Fool.com: Break Down: Akamai Technologies [Rule Breaker] August 3, 2000

Rule Breaker Portfolio
Break Down: Akamai Technologies

"Break Down August" means that we're spending this month analyzing several Rule Breaker candidates in search of a new purchase, with each company being subjected to a detailed analytical "Break Down." Akamai Technologies, the first Rule Breaker candidate that we'll study, has created a vital technology: Intelligent Internet content distribution. It is the first mover and the top dog in the field, which will become a vast industry as bandwidth usage increases.

By Brian Lund (TMF Tardior)
August 3, 2000

Hey, fellow Fools! As Jeff wrote on Tuesday, this is Break Down August! We're on the prowl for our next Rule Breaker.

I'm delighted to kick off the search by introducing you to one of my favorite companies, Akamai Technologies (Nasdaq: AKAM).

Know at the outset that The Motley Fool was one of the early customers of Akamai, that many of our techies here own shares in the company, and that some serve on Akamai's customer advisory board. I, too, have been impressed by what I see as Akamai's vital product, leading market position, and devotion to its customers. I also think that our tech Fools' strong approval of Akamai and its product is telling -- these are very smart and skeptical people. Akamai has impressed me enough that I also own shares. So, know this background as you read.

Let's jump straight to the first, key Rule Breaker criteria:

Top dog and first-mover in an important, emerging industry.

Akamai's core business is the global delivery of Internet content, streaming media, and applications. Here's how it works: Customers tag portions of their content that require significant bandwidth (like banner ads, graphics, video and audio presentations). Akamai holds tagged items in its worldwide network of servers, numbering more than 4,250 in more than 50 countries, connected to more than 225 different telecommunications networks.

When users request content from a customer's website, Akamai routes the request to the server best able to deliver the content quickest, based on the geographical proximity, performance, and congestion of all available servers in its network. It serves whatever portion of the page it has on its servers -- the "Akamaized" content -- while the home website serves the lower-bandwidth, ever-fresh content, usually text.

Customers pay Akamai for bandwidth served. Akamai, therefore, doesn't depend on acquiring new customers to grow, but rather on increasing bandwidth usage, something that is virtually assured in the coming years. Akamai is also always introducing new products, which it can sell to its existing customer base.

The Akamai Advantage
For customers, there are several advantages to having as much content Akamaized as possible. First, and most importantly, Akamai can speed up content transmission significantly. However fast your Internet connection, even if it's eventually running over great fiber optic cable and optical switches, delivery over large geographical areas takes time. As bandwidth usage increases exponentially, it will continue to be difficult for the network to avoid bottlenecks.

By bypassing potentially congested network connections and optimizing server selection, Akamai typically delivers content two to 10 times faster than the original site could. That's important right now, because long downloads of Motley Fool articles annoy you. It will be absolutely vital in the world to come, where streaming video, conferencing, and other real-time applications become an everyday part of our lives.

Another advantage of Akamaized content is that it saves money by reducing the customer's hardware requirements. Dwight, chief techie at the Fool, reckons that Akamai serves 90% of our content, mostly in the form of graphics. That greatly reduces the load on our servers, switches, load balancers, and routers -- meaning that we don't need to increase our hardware capacity as quickly.

Akamai leads its industry
The Internet content-distribution industry seems important to me and is certainly emerging. So, is Akamai the top dog and first-mover? In a word, yes. While Akamai didn't invent the concept of "edge distribution" to speed up data transfer, Akamai pioneered the intelligent content distribution industry.

Akamai's biggest direct competitor is currently Digital Island (Nasdaq: ISLD). Here are some comparative numbers (revenue numbers are for content delivery only, from the latest quarter):

      Servers  Customers  Rev ($mil)  Seq. Growth
ISLD   1,200       125       8.9          30%
AKAM   4,250     2,100      18.1         151%
Akamai has a strong lead in the market.

Other competitors may emerge, but many potential threats have already raised the white flag and become Akamai customers. Perhaps the most telling of these is Yahoo! (Nasdaq: YHOO), Akamai's first big customer without an equity stake.

Yahoo! is notoriously self-sufficient. They do almost everything themselves. If they can't do it themselves, they buy it. One joke around The Motley Fool TechDome is that Yahoo! smelts its own metal to make its own servers. Nevertheless, Yahoo! uses Akamai. Farzad Nazem, chief technology officer at Yahoo!, said in a recent interview, "They [Akamai] are really smart guys. They had the right idea, and it was very complementary to what we needed."

If Yahoo! (arguably the biggest Internet leader out there) outsources rather than builds this service in-house, it's unlikely that any other big player will want to compete. Akamai has already partnered with or signed up most of the likely competition, including Cisco Systems (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT). Brian NeSmith, CEO of CacheFlow, Inc. (Nasdaq: CFLO), another potential competitor, instead characterized his business as complementary to Akamai in a recent interview with the Fool.

Why don't the big players want to compete with Akamai? Two main reasons: Akamai's proprietary technology and its strong business momentum. I'll discuss these points and run Akamai through the remaining five Rule Breaker criteria in part two of this Break Down on Monday.

Tomorrow, of course, is a very special day: We will be celebrating the sixth anniversary of The Motley Fool's launch! Stop by and join the fun!

Your Turn!
Hop over to the "Rule Breaker Companies" discussion board and let us know: What key issues did we miss in our Akamai discussion? What have we gotten right? Do you believe Akamai is a Rule Breaker? What additional insight can you provide about its industry? If none, just check out what other Fools have to say about Akamai!

Fool on!

-- Brian Lund, TMF Tardior for tax purposes.

Suggested Links:
  • Akamai Discussion Board
  • Akamai website
  • Stock Talk, 7/6/00: CacheFlow, Inc.
  • Fool News, 4/25/00: The Unimportant Story of Akamai





  • Rule Breaker Portfolio

    8/3/2000 Closing Numbers
    Ticker Company Day Chg % Chg Price
    AMGNAMGEN INC-1/8-0.18%$70.19
    AMZNAMAZON.COM11/162.23%$31.50
    AOLAMERICA ONLINE5/162.51%$53.56
    ATHMAT HOME CORP CL A1/41.84%$13.81
    CRAPE CORP - CELERA GENOMICS GRP-2 15/16-3.21%$88.56
    EBAYEBAY INC1/82.30%$50.00
    SBUXSTARBUCKS CORP13/162.07%$40.06

      Day Week Month Year
    To Date
    Since
    8/5/1994
    Annualized
    Rule Breaker 1.13% 2.09% 2.48% -26.54% 1,094.04% 51.20%
    S&P 500 .96% 2.30% 1.52% -1.14% 216.88% 21.20%
    S&P 500(DA) .96% 2.30% 1.52% -1.14% 231.13% 22.09%
    NASDAQ 2.77% 2.64% -.19% -7.60% 422.08% 31.72%

    Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
    8/5/19944020AOL0.460$53.5611,553.82%
    9/9/19972640AMZN3.188$31.50888.23%
    12/16/19981160AMGN21.444$70.19227.30%
    12/17/19991260CRA39.756$88.56122.76%
    7/2/1998470SBUX27.955$40.0643.31%
    2/26/1999600EBAY50.263$50.00-0.52%
    12/4/1998900ATHM28.040$13.81-50.74%

    Trade Date # Shares Ticker Cost Value LT $ Val Ch
    8/5/19944020AOL$1,847.65$215,321.30$213,473.60
    9/9/19972640AMZN$8,415.03$83,160.00$74,744.97
    12/17/19991260CRA$50,093.00$111,588.80$61,495.75
    12/16/19981160AMGN$24,875.50$81,417.50$56,542.00
    7/2/1998470SBUX$13,138.63$18,829.38$5,690.75
    2/26/1999600EBAY$30,158.00$30,000.00($158.00)
    12/4/1998900ATHM$25,236.13$12,431.25($12,804.88)
      Cash: $44,060.03  
      Total: $596,808.10  



    Note
    The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.