By Allan Leinwand The mid-1990s content delivery networking technology deployed by Akamai, Digital Island (now part of Savvis) and Speedera (acquired by Akamai) to distribute content close to the consumer edge of the Internet should be yesterday’s news given the bandwidth boosts, and the ever increasing […]

By Allan Leinwand

The mid-1990s content delivery networking technology deployed by Akamai, Digital Island (now part of Savvis) and Speedera (acquired by Akamai) to distribute content close to the consumer edge of the Internet should be yesterday’s news given the bandwidth boosts, and the ever increasing speeds, both on the edge and the core. And yet, the business is in full bloom, and attracting the attention of private equity crowd.

Why? Because the current digital media boom means bigger, fatter files and more content online. CDNs don’t just deliver small banner ads anymore, but rather YouTube videos, movies from companies like Apple and Amazon and megapixel pictures via MySpace. It costs content providers money to distribute this content and CDNs can save money on Internet peering fees and server load.

Wall Street saw this trend early on, and you can see that in scorching stock performance of Akamai Technologies: Akamai stock price is up 400% in past 12 months, and market capitalization has topped $7 billion. Its’ profit/earnings ratio of about 25, a very nice multiple and a comparable for others in the market to dream about.

Vitalstream, a video streaming CDN, went public on NASDAQ in June and today has a current market capitalization of $188M. Savvis has a $1.4 billion dollar market capitalization, nearly doubling from a year ago.

Private equity guys are paying attention. CacheLogic, a company focused on peer-to-peer CDNs, just got $20M in funding. Limelight Networks, a CDN focused on video and multimedia content just raised $130 million from Goldman Sachs.

What the market sees is that Akamai is vulnerable on two fronts: innovation and expense. On the innovation side, Akamai does not appear to be building the CDN of the future that supports large file distribution, web services at the edge and peer-to-peer technologies. As an example, just look at how Limelight Networks built a cost-effective architecture that exploits their weakness in large file distribution capabilities.

On expenses, they have a large network deployment that requires significant expense to keep operational (and most say unnecessary with today’s Internet). It’s a classic innovators dilemma that the smaller players should be able to exploit if they focus on execution and customer acquisition.

Akamai is paying attention and is using their patent portfolio and threats of litigation to slow the smaller players down. We’ll see if they can use their current market capitalization to keep the smaller players down while they innovate future CDN services the market will require.

Allan Leinwand is a venture partner with Panorama Capital and founder of Vyatta. He was also the CTO of Digital Island.

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  1. CDNs are totally unecessary now a days. Back when latency was a true problem they served a purpose. Now a standard $109 box at EV1 can serve a file to a user just as fast as Akamai can. Sometimes faster and also sometimes slower.

    What I’m saying is CDN’s are over priced. Fortunately for them they are still riding high on 2001 perceptions that corporate IT guys still have. It’s like buying a Maybach for them, kind of a status symbol… although a Maxima would get them to their destination just as fast on the 65mph freeway they are both on.

    Stop the madness people!

  2. Your P/E ratio is a simple pull from Yahoo Finance and while not wrong, heavily distorts reality.

    AKAM earned $11M last quarter and sells for roughly $7.5B dollars. There was a one time gain a year ago of $225M that distorts the P/E calculation.

    THeir P/E ratio is 170 if you annualize last quarter. And that is undiluted.

  3. I Largely agree with Ted that the so called “last mile” problem is much less of an issue than it once was when Akamai and D.I. ruled the streaming media networks back in the 90’s. One other thought: A lot of high tech investors got burned funding CDN’s when the market crashed, I wonder if bad memory like that could make them think twice before investing in the same space again.

  4. Hi Andrew,

    Thanks for the correction on my P/E ratio. I think your numbers show why the CDN space is so hot for private equity right now. And the market cap of AKAM keeps on moving upwards…


  5. Ted, delivery speed is not the only reason to use a CDN. The ability to handle traffic spikes or localized outages is equally (if not more) important for a site with any meaningful user base — and you simply can’t do either with a single point of presence.

    I do agree that Akamai is wildly overpriced. But there are smaller players out there with cost-effective infrastructures and interesting pricing alternatives (rollover, pay-as-you-go).

  6. I completely disagree that CDN’s in general are totally unnecessary these days. Sure, the need for a CDN to deliver small media files (.jpg, .gif, etc) may not be necessary, but that’s not where this market is going anymore. Today we are talking about huge on demand content, streaming media with large bitrates, and enormous files. Companies rely on delivering this content on a daily basis to hundreds and thousands of users simultaneously, and for some it’s 100% of their business.

    Like Phil said, there are other reasons CDN’s are needed. Traffic spikes, outages, and redundancy are just a few. A single POP is not a wise idea if delivering media is at all important to your business. How can a single POP compete with multiple POP’s delivering your content using BGP? Quite simply, it can’t.

    Without CDN’s, CBS couldn’t have successfully streamed the NCAA March Madness tournament to over 200,000 people. Companies like YouTube and MySpace wouldn’t be what they are today. The on demand music and movie market wouldn’t be as successful as it has become.

    With that said, there are now second generation CDN’s with networks built from the ground up to easily handle the direction media is taking us.

  7. JNG, you do know that you can have a multi homed BGP routed setup without paying out the a$$ via the CDN’s right?

    For average customers this is all that’s needed and it would keep them under $20 per mbs. with great reliability. When you are doing under 100mbs with a CDN you are getting raped in prices. There’s no if ands or buts about it.

    Again, FOR MOST companies CDNs are a rip off.

    Although I’m sure at the Apple level Akamai’s prices look similar to a bargain host’s. Or at least they are cheap enough to keep a company from having to setup the infrastructure.

    I have been delivering content at over 1gbs for the past 4 years. I think I know a bit about media/content delivery. All of the problems you are talking about have caused me no significant issues. I maintain a backup setup in a remote location just in case. That’s all. That’s less for content delivery and more for data security but the delivery is there when I need it obviously.

    If I had gone with a CDN I’d be paying 200% more than I am now.

  8. Actually, the interesting thing is that not everybody in the CDN space is making money. For instance, CDN service providers are in demand at the moment due to lot of video and media content, but, the equipment manufacturers (for caches and routing intelligence used by service providers) are consolidating.


  9. Allan, what is your agenda.? Last time I checked Digital Island your former compamy got hammered by Akamai in district court for patent infringement much like what Lime Light is experiencing. DI merged with Sandpiper, got bought by Cable and Wireless and then bought out of BK. Looks like you could not differemnciate, or take adbvantage of the opportunity back then. To clarify on LimeLight, Goldman bought 53% of the company. The management team and investors at LL got 95 million in cash and retained 25% in stock. 35 million will be used for build out with a good portion used to fight Akam. Deal was 200 million pre-money.

    CDN’s a fine space, but much more required in 2006 to take advantage of high margin $. You seemed to miss that, narrow thinking. This requires quite the inveastment

  10. Tellit,
    2 words – “Spell Check”.
    if you insist on being a “know it all” – at least learn how to spell so that we can take you a little more seriously.

    Allan, love ya man ;-)

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