Each Friday, I write a column called Baby Breaker Birth Announcements. My aim is to profile stocks that are undermining existing industry conventions on the way to the public markets, and possibly to inclusion in our Motley Fool Rule Breakers portfolio.
Of course, I never expect to write about companies that could be undermining our current crop of Breakers. But that may be exactly what's happening with Akamai Technologies (Nasdaq: AKAM ) and emerging rival Limelight Networks.
A new delivery boy
In June, Akamai and MIT together sued Limelight, which describes itself as "the content network for digital media." At issue are two MIT patents licensed exclusively to Akamai. One covers software that captures and copies data from a website so that it may be distributed across an unlimited number of servers. The other, according to TheBoston Globe, is for a process for capturing photos and images to be used by content delivery networks (CDNs), which bring the Web geographically closer to users.
Akamai won't comment on the suit, but Limelight co-founder and chief strategy officer Mike Gordon says, with respect to the case, "I think they [Akamai] are wrong." No surprises there, but I was surprised by his kindly treatment of the competition in our interview. He refused to believe that Akamai's dominance of the content delivery market -- estimates reach as high as 70% -- is bad for business, saying instead "there's tremendous opportunity for both our companies."
Everybody loves content
Gordon may be right. Forrester Research (Nasdaq: FORR ) , which counts Akamai as a client, recently published a report in which analysts learned that broadband adoption is fueling digital media access, which, in turn, is fueling growth for CDNs.
It's a huge opportunity. Forrester estimates that only 40% of American homes had broadband Internet access as of the end of 2005, and that 26 million of us pay for online content of some sort. Average per-consumer spending on online content increased 14% from 2004 to 2005.
More broadly, several researchers are predicting massive growth for the remainder of the decade. Parks Associates, for example, said in January that it expects spending on digital music, movies, and games to rise from $2.4 billion at the end of 2005 to $9 billion by 2010. That's 30% growth annually, which, interestingly, closely mirrors Akamai's own annual revenue growth rate over the past few years.
The Chronic -- what? -- cles of Narnia
Limelight, though, is growing much faster. Recently, the firm announced that it had achieved its 20th consecutive quarter of sales growth, and that it has added more than 100 customers so far during 2006. Furthermore, Limelight has been profitable for 11 quarters straight and, at $24 million in revenue through the first six months of the year, is tracking closely to Forrester's prediction of $50 million in sales by the end of 2006.
What's more, Forrester rates Limelight highly in a head-to-head match-up with Akamai. While the Rule Breaker earns the overall top crown, Limelight is a very close second in terms of its network presence. And Forrester's analysts give higher marks to Limelight's customer base. That shouldn't be surprising. Limelight's client list is remarkable: DreamWorks, MSNBC, MySpace, Real Networks (Nasdaq: RNWK ) , and Microsoft's (Nasdaq: MSFT ) Xbox Live all do business with the upstart CDN. The superstar of the roster, however, is YouTube, which recently claimed $8 million in funding after achieving cult status for distributing the Saturday Night Live short "Lazy Sunday."
Limelight could do even better. Reporter Om Malik, a devoted watcher of the tech industry, recently reported on his blog that the company is pursuing a huge round of funding that would value the business in excess of $200 million. Malik writes that Goldman Sachs (NYSE: GS ) is coordinating the round.
Still a Rule Breaker
So, am I worried? Somewhat. But I also believe Gordon when he says there's room for both firms. Heck, there's room for more than two. Vitalstream (Nasdaq: VSTH ) , for example, recently left the pink sheets in the dust and has built up considerable expertise in streaming media.
Nevertheless, Akamai is king of the CDN market. It's growing at more than 30% on the top line, and the company has said that it expects to grow the bottom line by 40% for at least the next several quarters. Plus, the firm has vastly improved customer retention and sports the largest network by far. In other words, even if it must bask in the Limelight, Akamai remains a Rule Breaker till its financial results -- which are due Wednesday -- prove otherwise. Stay tuned, Fool.
Akamai is one of a handful of multibaggers found by the analysts atMotley Fool Rule Breakers.Ask us for abackstage passto Rule Breakers to find out the names of the other three. All you have to lose is the prospect of richer returns.
Fool contributorTim Beyersis still a very happy owner of Akamai shares. You can find out which other stocks he owns by checking Tim's Foolprofile. Microsoft is anInside Valuepick. The Motley Fool has an ironcladdisclosure policy.