September 9, 2008

Why BitGravity Attracted Tata

As one of the world's largest telecommunications carriers, India's Tata Communications already moves a massive share of voice and data across its global fiber-optic network. Now, the company is stepping up efforts to handle all that network traffic -- particularly a fast-rising tide of bandwidth-hogging video data -- more efficiently.

On Sept. 8, Tata said it will begin offering a so-called content-delivery network, or CDN, developed and operated by a small Silicon Valley startup called BitGravity. Tata is also making an $11.5 million investment in BitGravity.

Tata joins a growing number of communications providers in seizing on CDN. Until last year, market leader Akamai Technologies (AKAM) had scant competition, except from rival Limelight Networks (LLNW). But then Level 3 Communications (LVLT) joined the fray in 2007, followed by AT&T (T) in June of this year. A month later, Reliance Globalcom, another big Indian carrier, cut a deal to tap the CDN operated by Atlanta-based Internap Network Services. On the heels of the Tata BitGravity hookup, analysts say, are British Telecom (BT) and Verizon Communications (VZ).

Sharing the Load As the number of people using online video surges, carriers are scrambling for new ways to handle the load. This is especially true as video morphs from grainy user-generated clips that last a few seconds, to full-length high-definition downloadable flicks. By some estimates, 500,000 people get on the Internet for the first time each day. The number could rise with the expected introduction in coming years of wireless technologies that make it easier to get online anywhere. And one click on an HD movie consumes as much bandwidth as tens of thousands of plain Jane Web sites. "It's a different world we're moving into," says Srinivasa Addepalli, Tata's senior vice-president of strategy. "Just putting more cables in the street won't solve the problem."

CDNs help companies and carriers reduce the amount of bandwidth required to distribute each file, song, or movie by storing it in such a way that it takes the most direct path to the consumer. Akamai, for instance, caches the more popular content close to the people who want it. The Cambridge [Mass.]-based company has well over 50% of the market and more than 30,000 servers in locations around the world to handle everything from iTunes downloads for Apple (AAPL) to NCAA hoops tourney clips for CBS (CBS).

Akamai wannabes such as BitGravity take a different, more centralized approach. Rather than focusing on the actual miles traveled by data, these companies employ heavy-duty gear and sophisticated software to ensure content takes the most efficient path, however distant its destination.

Looming Shakeup Venture capitalists have poured $300 million into about 40 CDN startups in the past 18 months, according to Yankee Group Research. "This deal with Tata is huge" for BitGravity, says Yankee Group analyst David Vorhaus. "It's their flag in the ground."

Tata's investment may presage a shakeup in the industry that results in many providers being purchased outright by carriers, Vorhaus says. Carriers are likely to begin lumping in CDN services to help land big corporate accounts, at far lower prices than standalone technology outfits will charge, partly because the carriers don't have to pay for the bandwidth that makes up the biggest costs for small CDN specialists. Valuations will likely fall along with prices, making many CDN companies attractive takeover bait.

Limelight may become particularly alluring from a cost perspective if it loses an appeal on a patent-infringement case won by Akamai, Vorhaus says. A probable buyer is AT&T, he speculates. "The brand would take such a hit, that it would make too enticing a target," he says. Limelight would not comment on the takeover rumors, and AT&T was not available for comment

High-Definition Dreams For now, look for a marketing war to break out as the carriers set out to tangle with Akamai and each other for attention. But that's just a sideshow, of sorts. With industry revenues of less than $3 billion, the entire CDN services business is small potatoes to massive global carriers. The real importance isn't the new revenues carriers can generate but the network capacity they can free up through the use of these technologies. AT&T Chief Technology Officer John Donovan says AT&T will need to expand its overall capacity by more than 50% a year to meet the growing demand for video. He's hoping CDN will give the effort a push forward.

BitGravity founder Perry Wu has similarly high hopes in CDN's potential. The former venture capitalist and All-American water polo player created the company in 2006 to speed delivery of high-definition fare over the Net, and over time to catalyze creation of more interactive programming -- from football games where you can choose the camera angles to superrealistic online games that respond immediately to the move of a joystick. Wu joined forces with Barrett Lyon, a respected name in computer security circles who had helped defend against the massive denial-of-service attacks that brought many big Web sites to their knees in the late 1990s.

While Akamai's network is built around 36,000 garden-variety servers at thousands of locations all around the globe, BitGravity designed its own more powerful gear, which resides in just five places. The idea is that while each of Akamai's servers only stores what is currently in highest demand, BitGravity will store all of its customer's material in each of its centers, ensuring faster delivery for all of it. Wu reasons that as Web video embeds itself into the daily lives of hundreds of millions of people, there's no way to know what content will be in demand at any given moment. Akamai's decentralized approach leads to selection akin to "a grocery store in Moscow. If it's not popular, it won't be there," Wu says.

Staying on Top The same could undoubtedly be said of many small players in the CDN space, including BitGravity. Until recently it had attracted only a stable of smaller customers, including comedian Tom Green, who uses the technology to produce and distribute a one-hour online show from his living room. Now, thanks to the Tata deal and investments from the likes of Allen & Co., Wu's company seems to have risen above the crowd for the moment. Staying on top -- and independent -- could be tougher.