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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