November 11, 2010
Investors selling Akamai Technologies (Nasdaq: AKAM ) are making a mistake.
As I write this, shares of the company behind the web's leading content delivery network (CDN) are down more than 2% for the week. Here's why:
- Level 3 Communications (Nasdaq: LVLT ) today confirmed earlier reports that it would take over from Akamai some of Netflix's (Nasdaq: NFLX ) streaming business. Limelight Networks (Nasdaq: LLNW ) is also expected to realize some benefit from the shift.
- Yesterday, Akamai filed suit against smaller rival Cotendo for what it says are violations of three of its key patents for delivering services over the web. Cotendo is a key rival that aims to take away some of Akamai's higher-margin value-added services business, such as accelerated delivery of cloud-computing data. AT&T (NYSE: T ) and Google (Nasdaq: GOOG ) are two of the start-up's high-profile partners.
Perceptually, these developments are important. They indicate that Akamai's competitive advantage is under assault. (If it weren't, why sue Cotendo?)
But let's also be real about the money at stake here. Video remains a massive growth market, and Akamai will continue to deliver video for Netflix. Whatever revenue it loses to Level 3 and Limelight -- if any -- will likely be minimal in the larger scheme of the $1 billion empire it's creating.
If you want to worry about something, worry about the Cotendo suit. Value-added services such as e-commerce and web application acceleration (i.e., delivery of cloud-computing data) now comprise more than 50% of Akamai's annual revenue. To ensure future growth, Akamai must stake an unassailable claim on this area of the market. Cotendo and its partners are challenging that claim.
I'll have more on the details of the suit in the coming days. In the meantime, let us know what you think of these developments. Are you tempted to sell Akamai? Or do you see the sell-off as a buying opportunity? Please vote in the poll below, and then leave a comment to explain your thinking.
Interested in more info on Akamai? Add it to your watchlist.