth, the total monthly cost is $400,000 per month, or $4.8M per year. If the non-paying customers use 100Gbps of sustained bandwidth, the annual cost is $2.4M.

CloudFlare Business Plan for $200/month

Now let’s evaluate one of the plans that CloudFlare offers it customers called the “CloudFlare Business”, which customers pay to the tune of $200 per month. The plan includes unlimited bandwidth. If one customer pushes 10Gbps of bandwidth, and another customer pushes 10Mbps of bandwidth, both pay the same price. It doesn’t take a rocket scientist to figure out that this pricing model is flawed.

The customer pushing 10Gbps is going to end up costing CloudFlare $20,000 per month. Let’s say CloudFlare negotiates a super low rate with Cogent, lowering the cost to $500 for 1Gbps. For the customer pushing 10Gbps, its going to cost CloudFlare $5,000 per month. CloudFlare is losing a ton of money with this customer. There is no magic in these numbers and cost structures, CloudFlare is going down the road of Panther Express, who ended up selling itself in an asset sale.

Re-architect the Business Model

A possible solution to the current business model, create two platforms; one platform for the non-paying customers, and the other platform for paying customers. A separation of platform means infrastructures are separated logically and physically. Each platform has its own set of caching servers, networks, hardware, and so on. Then, cap the bandwidth for the non-paying customers from a bandwidth perspective, whether it’s 100Gbps, or 300Gbps.

As for the paying customers, they may burst to higher levels, and receive a generous block of bandwidth, whether its 20TB/month of data transfer, or 50TB/month (1Gbps = 350TB/month, roughly). Any bandwidth pushed above the block of bandwidth, gets charged an overage fee on a price per GB basis. CloudFlare might be surprised, and this little price adjustment may end up in its favor, resulting  in a significant increase of annual revenues.

Conclusion

CloudFlare is an Internet company, and as such, Internet companies need to change from time to time. In CloudFlare’s case, it looks like the time for change is now. There is a lot at stake here, not only for CloudFlare, but for the whole CDN industry. If CloudFlare fails, it’s going to impact the entire CDN industry, in a negative way. Akamai has proven that having fewer customers is sometimes better business. CloudFlare needs to do some deep soul searching, and find the right balance.