What Can Apple Inc. Do With This Under-the-Radar Competitive Advantage?

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You know how Netflix has battled with American ISPs in 2014, fighting to get more bandwidth for its streaming videos? Well, one way to get it done is to build an utterly massive content delivery network -- like Apple just did.

What's going on?
Digital video expert Dan Rayburn said Apple's CDN has been active for a while now, including paid interconnect deals with many service providers in Europe and America. The network already serves up OS X downloads, while Apple depends on existing deals with Level 3 for iTunes Radio and Akamai for other iTunes traffic.

The ever-connected Rayburn spoke to several ISPs about this, confirming that the new network is indeed live. Moreover, it's absolutely gigantic in scope. Rayburn's insiders said Apple has multiple terabits per second of available bandwidth, which is more than 10 times the capacity the company needs today.

Netflix has already migrated the vast majority of its streaming traffic to its own Open Connect network, either via special servers inside data centers and networking hubs, or through high-speed core connections into these traffic hubs. Done right, this saves both Netflix and the Internet service provider headaches and big bandwidth bills. Since Netflix represents up to one-third of all U.S. Internet traffic at peak viewing hours, smooth networking is kind of a big deal.

Unlike Netflix, Apple isn't likely to move its entire networking flow over to its internal CDN. Akamai and Level 3 will probably remain Apple vendors in some respect for the long haul. Apple cares more about reliability and redundant connection than about lightning-speed digital media delivery. That's the difference between streaming services such as Netflix and download-then-consume services such as iTunes and the App Store.

That being said, Cupertino is clearly bracing for some truly massive networking needs, and making sure the job gets done.

What kind of scale are we talking about?
Rayburn estimated that Apple CEO Tim Cook and friends spent about $100 million on this CDN build out over the last 12 months.

For Netflix, that kind of investment would be weighed against another exclusive show production or two; For the infinitely richer Apple, it's a rounding error on the cash flow statement.

But in a networking perspective, consider that Akamai spent only about twice that amount on capital expenses in 2013. The company has a grand total of $537 million in property, plant, and equipment after 16 years of hard-fought CDN leadership.

Level 3 runs a global networking business on many levels, with content delivery providing just 2% of its annual sales, but a $100 million investment would have equaled 13% of the company's capital expenses last year.

So this is a large investment any way you slice it -- except in the forgiving light of Apple's enormous budget numbers, where the whole project becomes easily ignored. Let's just say that Apple's CDN should be able to handle whatever networking nightmares the company aims to throw at it.

The rubber hits the road
An early test came last month, when Apple introduced the iPhone 6 and released the iOS 8 system upgrade.

The iOS 8 update was partially served by Apple's new content delivery network, alongside two old hands in the CDN game. This is what the traffic across Apple's networks looked like that day, according to network optimization firm DeepField:

Source: DeepField.

Keep in mind that Apple's sites rank among the 50 busiest Internet destinations to begin with. This is not just a significant traffic spike on a sleepy site at the far reaches of the Internet, but millions of Apple users jumping on the 1GB download of the latest and greatest software for their favorite iOS devices.

I don't recall any reports of slow networks or crashed servers. Everything just worked, with Apple's own network taking the brunt of the sudden load.

What's next?
The system is obviously ready for intense events like large software releases. What else might Apple do with a CDN on this scale?

The obvious next step would be adding streaming services to iTunes. Rather than letting users download their media for later consumption, iTunes could start serving up music and movies on demand. Netflix would gain an instant head-to-head rival in a way that the download-based iTunes never was. Rumor has it that some kind of streaming video service is in the works, but perhaps more of a DVR box in the cloud than an a la carte content library.

Spotify would be the closest match in the music market. Here, the wind in the willows is whispering about an iTunes streaming music service. This one would build on the recent Beats acquisition and maybe break new ground for low-cost music streaming services.

Of course, Apple just loves to shock all of us with the next big thing that nobody saw coming. Whatever plans Apple might have that rely on a world-class content delivery system, I can't wait to learn more.

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The article What Can Apple Inc. Do With This Under-the-Radar Competitive Advantage? originally appeared on Fool.com.

Anders Bylund owns shares of Netflix. The Motley Fool recommends Apple and Netflix. The Motley Fool also owns shares of Apple and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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