Netflix Throws Akamai a Bone

The country's most popular movie-streaming service is now working with the country's largest content-delivery network.

Netflix (Nasdaq: NFLX  ) is turning to Akamai (Nasdaq: AKAM  ) as its primary digital-delivery provider, a move that won't sit well with Limelight (Nasdaq: LLNW  ) and Level 3 (Nasdaq: LVLT  ) .

"We chose Akamai as our primary content delivery network because we need a strong partner to deliver movies instantly and to be able to meet our ever-increasing demand," Andrew Rendich, head of Netflix operations, is quoted as saying in yesterday's press release.

This may certainly be true, but there is probably something else at play here.

Two weeks ago, StreamingMedia.com's blog broke the story, indicating that Akamai would be charging Netflix just $0.015 per gigabyte for the first three or four months of the deal in exchange for handling at least 51% of Netflix's streams. That cutthroat rate is a third of Limelight's rate (and a fourth of what Akamai normally charges, according to NewTeeVee).

Neither party is confirming the price break required for Akamai to get the Netflix account, but let's see if this move has an impact on Akamai's margins going forward. Let's also see where things stand once Akamai's discount presumably ends.

As a global leader, Akamai would be a great partner to have -- all things being equal. Netflix has already committed to expand into an unannounced market outside the U.S. later this year, and Akamai would be an asset if the international launch includes the streaming component of Netflix's service.

In its latest quarter, 48% of Netflix's 12.3 million subscribers had streamed at least 15 minutes of video. It's included at no additional cost to unlimited DVD rental plans, so it's simply a matter of either having the mind-set to watch a flick on a computer or have the networked home theater appliances to make it happen.

Streaming is a growth vehicle at Netflix, since only 28% of its subscribers were watching Web-served video during the same quarter a year earlier. Netflix's ability to stream through existing Blu-ray, DVR, and video game consoles including Microsoft's (Nasdaq: MSFT  ) Xbox 360 and Sony's (NYSE: SNE  ) PS3 will only grow Netflix's demand for reliable content delivery.

So congrats to Akamai for getting its foot in the door. Now let's see if it can avoid stubbing its toe.

Is the content-delivery network industry too competitive to generate long-term profitable growth? Will Netflix stick with Akamai if the discounting ends? Share your thoughts in the comment box below.

Microsoft is a Motley Fool Inside Value selection. Akamai Technologies is a Motley Fool Rule Breakers pick. Netflix is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz has been a Netflix shareholder -- and subscriber -- since 2002. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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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 March 17, 2010, at 1:00 PM, 98analysis wrote:

    Great Content - Service Provider - Delivery Network

    Having great content is always the first step. The rest will follow.

  • Report this Comment On March 18, 2010, at 5:11 AM, quaternion2 wrote:

    Netflix business model certainly has an impressive growing potential so has its bandwidth need due to movies information content streamed being huge. I personally believe its actual streaming need is nothing compared to what it could develop when: 1 more movies will be available for streaming 2) it'll go international. If it isn't already happened, there is also a chance for Netflix to wreck and grab all market share from Blockbuster and similar oldies which are stuck with stores(they simply can't close all the stores at once). Assuming this picture comes true there is room for Netflix to request all sort of discounts from companies like Akamai, Limelight for a long forseeable future. In my opinion the only dark spot is how long it will take for Netflix to convert a sufficient amount of movies for sreaming. In fact movies available for streaming are a little selection when compared to those available for shipping. As a matter of fact I already rely just on streaming for convenience. I think this conversion speed is an important issue as, even if I believe old companies like blockbusters are stuck and doomed as much as the mail system, others may come into play. Ultimately this new players could grab the streaming idea and turn the game into a fierce competition. If Netflix is successful in converting all movies to stream it will be the Netflixbuster of the 21st century.

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