CDN Industry Buzz for Q3 – 2020

The CDN industry continues to thrive, not only for publicly traded vendors but also for startups. In the last few weeks, there have been several interesting developments. We’ll summarize the latest industry updates, rumors, and observations below. First, let’s start off discussing the growing startup ecosystem.

Startup Ecosystem
Today, there are six promising startups in the CDN ecosystem. Three of the vendors own their routing infrastructure. The other three use existing cloud provider infrastructure like AWS. Each vendor on the list below is focused on a particular area: StackPath on the edge, Subspace on gaming, HAProxy on Kubernetes, and so on. Netlify, Zycada, and Section provide CDN services but do not own the PoP infrastructure. Each model has its benefits. Owning infrastructure gives vendors control over the networking stack, thus they are able to continuously optimize routing performance and network latency. On the other hand, owning the infrastructure is expensive, costing millions of dollars per month to run it at scale.

Currently, there are 20 startups in the CDN ecosystem, not including the publicly traded vendors, China-focused, or cloud giants. The six above represent a diverse group of companies with the most promise. Four of them have enough traction to reach unicorn status in a few years. StackPath is closest, however, after their latest move (described below), their actions muddies the waters.

Total Raised To Date:

  • StackPath: $396M
  • Netlify: $97M
  • Zycada: $31.5
  • Subspace: $26M
  • Section: $3.8M – $4.8M
  • HAProxy: Private

CDN Market
The CDN industry has come a long way. The #2 (Cloudflare) and #3 (Fastly) publicly traded vendors are worth more than Akamai. That represents a healthy competitive environment. The best part, the #2 and #3 vendors have an incredible amount of upside. Their severless offering is just the right product to chip away at the computing stronghold of AWS.

Cloudflare Introduces Workers Unbound
Recently, Cloudflare launched the next generation of its serverless product called Workers Unbound. The original product was introduced in 2017. During the last three years, the Cloudflare team gained deep insight watching thousands of customers use this product. The new version resolves some of the limitations in the first release. The most important takeaway, the product is ready to support compute hungry workloads. Workers Unbound include the following updates:

  • Runs code in V8 Isolates, which was developed by the Google Chrome team. V8 is lightweight, especially compared to containers
  • Single Worker process can run thousands of Isolates
  • Workers are significantly faster and cheaper than AWS Lambda and Lambda@Edge
  • Product is available in all 200+ locations
  • No restrictive CPU limits, thus Workers supports more intensive, compute hungry workloads like image processing and complex algorithms
  • Supports zero cold starts, in that when a request comes into the network that uses Workers, there is zero booting time. Before, it took seconds. Workers accomplish this by starting up during the TLS handshaking process
  • Workers Unbound is a “general-purpose” computing platform vs a niche edge computing product
  • Supports multiple languages including Rust, C, C++, Python, Scala, Kotlin, Reason, and Dart

StackPath CTO-less
StackPath, the CDN startup that raised nearly $400M is now without a CTO. It’s been an interesting turn of events for the startup. Back in April, there was an executive shuffle and the CEO became the Chief Innovation Officer. That CEO was the face of the company for years, traveling the world, presenting his vision of the future, and its place within it. Thereafter, the CTO Wen Temitim picked up where the CEO left off and became the face of the startup, doing an excellent job, surpassing expectations. Then he was no more. The more interesting part, Juniper Networks hired the CTO away even though Juniper was an investor in the latest StackPath round. That’s great for Juniper but not so good for StackPath.

CDNetworks Lays Off US Sales Team
There is a rumor going around that CDNetworks laid off its US sales staff a couple of months ago, including the sales reps, VP of Sales, and others. Supposedly, the company is reworking on its strategy and plans to focus more on the non-CDN part of the business, like edge computing. CDNetworks is not a big player in the US or Europe. Their specialty is delivering content into mainland China on behalf of US and European companies.

CDN Earnings Summary 

Akamai reported Q2 earnings on July 28. We’re always interested in what they have to say since they are an industry bellwether. Here are the highlights:

  • Q2 Revenue was $795M, up 13% YoY and 30%+ operating margins
  • Peak traffic exceeded 100Tbps every day in Q2
  • 300,000 servers in 4,000 locations and 1,500 network partners
  • They work with “220 of the worlds largest OTT companies” and “24 of 25 of the worlds most popular video game publishers”
  • They launched a new product called Akamai Page Integrity that protects websites/users from malware-infected sites
  • 2,000 customers use Akamai WAF
  • 600 companies use Akamai Bot Manager
  • Cloud Security Solutions unit is now a $1B annual run rate business
  • Cloud Security customers: 30 of the 35 largest banks, 17 of the top 20 eCommerce sites, and 8 of 10 largest assets managers
  • 4 security products generate annual sales north of $100M including Kona Site Defender and Bot Manager
  • IoT Edge Connect platform uses the MQTT protocol, a pub/sub communications model which is best for latency-sensitive IoT devices

Cloudflare’s Q2 earnings continued to impress in sales growth and product innovation. When it comes to rolling out new products, they are the #1 vendor in the CDN ecosystem. Cloudflare highlights are as follows:

  • Q2 Revenue: $91M, up 48% YOY and gross margin of 78%
  • 2020 revenue forecast: $389 to $393M
  • Firewall team introduced new improvements to the product that reduced processing time off of every request by 40%
  • Performing threat analysis and full deep packet inspection takes only a fraction of a millisecond across its entire network
  • Pay-as-you-go business, which is the month-to-month subscriptions had the strongest quarter ever in Q2
  • Cloudflare for Teams, which launched in January is being offered for free until September 1 to help protect remote workers during COVID. More than 1,000 businesses have signed up so far.
  • Enterprise Wins: 1) Credit reporting agency signed $800k/ year on 3-year commit 2) Gaming platform signed $1M/year agreement 3) Insurance company signed $750k/year agreement 4) Food delivery company signed $1.1M deal (first $600k/yr, then upped it by another $500k/yr. Why mention this? Because Cloudflare is now a solution for the large enterprise
  • Added 250,000 total clients (free + paid) in Q2. Total customer count = 2.8M. Paying customers = 89,000
  • 556 customers paying $100,000 or more annually, up 65% YoY
  • Signed deal with JD Cloud in China to add 50 new cities per year in Mainland China

Fastly had a solid Q2. However, the stock suffered a hiccup due to the fact that Tik Tok represents 10% of the revenue in the first half of the year. The earnings highlights are as follows:

  • Q2 Revenue: $75M, up 62% YoY and gross margin of 60.2%, up from 55% YoY
  • Total Customer Count: 1,951, up from 1,837 in Q1
  • Enterprise Customer Count (ECC): 304, up from 297 in Q1
  • Average spend for ECC: $716,000 up from $642,000 in Q1
  • Expanded Developer Hub which provides recipes, code snippets, and tools for developers
  • In Q2, increased network capacity to 100Tbps
  • Fastly Flow Control bot mitigation feature will be coming out in the near future

Limelight’s economic situation seems to be improving. At one point, it was close to breaking $1 billion in market cap a few weeks ago. The earnings highlights are as follows:

  • Q2 Revenue: $58.5M, up 28% YoY, and “highest quarterly revenue in history” with gross margins are 40.6%
  • 2020 revenue forecast is $230 to $240M for the year
  • NBCU Peacock and HBO Max help LL deliver record traffic in Q2
  • They’re on target to upgrade network capacity to 100Tbps by year-end
  • Edge services pipeline growing and they expect to close “several” deals in Q3
  • EdgeFunctions, their severless product is still in beta and will be launched in Q3. This product is focused on video (unlike Cloudflare Workers). The use cases for this product revolve around A/B testing, ad insertion, watermarking, and so on.
  • LL rolled out Developer Central which houses API docs, dev kits, and code samples (similar to Fastly’s Developer Hub)

Observations

Imperva Destroys Incapsula Brand
Incapsula, the once-promising CDN focused on security has completely vanished under the Imperva umbrella, wiping out $7B – $10B in valuation. There’s no denying that if Incapsula would have stayed the course as an independent company and went public, it would have had a valuation rivaling Cloudflare and Fastly. It was a leader in CDN security, generating $100M+ in annual revenue a few years back. Instead, Imperva, the parent company that was once public and valued at $1.9B made a fatal decision to wipe out the Incapsula brand in favor of Imperva and choke the resources being invested into the CDN. Today, Imperva is still likely a $2B company while Incapsula is $0.

Akamai’s View on Edge Computing
Akamai, the CDN juggernaut of the past has been shaken up. It appears that the success of Cloudflare and Fastly has really gotten under its skin. During the last earnings call, Akamai executive came out of the gate swinging, boasting about the size of its network (been doing that for more than a decade) and attacking “other CDNs”. Akamai said it has been doing edge computing for the last 20 years and they don’t break down edge computing revenue but if they did, it would be a $2B annual business based on the definition of edge computing by analysts.

We can all agree that most definitions on edge computing have been way off when applied to the CDN business model. However, we have a much better idea today of what it is thanks to folks at Cloudflare and Fastly. CDN edge computing can be broken down into two categories: 1) CDN-centric edge computing and 2) CDN edge computing for building applications. There is a stark difference between the two.

The CDN-centric edge computing model allows customers to create URL redirections, A/B testing, authentication, ad insertion, and so on. Thus, these are value-added services to the CDN stack. Even Akamai’s Cloudlet applications fall into this category. In the second category, edge computing for building applications is done with severless computing. In short, customers can build modern, cloud-native applications, similar to what customers are doing on AWS with EC2, Lambda, RDS, etc. Cloudflare, Fastly, and StackPath fall in this category.

Akamai is right in that they’ve been doing edge computing for the last 20 years but it’s a CDN-centric edge computing model that aims to capture market share in the saturated $7B CDN market. On the other hand, the second model focuses on developers that build cloud-native applications. That’s a better model because it targets a significantly larger market, which is being led by AWS.

Akamai’s Statements during Earnings Call 

  • “4,000 locations spanning 135 countries is a powerful offering for global customers and goes far beyond the deployments of other CDNs, even if you were to somehow put them all together”
  • “Peak traffic on the Akamai platform exceeded 100 terabits per second every day in the second quarter. That’s a lot of traffic. Of course, many CDNs claim to have lots of capacity, but none get close to Akamai when it comes to the actual delivery of content”
  • “We’re the largest provider of edge computing services by far. We have been doing it for close to 20 years. And the idea that this is how somehow something new is just not true. It’s – most of our customers are using our edge computing capabilities for a variety of applications to A, B testing for how users like their site, to do things locally about what content actually gets delivered to the user, what ads get delivered to the user”   
  • “We don’t break it out as a separate revenue item, but if you use the definitions, we see that a lot of folks in the analyst community are using, I would say already, it’s over a $2 billion business for us. We don’t report it that way. But most of our customers are using the computing in some form or another, and also when it comes to Edge”
  • “A lot of the other CDNs, who talk about doing Edge or Edge Computing, maybe they’re in a couple of dozen cloud core data centers, which is really not the Edge. In fact, you could take probably about maybe even all of our CDN competitors put them together and they don’t get anywhere close to the Edge presence that Akamai has”
  • Akamai CEO: “But again, I just want to be really clear Edge Computing is not a new phenomenon. It’s got recent buzz with a couple of IPOs on the street, but we’ve been doing that at scale for a long, long time”

Industry Updates

  • Fastly acquired Tesuto, a startup that developed a network emulation stack. Jay Sakata, who initially built the EdgeCast network from scratch left Verizon Media (after they acquired EdgeCast) to start Tesuto along with others.
  • Section has raised $3.8M in Series A. Section provides an edge computing platform based on Kubernetes.
  • Cloudflare has developed has introduced a new bot management product that uses machine learning to detect/prevent advanced bot attacks.
  • Cato Networks, the first startup to build a security stack on a global PoP network raised $77M, bringing its total to $200M. Not bad for the 5-year-old startup. Cato has grown rapidly. They now employ 228 people and have become the go-to product for replacing legacy telco-based MPLS.