Akamai Puts Pricing Thumbscrews on the Competition

Economies of scale can be tricky. In many industries, you're always walking a very fine line between cash-cow genius and money-burning insanity. Get the balance between price, supply, and demand just right and you've struck gold; one false move and you're an instant industry laughingstock.

Right now, Akamai Technologies (Nasdaq: AKAM  ) is trying to strike a brand-new pricing balance. According to digital services analyst Dan Rayburn and his extensive network of industry contacts, Akamai has been slashing service prices on its content delivery, or CDN, services since the end of November.

The information comes from a mix of Akamai customers and rivals, bolstered by marketing emails falling into Rayburn's own mailbox. Then he triple-checked his conclusions with the company itself. This is the real deal.

The company has been "significantly reducing bandwidth costs" lately, and purports to pass the savings on to customers. "Akamai is now pretty much at the same price as Limelight (Nasdaq: LLNW  ) , Level 3 (Nasdaq: LVLT  ) , and [privately held] EdgeCast, for the right sized deals," says Rayburn.

Akamai has been selling its CDN services at a premium thanks to the sterling reputation that comes from a long operating history and large industry footprint. This strategy shift should have Limelight and Level 3 investors biting their fingernails because it puts a whole new set of pricing pressures on the high-growth CDN market. Akamai's 27% operating margin over the last 12 months stands head, shoulders, and lint-filled belly button above the barely breakeven Level 3 and solidly unprofitable Limelight.

If Rayburn's research is correct -- and I see no reason to doubt it -- Akamai should surprise us all with strong revenues when it reports earnings next month. Will those hefty margins stand up to the discounting?

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Fool contributor Anders Bylund holds no position in any of the companies mentioned. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


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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 January 13, 2012, at 12:22 PM, carlkiefer wrote:

    According to Dan's own article, he has hardly triple checked anything yet. As a matter of fact, it won't be before the end of Q1, or March 31st, that his data mining experiment from a host of CDN customers will give him sufficient insight as to whether or not Akamai can possibly be successful at lowering prices while beating their healthier "margins" into plowshares, especially when it comes to delivering quality services dependent upon "bandwidth" which they don't own.

    According to him, they have tried this methodology before in the media and entertainment space, and failed.

    http://blog.streamingmedia.com/the_business_of_online_vi/201...

    I'll be doing my annual CDN pricing survey with customers next month, which typically collects data from 500-800 CDN customers, so I'll have more detailed pricing trends to share at the end of Q1.

  • Report this Comment On January 13, 2012, at 2:35 PM, ddm08 wrote:

    "This strategy shift should have Limelight and Level 3 investors biting their fingernails because it puts a whole new set of pricing pressures on the high-growth CDN market."

    Anders, it's very comical when you guys at the Fool writers are constantly twisting facts to help out your sister company, Fool Asset Management.

    If you had taken Econ 101, you would know why a company has to cut prices. I give you a hint, it's called "intense competition". When Dan is through with his little pricing survey, you will learn that the CDN field is full of competitors. Whether you a front-runner like AKAM or niche players like EdgeCast, you need to have "competitive edge".

    As the CDN evolves into a carrier-based business, you have to ask yourself what AKAM's competitive edge is if this industry is evolving into a carrier-based. So, it is NOT that the competitions are shaking in its boots that you should be concerned with, Mr. AKAM pumper, it's more of the facts that competitors like LVLT is cutting prices because they own and operate their own network. Pretty soon, you will learn that any market leader who has to cut prices to compete or overpaying to an acquire a niche player like Cotendo to compete; it's not a pretty sign and pretty site to see.

    So, if your AKAM doesn't own a Tier-1 network, bubba, you are going to feel the pain coming down the pike. Losing Netflix to Level 3 is only the beginning for AKAM, the pain will continue as the CDN business get bundled into a carrier's product portfolio like LVLT is already doing...

    So, nice try at your attempts at pumping AKAM while cheap-shotting LVLT and LLNW...

  • Report this Comment On January 28, 2012, at 2:45 PM, NotFooled2 wrote:

    Dear AB,

    In reading your January article "Akamai Puts Pricing Thumbscrews to the Competition", I found myself thinking how unreliable your research is in formulating such a bold prediction for the investor community. Instead of doing a proper due diligence yourself, you rely on CDN/streaming industry writer Dan Rayburn as your sole source of validation. To make matters worse (for you), you point out that you have no reason to doubt Mr. Rayburn's research. Even a novice investor doing some cursory homework will find that Mr Rayburn has missed badly on several predictions, i.e. Verizon or AT&T acquiring Akamai, Level 3 acquiring or teaming with Limelight, and the list goes on. Clearly, Mr Rayburn is subjected to the same motivations for ginning up anxiety and excitement to get attention that many who have a media forum are prone to do in order to get and keep readers focused on their pontifications.

    If you'll dig a little deeper into the business models of each of the companies you referenced, Akamai, Level 3, Limelight, and EdgeCast, you would find that pricing is the result of the business models, not the beginning. Akamai's huge, disparate infrastructure requires much more overhead management than does the other companies. Level 3 has scale and infrastructure in the telecom industry and is prone to pricing wars, but pricing is clearly not its only competitive advantage. Limelight's lower pricing has been a function of leaner opertional expenses than Akamai, forcing Akamai to reduce its pricing to be competitive, but after 5 recent acquisitions, Limelight has now positioned itself out of the pure-play CDN game with more value-added solutions. EdgeCast is the up-and-comer of the four, fighting for market share and attention, and most likely to find itself using pricing as a stronger competitive weapon, but they too are not without their story of differentiation that could turn a customer's head.

    In short, your story does a disservice to Fool readers who have long held the belief that Fool contributors do proper due diligence for their investor community so that they don't have to. I encourage you to interview each company independently, find out what makes them tick, then come back and either re-write this story or vindicate yourself that investors need only turn to Dan Rayburn for advice in the online media industry for wise investment advice.

    BTW, in trying to post this to your article's comments, the MF page experienced

    Not Fooled

  • Report this Comment On January 28, 2012, at 2:50 PM, NotFooled2 wrote:

    (continuing my last post that got interrupted). . . experienced a 404 error. Interesting. www.fool.com uses Akamai as its CDN. I bet if Akamai lowers its price to MF, that the site won't experience such problems. Oh, I'm sorry. You're just the contributing writer. I should ask that of Dan Rayburn. Dan??

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