China’s leading CDN platform provider ChinaNetCenter issued its performance report for the first quarters of the year last Friday, which shows a net income of 522 million to 614 million yuan, decreasing by 33 percent year-over-year to 43 percent. The net income of the third quarter, according to the report, reached 116 million to 182 million, declining by 45 percent to 64 percent. ChinaNetCenter attributed the net income decrease to low gross margins in early stage.
“Profit declination is a big trend in CDN market,” said Fu Liang, an independent telecom analyst. He added that the future transformation and upgrading for ChinaNetCenter should target businesses with more additional values, which is totally opposed to its former traditional business.
Increasingly Fierce Competition in CDN Market
In recent years, China is seeing a rapid demand for video, gaming and other traditional internet applications. At the same time, there are many new business models introduced, such as cloud computing and Internet Plus. All these combined together motivates the boom of domestic CDN industries. In such a condition, cloud computing vendors, including Aliyun and Tencent Cloud, obtain a license to develop CDN business. Since then, price war becomes the most powerful tool for these new cloud computing players to grab CDN market share.
In May 2015, Alibaba’s cloud computing division, Aliyun announced a high-profile 21% price cut off its CDN service, after which, its price would be only one-third of that of ChinaNetCenter. Tencent, Baidu and many other CDN service providers made responses one after another, jumping into the fray of price underselling. CDN prices continued downward trend in 2016 and ChinaNetCenter was caught unprepared. Some traditional CDN service providers, who made a profit on selling overpriced bandwidth resources, had to drop the price to stay competitive. ChinaNetCenter as the largest CDN platform provider in China, has suffered a traumatic shock. The company has lost roughly half of it value from 58 billion yuan to 29.8 billion yuan since last July.
Seeking Comfort in Overseas Markets
However, ChinaNetCenter refused to overestimate the impact of internet service giants on its decreasing growth rate. According to vice president of ChinaNetCenter Sun Xiaocheng, the CDN market is experiencing a “warring states period”, with many companies are running in negative gross margins. New emerging startups are unlikely to see any profit prospects until CDN prices back to rational levels.
What is for sure is that ChinaNetCenter is experiencing a severe time. On one hand, the number of company acquiring CDN license is increasing. China’s Ministry of Industry and Information Technology officially confirmed the ninth receivers of obtaining CDN licenses; by far, there are 34 having been given a license to do CDN businesses. On the other hand, the old rival ChinaCache, with a market value of 27 million dollars, lost 400 million yuan in 2016 and possessed very high asset-ability ratio at 87.36 percent. Surprisingly, ChinaCache is still one of the top three CDN service providers in China. In other words, China’s CDN market is nowhere as prosperous as expected.
Contrary to domestic market, global CDN market scale sees sharp increase as with development of internet in new emerging markets. Research institution MicroMarketMonitor5 revealed that global CDN market size was expected to increase to 12.1 billion dollars by 2019, over 3 times the amount of 3.7 billion in 2014. MicroMarketMonitor5 also expected that more than 50 percent of internet traffic will be accelerated through content delivery network.
With China’s “One Belt One Road” initiative launched in 2013, more and more Chinese companies are going abroad to seek opportunities. So do ChinaNetCenter, it is accelerating expansion in oversea CDN markets.