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Summary:

Akamai, a leading content distribution network, saw its stock jump almost 6 percent to about $23.97 a share today, leading to speculation by some blogs that the company might be takeover bait. Prompting this talk is the company’s market capitalization of around $4 billion. The whole […]

Akamai, a leading content distribution network, saw its stock jump almost 6 percent to about $23.97 a share today, leading to speculation by some blogs that the company might be takeover bait. Prompting this talk is the company’s market capitalization of around $4 billion.

The whole fracas today is nothing more than a tempest in a teapot, and I am not putting much credence to this talk. Why? First, the stock has already started to come down. Secondly, today’s trading volume isn’t too different from an average daily volume of Akamai stock trading.

More importantly, Akamai has come through a really rough patch and is starting to move in the upward direction. The company management is loathe to sell and more acquisitive in nature. If you follow the industry long enough, like I have, then you know that there is a rumor a week when it comes to Akamai and Limelight Networks. The whole thing feels like one big circle jerk.

Regardless, this chatter brings up the big question: Who will buy Akamai? In the past there were some serious talks between Akamai and AT&T, but they didn’t go anywhere. AT&T is launching its own CDN efforts, though it is hard to tell if it had any impact on Akamai’s business.

Given its interest, AT&T could come back to the table. Thinking beyond AT&T, other suitors for Akamai could include Level 3, Verizon, Comcast or some international telecom operators. Cisco, Microsoft and Google could throw their hats in the ring. Akamai has an enviable infrastructure and still remains a dominant player in the CDN business.

  1. Akamai is in an interesting position today as relates to its CDN business. The growth of video has had a dramatic effect on the CDN landscape as costs and profits in the segment shift to the business of moving video files.

    The problem with this, as far as Akamai is concerned, is that despite attempts by all the CDN players to offer value-added services, this is primarily a cost-driven business which is rapidly commoditizing. Since Akamai is the largest player by an order of magnitude, they continue to enjoy a brand leadership position. However, as costs escalate for publishers and video monetization continues to be elusive, cost-effectiveness will become increasingly important, and Akamai is trying desperately to hold their price points. This leaves them vulnerable to companies like Limelight Network who are willing to undercut them with similar services.

    The second challenge is that there are a limited number of large media companies, and a rapidly increasing number of players attempting to woo them. Companies like Brightcove and Maven are giving Akamai a serious run for their money, and are offering packaged solutions that address high-consideration strategic problems for these customers, rather than bandwidth alone. This is very small, semi-mature market, with high competition and a lot of hungry new entrants that are willing to make deals that Akamai cannot broker without cannibalizing existing price points and revenue.

    When you move down below the top of the pyramid, into the mass market, which is where the real growth opportunities in media exist, things look even bleaker for Akamai. Companies in this segment of the market need the kind of end-to-end solutions that Akamai doesn’t offer today, and are even more cost-sensitive than their larger brethen. The winners today in this part of the market are the video and media solutions providers, who are in turn controlling the CDN decision-making process.

    In order to win in this broader market, Akamai will need to either dramatically reduce its price points, build or acquire an end-to-end video solution, or both.

    I anticipate that in the next 12 months, we will see signficiant reduction in Akamai’s price points, as well as the acquisition of one of the leading white label video solutions providers. If Akamai hesitates in doing either, we’re likely to see signficant erosion in their market share and stock value.

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  2. Om, I would have to agree. It seems each month there is a “rumor” that someone is buying Akamai. Last quarter is was Microsoft, before that Cisco, then the street was talking about IBM…. it’s a never ending cycle.

    On the AT&T part, I would have to disagree and say that we do know that today, AT&T is not having any impact on Akamai’s video CDN business. AT&T’s CDN capacity today is not even 5% of what Akamai has. AT&T is aiming to have 400Gbps of CDN specific capacity by year’s end. And AT&T does not currently support Flash streaming and is not currently a certified Flash hosting provider. AT&T is more than 18 months away before it can think about giving Akamai any challenge for video CDN business.

    To BW’s comment, folks like Brightcove are NOT challenging Akamai. Brightcove uses CDNs like Akamai and Limelight to deliver their content. Brigthcove is a customer of CDNs. Brightcove is not a CDN and does not have a content delivery network. Maven is a video platform, not a CDN either and although Yahoo! does a lot of their own delivery, Yahoo! is not competing with the CDNs.

    It’s also important to remember that there are two kinds of video CDN customers. Those who only buy on price and only care about the lowest cost. That’s the commodity part of the business. But there are more customers, who while wanting a cheap price, are willing to pay more for services they feel will help their business. Things in the ecosystem like ingestion, transcoding, content management, authentication, metadata tools, detailed reporting and analytics, ad insertion etc…. that is not business that Akamai is losing as that is their strength.

    The only place you see a lot of pressure on price and competition is from the customers who care about price and price only. And as business models evolve over time, these customers will realize they need more than just a low price to have a real business and will need many of the other pieces in the ecosystem. That’s why Akamai bought Nine Systems, for the ecosystem application, Stream OS. That’s why Accenture bought Origin Digital, for the workflow solution. That’s why Limelight, when it launched its new website in April added an entire new section in their navigation called “ecosystem”.

    You say imply that Akamai does not offer the end-to-end solutions that content owners need. That’s inaccurate. So far, Akamai is the only CDN that offers the ecosystem from creation to distribution. Level 3 is working on doing that as well and Limelight is trying to address those needs with partners.

    But the idea that it’s looking bleak for Akamai is just not the case. Case in point, for 2008, only three CDNs will do more than $25 million in video CDN revenue. Akamai, Limelight and CDNetworks. Akamai is not losing any large market share anytime soon. Yes, they can lose some, for commodity business, but they won’t lose much until other CDNs truly look at doing more than just delivering bits.

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  3. Akamai powers the U.S.News & World Report Best College Rankings that was on the front page of MSN, AOL, and Yahoo today -> http://colleges.usnews.rankingsandreviews.com/college

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  4. Dan,

    You’re certainly an expert in the space, and so I definitely respect both your experience and the authority of your opinion. However, I’d respectfully offer a different opinion on a few of these points.

    I met recently with the heads of Akamai’s emerging media group, who are working to win our business. When I asked them what competitor they most sweated in today’s market, they were clear that it was Brightcove. It’s true that Brightcove does use Akamai as one of its CDN partners, but ultimately what’s at stake is both the price point of the bandwidth and the control of the customer. Once Brightcove has management of the customer (and by buying their solution you’re giving them control of the CDN decision), they control both the pricepoint of bandwidth (subject of course to the cost at which they themselves can purchase it) and the overall customer relationship. Once Brightcove owns the customer, they dictate the CDN relationship, and that does directly threaten Akamai’s business.

    As far as Akamai having strengths in encoding, content management, etc., I have to disagree. Akamai partners to outsource its encoding (we’re in discussions to be one of those partners), and no one in the mass market is looking to Akamai to deal with ad serving, content ingestion, or moderation. Akamai would like to be an end-to-end technology in this area, but they’re just not there yet today.

    At a high level, it’s also about what customers perceive. Customers do not see Akamai as an end-to-end video solutions provider, they see them as a bandwidth provider. The additional services that they offer are designed to justify the additional expense, but it’s not clear that all customers are seeing enough value in those services to offset the cost. Outside of large media companies, monetization of video remains elusive, and they all have to be cost-conscious.

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  5. If delivering bits is the only service offered, acquiring new customers will be very difficult, even those customers who are mainly price driven. One would find hard to believe that particular model is sustainable over longer term especially if margins are suppressed. CDNs have three choices: build in-house (not known for), acquire application centric companies, or partner up with application centric companies. The bottom line is they need to offer the entire media workflow for Flash and Windows Media if they want to compete, retain and acquire new customers and grow their core delivery business.

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