Can Level 3 & Akamai Survive Big Changes in the Network Delivery Market?

With major changes underway in the content delivery network space, what does the future hold for Level 3 Communications and Akamai Technologies?

Jul 9, 2014 at 9:00PM

Akamai Technologies (NASDAQ:AKAM) and Level 3 Communications (NYSE:LVLT) are both large providers of CDN services. These content delivery networks are widely used in technology and telecom, but as large companies like Apple (NASDAQ:AAPL) and, now, Verizon Communications (NYSE:VZ) elect to build or acquire their own CDN networks, what does this mean for Akamai and Level 3?

The build-outs begin
Back in early 2014, Apple began the process of building its own CDN. In the past, Apple had used both Level 3 and Akamai for CDN services to deliver applications, services, and content to its users. However, as Apple's network has surpassed 700 million users and continues to grow, creating a proprietary CDN made sense as a way to protect margins long-term.

The other benefit of building, rather than renting, a network is full control. These CDNs are instrumental in how users experience Apple's ecosystem, and it makes sense for the company to seek full control of this power.

What happens to Akamai and Level 3?
The end result will be lost business for both Akamai and Level 3. The former is believed to be Apple's largest CDN client, with more than $100 million paid for services. Akamai has grown revenue at a 15.5% annualized rate over the last three years, as it still finds plenty of business with smaller up-and-coming technology companies in need of CDN services.

However, a $100 million loss would be equivalent to 15% of Akamai's 2013 revenue. In other words, losing too many of these large customers could essentially wipe out Akamai's growth.

As for Level 3, its $6.3 billion in 12-month revenue, and its diversified services, gives it a little more protection against this movement. Certainly, the company has high exposure to this enterprise space, but with more miles of fiber than any other company in the world, it is also a key provider of content delivery on many consumer services like Internet.

The acquisition approach
With that said, Akamai looks to be the real loser in the build-your-own-CDN movement within the enterprise space. Just last week, Verizon presented a new CDN service to improve content delivery in the e-commerce industry.

While Apple builds its own CDN platform, Verizon took the road of acquiring one of Akamai's top competitors, EdgeCast, for $350 million. Therefore, Akamai is not only losing a customer, but also gaining a competitor with this move.

Albeit, CDN services are unlikely to ever become a large piece of Verizon's fundamental pie. However, with telecom companies placing so much emphasis on broadband and increasing content speeds, it's no surprise the company wants full control of the delivery network.

Is Level 3 or Akamai still a good investment?
The bottom line is that it's hard to find a way Akamai comes out on top in this new CDN market long-term. The company may continue to perform short-term, but if it loses too many of its top clients, many of which could then become competitors, the company won't have a hedge for protection.

Level 3 is a much larger global company, and its fiber network is its hedge as these changes occur. Moreover, this fiber network, which includes 35,000 miles for Level 3 and 27,000 route miles for newly acquired TW Telecom (with much being in metropolitan areas), makes it nearly impossible for customers to build a better network.

Foolish thoughts
As a result, there is still a place in this market for Level 3, but Akamai might want to explore strategic options. Albeit, Akamai, at 22.2 times next year's earnings, is very much valued like a company with 15% annualized growth, but the reality is that this growth could be undercut very quickly.

On the other hand, Level 3 is focused on efficiency rather than growth, and with operating margins being half that of Akamai's, there could still be significant room to improve, thus creating shareholder value.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.


Brian Nichols owns shares of Apple and Verizon Communications. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers