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Deliverance for the content-delivery business? - January 2, 2008

For a business that's supposed to be in a pricing death-spiral, there sure is a lot going on in the content-delivery network business lately. Dan Rayburn over at Streaming Media has been on top of the action including the patent infringement lawsuit filed just before Christmas by Level 3 Communications against competitor Limelight Networks (a copy of the complaint is available here).

More interesting than the lawsuit, however, is the money pouring into the CDN business lately--not the sort of activity you'd typically see in a business in the midst of a price war and plunging valuations. Rayburn highlights the $96.5 million raised by Korean CDN provider CDNetworks as it looks to expand its business in the U.S. Investors include U.S. VC firm Oak Investment Partners, South Korea's Shinhan Private Equity and Goldman Sachs.

That followed the $6 million raised in a second round by EdgeCast Networks, bringing its total capitalization to $10 million.

Perhaps more interesting than the amount raised by EdgeCast, though, is the participants. The second round was led by Steamboat Ventures, Disney's VC arm, whose senior principal Scott Hilleboe gets a seat on the board. Hilleboe will join directors from the Series A round, including Mark Amin, chairman of CinemaNow and Jon Feltheimer, CEO of Lionsgate Films.

The Hollywood connection raises an interesting question: Are some in the studios starting to think about trying to control their own technological destiny in the emerging business of online video distribution (a remarkable development in its own right given Hollywood's historical blindness to tech trends)? Or, are they actually thinking in terms of becoming platform providers themselves?

Okay that's really two questions, but never mind. Even if some in Hollywood are simply looking for leverage to shape the development of the CDN business it would be remarkably forward-looking of them. CDN service is one of those dull-as-dirt, geeky tech subjects that could nonetheless turn out to be crucial to the studios' future margins in the online distribution business.

One of the big issues facing content providers online is scalability. If the business doesn't scale efficiently it's going to be very hard to replace the sort of margins the studios enjoyed in the DVD business, which scaled magnificently. And a big part of how well online distribution scales will be depend on the architecture of the networks used to deliver the content. Getting your oar in the water now is not a terrible idea.
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