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Summary:

Akamai Technologies (AKAM) investors are the stock market’s walking wounded. Over the last month, the stock has plummeted to about $33 a share, wiping out over $3 billion in market capitalization. The slide began soon after the company announced its second quarter earnings, indicating that it […]

Akamai Technologies (AKAM) investors are the stock market’s walking wounded. Over the last month, the stock has plummeted to about $33 a share, wiping out over $3 billion in market capitalization. The slide began soon after the company announced its second quarter earnings, indicating that it would have to spend more, and its gross margins were going to decline. The reason: price wars.

For a very long time, Akamai, thanks to its arsenal of patents and early technological leads, had a near dominant market share in the content delivery network sector. It was able to charge a lot of money for delivering bits more reliably. Their dominant position meant that investors plowed a lot of money into their stock, pushing it to nosebleed levels. Akamai got priced for perfection, where even a slight burp could send the stock tumbling.

That burp has come with the increase in the number of competitors, each one trying to cash in on the boom in online video and other digital content. Limelight Networks (LLNW), Level 3 (LVLT), Internap (INAP), CDNetworks, along with new entrants Panther Express and EdgeCast Networks are some of the CDN players currently involved in a catfight with Akamai. (Their stocks are slumping as well.)

We have heard from various sources that there is a price war going on, with some players being more aggressive in luring business away from Akamai. Why? because as HipMojo correctly points out the basic CDN business is getting commoditized.

The action now revolves around adding new services on the basic commoditized CDN service, especially when it comes to online video. The good news is that Akamai’s management knows that, and bought Nine Systems and Red Swoosh to address those opportunities. The bad news is that some of its basic CDN customers, for example, Move Networks also offer similar value added services. This conflict management will be Akamai’s dilemma in the near future. Not that it helps their investors much.

Related Stories
1. Level 3 buys Savvis CDN Business.
2. Limelight Raises $130 million.
3. Our previous Akamai Coverage

Also read, 24/7 WallStreet about why Internet infrastructure companies are not doing well despite an online video boom.

The first is the the service providers are in such fierce competition for business in a market that Wall St. views as hot that margins are being compressd by price cuts. The other possibility is that, after two years of extremely rapid expansion, video streaming and consumption is flattening. Neither set of circumstances is good for these business, and neither is likely to go away.

  1. Well I think a big one you missed out here is Amazon, with their S3 and other offerings is also taking a HUGE chunk out of the CDN network. One service I was advising on went with S3 instead of a CDN because it enabled them to very easily and inexpensively setup their own service, albeit not as fully covered as others but sufficient to their needs. Also is Google not gearing up to do this themselves? Shouldn’t that not frighten investors.

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  2. Fierce Competition in the service provider business? You must be kidding.

    Hasn’t anyone noticed that CLEC consolidation is about complete, and gee, we are left with only Verizon and AT&T?

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  3. James Tellier Tuesday, August 7, 2007

    Check out Jim Cramer’s recommendations on LVLT, still waiting for this one to double Jim – http://www.stocktagger.com/2007/08/jim-cramer-accuracy-of-level-3.html

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  4. There is no evidence of a “possibility” that video consumption is flattening. Increasing consumption of long-form content (via IPTV/ITV) is going to push video mix to well above 80% of total Internet traffic from around 50% today.

    Most of AKAM’s business today is not video, it is traditional web acceleration, priced on a $/GB delivered basis. Their distributed infrastructure simply cannot be scaled as cost effectively as more centralized systems such as Limelight, S3, and Google who can always push harder on $/GB.

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  5. @Random_Graph:

    IPTV traffic won’t help Akamai because it is on private networks operated by the Telco’s. Akamai is only relevant to traffic on the public net.

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  6. Concern About Prospect of CDN Price Wars

    New entrants in the CDN market are raising concerns about pricing and margins.

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  7. We’ve seen many generations of CDN companies arrive to compete in the market and then vanish. These arrivals are often accompanied by articles talking about price wars, deal losses, and decreasing margins. Yet these articles never show any analysis to back up those claims. Stock price movement cannot be correlated with anything but the movement of stock price. Enron used to have a stock price…

    Content delivery networking is a crucial component of the internet- you see the delivery from CDNs during just about every minute of time you spend online.

    But the welcome arrival of new competitors does not instantly guarantee the failure of those who already have existing business. There is plenty of room for all types of vendors in any market.

    P.S. For all your CDN vets- remember Microcast, Cidera, Enron Media, Ibeam, Axient, Sonicity, Inktomi, and Volera?

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  8. I’m waiting for Amazon to release this as a utility service built on S3 and EC2. I did some work making a java servlet filter to make the process of automating the upload of files to S3 a seamless process, thereby creating a poor man’s CDN. If the latency on S3 was lower or if it was possible to do this, I’m sure that Akamai would lose the bottom half of their business. More here:

    http://www.whirlycott.com/phil/2006/12/18/announcing-s3cdnfilter-possibly-a-cute-little-idea/

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  9. [...] and deter users. But if you can get past the fact that it was paid for by a company that’s lost $3 billion in market capitalization in the last month and needs to prove its service is worth t… — and I fully understand if you can’t — there’s some interesting statistics [...]

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