Is Akamai Doomed?

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Content delivery networks (CDNs) operated by Akamai Technologies (Nasdaq: AKAM  ) , Limelight Networks (Nasdaq: LLNW  ) , and Level 3 (Nasdaq: LVLT  ) are a dime a dozen. So says conventional wisdom -- and Raj Dutt.

Dutt's the chief executive of Voxel, a provider of hosting services that has its own CDN, as well as dedicated servers for some of its larger clients. For the unfamiliar, hosting is like data outsourcing -- you own a website or business that deals in Web traffic, but you outsource the equipment and software to manage the traffic to another company, which "hosts" that information for you.

"Every single CDN competes on price, and there are too many providers," Dutt told GigaOm's Stacey Higginbotham in a recent interview. "And they're all going after the same business, so what used to be high margin is now marginally better than selling IP transit."

So the juicy gross profit margin that Akamai enjoys -- 76.9% over the trailing 12 months -- may soon be no more, eaten by a rotten economy and low-cost upstarts? Dutt says yes. He may be right.

The curse of the CDN business
Dutt's Voxel competes against Rackspace (NYSE: RAX  ) and other companies that promise comprehensive data storage and delivery on the cheap. These are the generalists; Akamai and its peers are the specialists. Investors fear that, over time, generalists will be good enough to supplant the specialists. Even when it comes to Web content delivery.

Voxel has only fed those fears. Whereas some hosters turn to specialist CDNs for help when traffic gets overwhelming -- Rackspace uses Limelight, for example -- Voxel handles 100% of its customers' traffic. What if others follow suit?

Akamai is under assault as is. In January, industry watcher Dan Rayburn confirmed that Apple (Nasdaq: AAPL  ) had begun employing Limelight for some content delivery. Previously, Akamai had been the iEmpire's exclusive provider.

Meanwhile, top techies such as Robert Scoble are lauding the efforts of BitGravity, a rebel company that believes it has created the premium CDN for video delivery. Executives at Tata Communications agree; they've partnered with BitGravity to provide CDN services to customers and invested $11.5 million in the upstart.

And let's not forget EdgeCast, which struck a similar deal with Deutsche Telekom at the time Rayburn broke the news about Limelight's Apple breakthrough.

Why the CDN curse is more of a blessing
So there are excellent reasons to be skeptical of Akamai's long-term advantage. Healthy skepticism ought to be a key part of every investor's toolkit.

But Dutt's predictions are far too dire. Pure-play CDNs that deliver little more than Web pages may, indeed, be dying. Panther Express operated that sort of network, and China's CDNetworks acquired the company last month.

Akamai has a much richer business. So does Limelight. And even if BitGravity is winning well-deserved acclaim, Web video delivery is anything but a perfect science. Just ask Netflix (Nasdaq: NFLX  ) . This week, the company was forced to refute rumors that it was throttling the streams of premium customers watching online.

Watch Instantly? Not so instant for some, yours truly included. I've been watching The Natural via my Netflix account recently, yet the film often resets, adjusting to match my Internet speed. Whatever that means. (Ours is a very fast broadband wireless connection.)

Akamai has a stake in solving this problem. With Microsoft (Nasdaq: MSFT  ) , it recently unveiled "smooth streaming," a service that senses the speed at which bits may be delivered to avoid delays and interruptions. Broadcasters in Canada and Italy have already taken to the technology.

The Next Big Thing hasn't yet been delivered
CDNs are changing and Akamai is changing with them. Can it navigate the transition effectively? So far, so good: Revenue rose 16% in the fourth quarter. Margins held up in the same period, and cash continued to flow, as it has for years. Akamai had more than $300 million in cash and liquid investments as of Dec. 31.

The truth about tech is that the Next Big Thing often takes decades to develop. Content delivery was one of those Next Big Things once, a decade ago, and it still needs improving. So long as that remains true, there's every reason to hold Akamai for the very long term.

Microsoft is an Inside Value pick. Apple and Netflix are Stock Advisor selections. Akamai is a Rule Breakers recommendation. Try any of these Foolish services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers had stock and options in Apple and a stock position in Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy went out for a walk to deliver a cup of sugar to a neighboring disclosure policy.

Read/Post Comments (5) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 25, 2009, at 8:47 PM, DanRayburn wrote:

    Hi Tim,

    I disagree with some of Raj's statements. The idea that "Every single CDN competes on price" and that "all are going after the same business" is not true. Limelight and Level 3 are not the cheapest in the market. There are other CDNs that charge half what Limelight or Level 3 charge, BitGravity for example, so why aren't they winning the business? It's not all just about price.

    And many of the CDNs are not going after the same customers Akamai and Limelight are. Companies like EdgeCast and Highwinds have taken a completely different approach and are going after mid-tier customers via resellers. They are not targeting the customer base of Limelight and Akamai.

    Also, you talk about video delivery and mention Akamai's margins, "76.9% over the trailing 12 months", but that's specific to all of their products, not video delivery. We don't know what their margins are for video services.

    Same with the statement that "revenue rose 16% in the fourth quarter." That's correct, but again that's the company overall, not video revenue. If anything, video delivery revenue declined last quarter as Akamai revenue from their M&E business declined.

    I do agree with your assement though that Akamai and Limelight have a much richer business. For the past 10 years, many CDNs have all said they were going to displace Akamai. But by the end of this year, only Limelight and Level 3 will have come within about 35% of Akamai's total CDN revenue. They all still have a long way to go.

  • Report this Comment On March 26, 2009, at 11:18 AM, gshuang wrote:

    CDNetworks is a Korean Company and not a Chinese one, even though they do have a Chinese subsidiary. Please check the facts--it makes me uneasy that this simple miss-statement is reflective of the article. Just how well did this author/reporter check his facts?

  • Report this Comment On March 27, 2009, at 9:52 PM, chelleward wrote:

    Tim...nice article and good points but I find it amazing that, while many of players, both the small and large, in the CDN field were mentioned, nowhere in the article did they mention Internap Network Services CDN. I've done some research, though I admit I have probably just discovered only the tip of the iceburg, but for the life of me I can't figure out why Internap is being "left out" of the club so to speak. Perhaps it's because wall street and investors have little faith that Internap has what it takes to overcome adversity in the declining economy.

    I understand that Internap has disappointed some folks in the past. They've made some decisions that have really cost the company and the shareholders (i.e. remember the vitalstream aquisition?) but that is behind them. Many would try to blame the previous CEO and the management who were there when the decisions were made. It appears to be more complicated than that. It's hard to say what forces were at work that eventually led to the million dollar write-off late last year. Perhaps it's a combination of factors, including the integration factors and the declining economy, that no one could have predicted or avoided.

    When you really take a look at where Internap is today, and I'm not talking about stock price, but if you really take a moment to "check under the hood", you'll find a company who has prevailed. They are a company who is really planning for the future. They haven't just caught the next wave in hopes that they'll make a profit this year. I'll agree, I don't believe the Vitalstream Acquisition went as they would have liked. But I look at it this way. They stubbled and fell, but it didn't kill them. They took that experience, looked at the mistakes that were made and instead of throwing out the baby out with the bath, they have made lemonaide with the lemons they were delt. And that's what I really want to see in a company, especially in this economy. I want to see a company that, in the face of adversity, can overcome. And that is what Internap has done, and they have done all of that in a weakening economy, and in the midst of criticism and management turnover. Change isn't an easy thing, if you've ever worked at company that is experiencing turnover and experiencing growth you'll know what I mean.

    When I first started following CDN's, I didn't really even know what having a CDN meant. And visiting the websites of the vendors wasn't really much help either. I recently went back to the websites of some of the vendors and have to say that the information that they have published today, is much more descriptive and informative that it was one year ago. I believe they are really trying to educate their customers. I tried to compare offerings of some of the major players, specifically Limelight and Akamai, and it was extrememly difficult to distinguish the competative advantage each might have. It's clear that because of resources, Akamai and perhaps to a lesser extent Limelight have the market on larger clients.

    Comparing Internap's offerings with the others, it appears that they are no less equipped to serve their CDN customers a full life-cycle Content Delivery Network ranging from content production to transcoding, management, security, monitization, delivery (including their Hybrid peer to peer option) and analytics with their customizable media console. I think the thing that most impresses me about them is their willingness to go the extra mile for their customer, to make sure that the customer gets exactly what they need to make their business successful. What makes this possible is the team of people they have on board to customize services specifically meeting the business needs of their clients. Combined with their IP services and datacenter services, it makes them a one stop shop. While they continue to offer a bundled services package, it's nice that they can now contract for only the services they need.

    CDN's are popping up all over the place these days. They offer a needed service that will continue to grow, to help companies and businesses grow in difficult economic times. To know which company to choose is hard because they all claim to be the best. By and large the speed and quality, and capacity of the service appears to be about the same. Some companies may have a larger head count in terms of employees, and I don't know how that plays out in terms of service. The only thing customers really have to go on is how the company serves others. Many CDN companies offer case studies on their websites of how they have helped provide business solutions to their customers. Really, aside from looking at the physical resources of the company, and perhaps the financial health of the company which isn't necessarily reflected in the share price, the only other way I can think of for a customer to evaluate these companies is to call a sales rep and see what they are offerring and how they are offering it, and then look to see what their existing customers have to say about them.

  • Report this Comment On April 07, 2009, at 10:43 PM, abibes wrote:

    I've noticed that some CDNs have focused more on Partnerships rather than selling to the direct end-user. This is the failures of Edgecast and Highwinds. Speaking of Edgecast, there's a rumor going around that they are out of money and seeking a selling to DT. If you read the owner's history, this should come as no surprise. They always sell there companies after a few years. As for Akamai & Limelight, I think they'll survive.

  • Report this Comment On April 08, 2009, at 7:13 PM, DanRayburn wrote:

    There is no rumor going around that EdgeCast is out of money, it's only a rumor YOU are trying to start, without even posting under your own name, and you only created a account the day before you posted this comment.

    You've now posted this exact same comment on three blogs, including my own. EdgeCast is not out of money and in fact, have only raised around $5M, the least amount of money by any CDN so far. Not to mention, in only one year they have already signed up over 300 customers and have two major carriers reselling their network.

    Stop trying to spam blogs saying that EdgeCast is out of money, it's simply not true and you have absolutely no data to back it up. You don't post under your own name as clearly you are trying to discredit a competitor. Nice try.

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