In another eyebrow-raising acquisition of an L.A. tech company, Verizon Communi-cations Inc. announced last week that it planned to buy Santa Monica content delivery network EdgeCast Networks Inc.
EdgeCast will function as Verizon’s main provider of content delivery services and is part of the Basking Ridge, N.J., telecom provider’s effort to expand its digital offerings. EdgeCast will remain in its Santa Monica offices, where it houses most of its roughly 200 employees; it hasn’t been determined whether EdgeCast will keep its name.
Though the terms of the deal, which is still pending approval by the Justice Department, were not disclosed, multiple outlets pegged it at just under $400 million.
EdgeCast’s purchase marks the second big L.A. tech transaction in as many weeks. On Dec. 4, Santa Monica online document library Docstoc Inc. announced that it had been acquired by Mountain View enterprise software maker Intuit Inc. for a reported $50 million.
Content delivery networks, or CDNs, provide websites and apps with redundant servers at multiple locations to speed up and support online connections. They’re essential components of the Internet’s infrastructure, particularly as people transfer more data over mobile devices.
EdgeCast lists more than 6,000 companies among its client base, including Twitter, Tumblr and Yahoo.
For Verizon, picking up EdgeCast is meant to fortify its delivery of video content, which has become a major component of all Web traffic. In the next three years, more than two-thirds of global Internet bandwidth will be consumed by video, according to a report from Cisco Systems. That report also projected more than half of all Web traffic will be routed through CDNs.
Verizon partnered with video distributor Redbox last year to offer a movie streaming business and has been pursuing an arrangement with the National Football League to stream its games direct to mobile.
“This is clearly the next step forward for our video strategy because we know that’s where consumption is going,” said Bob Toohey, president of Verizon Digital Media Services. “It’s a great alignment given our companies’ very clear paths.”
A source close to EdgeCast said potential buyers had been circling the company for some time. Content delivery is a capital-intensive service and smaller providers are routinely acquired by large competitors.
A few months ago, EdgeCast raised a $54 million series D round, led by private equity firm Performance Equity Management in Greenwich, Conn. That brought the company’s total investment to $74 million, which has been used largely to build a global presence, including new server locations in South America and Europe. Recently, EdgeCast rolled out services targeted at specific Web businesses, such as a network dedicated to e-commerce.
The company, co-founded in 2007 by a group of serial entrepreneurs, is on pace to have revenues of $100 million this year, according to executives; they also maintain it is profitable. That fueled speculation EdgeCast was headed toward an initial public offering in 2015, something the co-owners declined to comment on.
Donna Jaegers, a Seattle analyst with brokerage D.A. Davidson & Co., said that might have proved a difficult course for EdgeCast. The CDN industry is dominated by Boston’s Akamai Technologies Inc., which controls nearly one-fifth of the world’s Web traffic. There are other publicly traded CDNs, such as Limelight Inc. of Tempe, Ariz. But Limelight has never posted a profitable quarter and its stock, which debuted at $22.18, has plummeted to hover around $2.
“If you were looking at how public CDNs have fared, Akamai is the only one that’s done well,” Jaegers said. “EdgeCast could have been looking around worrying about how they are going to grow.”
New fight?
Although EdgeCast is now destined never to go public, executives there expressed excitement about being underneath the Verizon umbrella. As they see it, the new parent has the firepower – and the bank account – to carve out a bigger niche in the content delivery marketplace.
“We now have the resources of a Fortune 15 company and a massive global network,” said EdgeCast President James Segil. “I look forward to a healthy future. I certainly believe we have a tremendous competitive advantage.”
In buying a CDN, Verizon puts itself in a somewhat awkward position with Akamai. Verizon has been a CDN reseller, having sold Akamai’s service under the Verizon label. Executives there did not indicate whether that partnership was over after the EdgeCast deal, but multiple analysts said its continuation was unlikely.
Locally, EdgeCast’s sale will bring a return to a number of L.A.-based investors. Much of the company’s early funds came from Steamboat Ventures, the investment arm of Burbank’s Walt Disney Co. A few local angel investors have also contributed at the seed level, including Mark Mullen of Mull Capital and Clark Landry.
Segil, an L.A. native, said the recent EdgeCast and Docstoc deals serve as an indication that the local tech scene is finally catching the eye of wealthy outsiders.
“It’s a nice crowning achievement that this kind of news hit the marketplace,” he said. “It’s a validation of our community that the global operators are paying attention to what we’re doing.”
