Verizon Digital Media Services (VDMS), the managed service arm of US Telco Verizon, has acquired content delivery network (CDN) provider EdgeCast for $350 million. EdgeCast provides accelerated content services for major media companies globally, such as web services like Yahoo and Twitter and TV operators such as Deutsche Telekom and Telus.
Verizon Digital Media Services (VDMS) was formed in 2011 to manage video content on the Verizon backbone and to offer automated managed services, starting at content acquisition and finishing at delivery. VDMS recently acquired upLynk - a start-up multiscreen service provider who specialises in asset management across multiple devices - for an undisclosed fee.
In a market where outright scale remains crucial, where video transport margins are on the decline, and where the ability to provide services ancillary to the distribution of bits is important, the Edgecast acquisition looks strategically promising.
While the EdgeCast acquisition confers upon Verizon additional expertise in CDN software, one of the most valuable assets that Verizon is purchasing is reach. While VDMS remains largely US centric, and indeed is used by Verizon to underpin some of its own services - such as Redbox Instant - EdgeCast's network is relatively international. In a competitive market where price hugely underlies firms' choice of CDN, it is scale that allows providers to feasibly lower and set attractive rates.
However, as a consequence of intense price pressure, falling video transport margins have forced CDN providers to look elsewhere for services that generate higher margins, and that inch the CDN business away from one of rote, mechanical bit distribution. Non-video service delivery, and ancillary, managed media services are two such strategies for creating profitability.
Given that EdgeCast has built a substantial business around site acceleration and application delivery, the acquisition grants Verizon access to a range of clients whose principal focus is not strictly on video. This is potentially advantageous for two reasons. First, non-video CDN services tend to produce much higher margins, relative to video delivery. Second, Verizon has effectively purchased access to an untapped client base, and may use the opportunity to generate new - if smaller - video delivery agreements, video margins notwithstanding.
In addition, the complementarity that exists between EdgeCast's portfolio, and VDMS' media management expertise should not be underestimated. Beyond its transport component, the strength of the VDMS solution lies in its asset management capabilities, spanning ingest, transcoding, content rights management, and video analytics. In a market where video margins pose major challenges to profitability, the ability to bundle high-margin media management services with EdgeCast's wide-reaching transport services will likely be a boon to the bottom line, and to EdgeCast's broader competitiveness against the likes of an Akamai or Limelight.
What is less clear is whether the acquisition will threaten any of EdgeCast's existing contracts, due to the potential for conflict of interest. EdgeCast's current relationship with Deutsche Telekom is a microcosm of this problem: touched off by the acquisition, some telecom operators may inadvertently find themselves supporting a new, corporate parent with whom they do compete in international transport markets. Such conflicts of interest may well pose some problems for EdgeCast, but on the whole, these problems are not likely to be severe. Given Verizon's and VDMS' hitherto US focus, a degree of hard, geographic separation should minimize instances of conflicting incentives, and support of a direct competitor.