Netflix said Thursday that Level 3 will become the company's primary content delivery network provider for its streaming video.
The news confirms worries about Akamai. Earlier this week, Akamai shares were thumped on reports that it was going to lose Netflix as a customer. Both Netflix and Akamai denied performance was the problem. Instead, the two parties were negotiating a contract with Level 3 and Limelight looking to steal the Akamai business. Businessofvideo.com blogger Dan Rayburn first broke the story.
Here's a look at Akamai's 5-day chart:
Under the terms of the Level 3 deal with Netflix, the telecom provider will double its storage capacity and add 2.9 terabits per second (Tbps) of CDN capacity. Level 3 already deployed 1.65 Tbps of capacity in the third quarter.
Netflix in a statement said it was looking for "headroom" to meet demand for its streaming content library.
Level 3 will store the Netflix streaming library of 20,000 titles. In November and December, the companies will move the library to Level 3 storage and serve traffic Jan. 1.
The reaction to Akamai losing the Netflix business varied.
Oppenheimer analyst Srinivas Anantha said concerns over Akamai's performance was overblown and Netflix is diversifying its CDN providers. In addition, Netflix accounts for less than 1 percent of Akamai's revenue. "We've heard no signs of dissatisfaction from Netflix (or any other customer, for that matter) regarding Akamai's network performance. If Netflix were to shift core video traffic, it will likely be driven by price differential," he said.
Wedbush analyst Kerry Rice said Akamai initially won the Netflix business on favorable pricing, but decicded that it wasn't willing to cut a similar deal this time.
Overall, the CDN market looks like it's about to see some price pressure, especially with customers like Netflix that have the clout. Netflix also uses Limelight and has a contract that runs through 2013.