Cutthroat Competition Helps Netflix, Akamai Win

Noted networking industry analyst Dan Rayburn just dropped a bombshell regarding Akamai Technologies' (Nasdaq: AKAM  ) pricing tactics.

Rayburn's sources say that Akamai is cutting prices on some of its largest contracts by half or more, in return for commitments to handle at least 51% of the client's content delivery needs. This makes Akamai the cheapest option in many cases, which is a drastic change from LimeLight Networks (Nasdaq: LLNW  ) and Level 3 Communications (Nasdaq: LVLT  ) playing the low-cost role. Thanks to economies of scale, increased traffic should boost Akamai's bottom line even at lower prices.

Rayburn doesn't name a whole lot of new deals that Akamai gained from this radical strategy shift, but the one name he does mention is a doozy. You might wonder how Netflix (Nasdaq: NFLX  ) could afford to let its customers stream movies all day long without paying another nickel. Well, Netflix is now one of the fortunate Akamai customers enjoying ultra-low content-delivery prices.

With charges as low as $0.015 per gigabyte of data delivered, the direct cost to Netflix is about $0.05 per high-definition video delivered and even less for a standard-definition flick. In other words, delivery costs are nearly inconsequential and certainly far less than first-class postage. Knowing how Netflix operates, the delivery cost savings will probably be poured into buying more licenses for streaming content.

For Netflix, this is obviously a sweet deal that turns up the fire under the streaming business model another notch. It is possible that competitors like Apple (Nasdaq: AAPL  ) , Amazon.com (Nasdaq: AMZN  ) , and Wal-Mart’s (NYSE: WMT  ) Vudu are taking advantage of the same Akamai deal, of course, but it's great news for the online media sector as a whole. And I like to see Netflix making use of unexpected opportunities like this Akamai deal.

For Akamai, the name of the game is market share. Akamai is already the leader in content delivery, and Rayburn notes that the company really doesn't have to beat its competitors' prices outright. "Akamai typically only has to reduce their pricing to be about 15%-20% more than their competitors to retain the business," he says. That pricing power is a testament to Akamai's mind share and reputation for quality service. This new pricing option can only help swat the competition out of contention for many high-profile contracts. Netflix can't be the only big name among Akamai's new customers.

The next round of earnings reports from Akamai, LimeLight, and the rest should tell that tale. Meanwhile, Netflix should report lower costs and a fatter streaming video library. I can hardly wait.

Fool contributor Anders Bylund owns shares in Netflix and Akamai, but he holds no other position in any of the companies discussed here. That should explain why he's so excited by this news. Akamai Technologies is a Motley Fool Rule Breakers selection. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On March 02, 2010, at 8:51 PM, XMFWhatsmyoption wrote:

    Nice article Anders. 5 cents for streaming a HD movie is so low and yet is bound to go even lower in the future. I under estimated the benefit of streaming to Netflix. Every movie streamed is one set of return postage less they have to pay.

    Though take anything Dan Rayburn says with a pinch of salt. He often seems to say things with little actual factual backing, he's a rumour mill.

    Thanks again - Dean

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