Our take...
AT&T follows other network operators in expanding beyond access provision for distributing content (as an ISP) to monetization of the content itself (as a CDN service provider). As an ISP, AT&T is facing tightening access revenue margins given the rapidly rising levels of data on its network; meanwhile, standalone CDNs are confronted with a margin squeeze from a growing number of new entrants with aggressive per GB pricing strategies.

On one hand, if take-up is strong, revenues from the CDN business should provide a welcome boost to the telco's bottom line, and that could, in theory, be used to re-invest in network capacity. On the other, AT&T's ownership of a core network enables it to absorb some of the costs of data transfer more efficiently than standalone CDNs paying data costs to third parties. AT&T's foothold in the Tier 1 access business could given the telco the opportunity to undercut rival CDN pricing in the content business - a major benefit of its strategic position and attempt to unlock the synergies between the two value chains. Unlike Level3 and other core operators that have moved into CDN operations, AT&T is at an advantage given that it owns a complete end-to-end infrastructure - a wide-reaching backbone network in addition to its fixed/wired access network that stretches right to end users. As such, it can offer enterprises and content owners a full spectrum of solutions for distributing content, with a range of CDN services (from encoding and management of content through to delivery) adding to its traditional network-related services offered as network owner – security, hosting, peering etc.

Further, the incumbent can leverage relationships with existing customers of these network-related services to promote its CDN solutions. Given these potential upsides to launching a CDN business as a US incumbent telco, with both a Tier 1 and access network, Screen Digest would not be surprised to find others among its peers – Verizon, Qwest – heading down the same path.

However, at least in the immediate term, Screen Digest believes that AT&T is not expected to upset the dominance of the leaders in the CDN sector such as Limelight and Akamai. On one hand, the reported investment sum for the first year is unlikely to sustain a build out of a CDN with sufficient capacity and reach, given the cost of implementing the necessary server farms and routing switches needed to become the market-leading player. For example, reports claim that AT&T's 400Gbit/s quoted capacity still represents only a fifth of Limelight's and a quarter of Level3's CDN networks. Further, implementation of the CDN infrastructure will take several months, if not years. Level3, for example, is still rolling out its CDN network 18 months after its acquisition. Additionally, having not yet signed up to the Flash Video FVSS programme, the incumbent is initially unlikely to be in a position to economically support the large-audience needs of media companies that have Flash-based video services (the likes of Google, the major US broadcasters ABC, NBC, Fox, and the sports networks). Bearing in mind the bandwidth and investment restraints in addition to the lack of FVSS, AT&T is at first expected to target smaller customers demanding less bandwidth for their services.

Screen Digest research suggests that there are two types of CDN customer: on one side, a set of technically literate clients which tend to shift between and utilize a number of CDNs; and a remaining group, generally made up of smaller businesses, that use a single CDN and only churn due to a liability. Given that AT&T's move is a departure from its core network access provision business, it remains to be seen if the provider can build up the necessary expertise and reputation specific to the sector – including customer relationships and technical support, managing traffic (e.g. server load for peak-time live streaming), understanding how to package and market services, and at which price points – to persuade clients to abandon rival CDNs.