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Is Akamai About to be Googled?

The Wall Street Journal doesn't know much about content delivery over the Web, or so says Google (Nasdaq: GOOG  ) . Quoting from yesterday's blog post by Google legal counsel Richard Whitt:

By bringing YouTube videos and other content physically closer to end users, site operators can improve page load times for videos and Web pages. In addition, these solutions help broadband providers by minimizing the need to send traffic outside of their networks and reducing congestion on the Internet's backbones.

He's responding to a Journal story that says Google could violate the principles of network neutrality by creating a "fast lane" for its own content. Whitt's arguing that content delivery network (CDN) services of the sort Google proposes have been around for years, notably from Rule Breakers recommendation Akamai (Nasdaq: AKAM  ) and peers Limelight Networks (Nasdaq: LLNW  ) and Level 3. Even (Nasdaq: AMZN  ) performs content delivery with its new CloudFront service.

Good point. Net neutrality refers principally to bandwidth and access. Providers can neither restrict nor optimize either factor in hopes of squeezing out a few extra dollars of profit, as Comcast (Nasdaq: CMCSA  ) recently proposed under the guise of creating a more equitable Internet. Edge networks are different; most simply cache (i.e., store) content. No preferential access required.  

Google 1, WSJ 0.

The end of the CDN?
But, of course, the controversy doesn't end there. If Google can enter the CDN business so easily, the thinking goes, then Akamai must be at risk, right? Some investors certainly think so. "I expect the smaller players to eat at Akamai's business, and their past price-gouging sales tactics to come back to punch them in the face," wrote bearish CAPS investor lamontsf in September.

It's certainly possible. We've seen Akamai cut jobs and prices recently. Yet how many firms would really be capable of creating a CDN from the ground up? Google, sure, but who else? Well, AT&T (NYSE: T  ) has one today. Microsoft (Nasdaq: MSFT  ) , too, has been working on a CDN. But Mr. Softy also uses both Akamai and Limelight. Each partner allows Microsoft to more easily propagate its Silverlight streaming technology, industry-watcher Dan Rayburn told me in an interview earlier today.

Google, too, is rumored to be using Akamai, even as it hosts and distributes third-party content via Google News. Perhaps that will change over time. Maybe Apple will stream iTunes movies on its own. Even then, thousands of firms will still need help distributing content. For them, Akamai, Limelight, and Level 3 are perfect partners.

Which is the best? Akamai and Level 3 get the nod from our 120,000-strong Motley Fool CAPS community:



Limelight Networks

Level 3

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CAPS data current as of Dec. 16, 2008.

"It may take a while to reach profitability, but this is a company that should eventually get there in a big way," wrote CAPS investor mkeszler last September referring to Level 3. "Smart investors like George Soros think so and so does the Prudent Speculator. With any luck we are near the bottom here, but I am in for the long run on this one."

Soros has since sold out, reports, but value investors such as Wally Weitz were buying over the summer. With each dollar of revenue priced as if it were worth just $0.28, I can understand why.

And what of Akamai? "AKAM is still growing sales and has an excellent balance sheet. Price to cash flow is less than 6. Competition is an issue, but hey, that's life," wrote CAPS All-Star nonzerosum last month.

Both pitches make sense, but I'm an Akamai investor, and Level 3 has too much debt for my tastes. What about you? Which CDN would you buy? Which would you short? Let us know by signing up for CAPS today. It's 100% free to participate.

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Amazon and Apple are Stock Advisor selections. Microsoft is an Inside Value pick. Akamai and Google are Rule Breakers recommendations. Try any of these Foolish services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers is a member of the Rule Breakers team and had stock and options positions in Apple and Google and a stock position in Akamai at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is still sipping its morning coffee.

Read/Post Comments (2) | Recommend This Article (5)

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 December 17, 2008, at 3:24 PM, dividendgrowth wrote:

    Level 3 will soon go bankrupt, and Akamai will be made obsolete by Google's thousands of data centers.

  • Report this Comment On December 17, 2008, at 8:46 PM, lamontsf wrote:

    Independent of the publicly traded companies running CDNs that you mention, there are dozens and dozens of small private companies providing the same service. It is significantly cheaper to build a national or global network than it was when Akamai first rolled theirs out, and storage/networking costs have dropped to a fraction of what it cost to build them 8 years ago.

    CDNs have become a commodity, and akamai cannot or will not be able to lower their prices to match the likes of PantherExpress or LimeLight. There is a minor level of performance difference between some players, but not enough to justify the higher costs of Akamai. Level3 getting into the space last year and Amazon this year should serve to show that it's become easy enough to do this business as an afterthought to your main line of work. Akamai does not offer enough services or value-add to keep themselves above the fray, and as the previously signed multi-year contracts finish, I suspect Akamai will lose customers in droves.

    I'd go so far as to say the only reason they're still here is that Akamai had a habit of buying up whichever competitor was largest at the time. (Speedera comes to mind) But now there are too many competitors to buy up or drive out of business, and I can't imagine Akamai has the money to even try.

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