Netflix Inc. has signed up Level 3 Communications Inc. as a primary network provider to support its popular online video streaming service, according to Level 3, whose shares rose 13 percent.
Shares in rival Akamai Technologies Inc. fell 2.7 percent and Limelight's shares lost almost 5 percent in Thursday morning trading after the news, even as analysts downplayed its financial significance to all three companies.
Level 3 said it will also store the Netflix library of more than 20,000 video titles as well offer content delivery network (CDN) services, which will help improve Netflix's video delivery by navigating it over less congested Web routes.
The announcement follows a Nov. 9, Reuters story citing sources saying that Akamai was at risk of losing its status as Netflix's primary CDN provider and that Limelight would expand its business there.
However, D.A. Davidson analyst Donna Jaegers said Limelight, not Level 3, will likely be the primary CDN provider for Netflix and the market share loss for Akamai would hurt its profit less than investors feared.
"For smaller players like Level 3 and Limelight this is like a seal of approval that they have a good system, but in financial terms this is not as bad for Akamai as the stock reaction," Jaegers said.
Level 3's shares rose 15 cents, or 15 percent, to $1.18 on Nasdaq where Akamai shares were down $1.42, or almost 3 percent at $50.42. Limelight stock fell 26 cents, or 3 percent, to $7.69.
Jaegers said that smaller Netflix business would shave off up to 2 cents per share from her previous estimate for Akamai 2011 earnings of $1.05 per share.
Oppenheimer analyst Srinivas Anantha said in a research note that Netflix brings in less than 1 percent of Akamai's total revenue, which was $254 million for the third quarter.
Jaegers said that including storage, the deal could bring a revenue increase in a range of $15 million to $20 million each year at Level 3, whose third-quarter revenue was $912 million. She estimated that the total CDN bill for Netflix streaming service would be about $25 million to $30 million in 2011.
"On a perception sense this contract is huge news for Level 3 and Limelight," she said.
Netflix is one of the biggest sources of Internet traffic, according to traffic measurement company Sandvine, which estimated in a recent report that Netflix represents 20 percent of traffic in the prime TV viewing hours of 8 p.m. to 10 p.m.
But Jaegers noted that because Netflix is gaining subscribers quickly, it is also looking to get a good price for network services, making its service less profitable for operators like Akamai.
"It's a decent chunk of change in terms of revenue, but margins are pretty skinny," she said. "They're trying to pull their rate per movie streamed down as they grow."
Level 3 said it has accelerated plans to further invest in its CDN capacity and will double its storage capacity.
Demand for content delivery services have been increasing due to the popularity of live streaming of events and movie downloads, particularly in high definition.
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