Even With CDN Pricing Problems, Akamai Still Not Doing Enough To Spur Growth

On yesterday's earnings call, Akamai once again said they were seeing more pricing pressure in the market and stated that they are being more aggressive on their CDN pricing. While this may sound like Akamai is finally waking up to the reality of what's taking place in the market, I don't think that's the case and they still aren't taking the necessary steps needed to grow their CDN business.

Back in December I wrote a post entitled "Akamai Getting More Aggressive On CDN Pricing, But More Steps Are Needed", and I detailed how I was seeing Akamai compete on some deals with lower pricing, but not on enough of them. Seven months later, Akamai's saying they are going to be more aggressive, but noticed they always followed that statement on the call with phrases like "with key customers" or "with key strategic customers". If Akamai has any intention of growing their CDN business again, they can't be more aggressive on pricing only with "key customers". If they have finally come to the realization that their CDN pricing is too high, then it's too high. That's the bottom line. It's not that it's only too high for "key customers", it's too high for everyone. And what every investor should be asking is, what percentage of revenue do those "key customers" make up? If those "key customers" are only responsible for lets say 20% of Akamai's CDN revenue, then lowering pricing for them really won't have much impact.

On the day of Akamai's earnings, I saw two deals where Akamai was charging a customer $10 per Mbps and that customer left Akamai for a competitor who was charging $6.50 per Mbps. This was a customer that was billing about $800K a year and Akamai wouldn't lower their pricing, but did offer to defer their payment until next year. I also heard from another major M&E customer who said Akamai charges them $0.15 per GB delivered, with no monthly commit, yet other competitors are at $0.10 per GB on the same deal. Akamai can't afford to be aggressive with pricing for only select customers.

Over the past ten years, Akamai has run their business successfully using two difference strategies. One was simply the ability to grow their business based on significant traffic volume on their network due to it being a good time in the market and the economy. The second strategy for growing their business was that Akamai could charge more for their services, since for many years, they had no competitors in the market. The problem with both of these strategies today is that due to the market we are in, significant traffic growth is not there and not a guarantee, and today, Akamai does have competitors in the market.

With Akamai's M&E revenue down 4% year over year and 8% sequentially, they need to take immediate steps to get their CDN business back on track, including the ridiculous practice of trying to charge more to deliver content via streaming protocols, without explaining to anyone, including customers, what the additional charge is for. When I told Akamai a few weeks ago just how many deals I see them losing in the market because of their streaming pricing surcharge, they were very adamant with me that it was not affecting the flow of deals they are winning. Really? After yesterday's earnings, how can they possibly try and convince anyone of that? Lets stop pretending people don't see what's really going on in the market and deal with the reality of what's taking place so Akamai can take the necessary steps to fix it.

While Akamai did say things on the call about lowering their pricing to drive volume, that doesn't make any sense to me. Lowering pricing does not drive more consumption since it's consumers that drive volume, not content owners. Yes, if Akamai lowered pricing and kept more CDN business and won more new contracts in the market, that would drive more traffic on their network, but it does not drive volume for the content owner. I also found it odd that Akamai talked about how some of their customers are already at a point where they can make money from their content. If that's the case and content owners are making money, then why would Akamai have to lower their pricing? If your customers are already able to generate a profit over the model that is in place today, why would you need to reduce pricing? I simply don't believe that most of Akamai's customers are making any money from video specifically and Akamai didn't say that they were, since they used the generic term "content", which does not necessarily mean video.

Even with all of these problems, Akamai's not going anywhere. They have plenty of cash in the bank, still lead the market in terms of CDN revenue and are in a position to make acquisitions that could potentially help their business, something many other CDNs can't do. While I am not an investor in any public company, and never have been, it does not matter to me what their stock price is. But for investors, I keep hearing that the story from Akamai needs to be about growth, which is not happening. Why Akamai doesn't attack the market and their competitors with aggressive, fair and reasonable CDN pricing so that they would increase their revenue and put their competitors out of business is beyond me. They could do it overnight if they wanted to, but still aren't doing it.

The only way you grow business at a CDN is by taking advantage of the economics of scale, something Akamai knows very well, yet is not applying when it comes to their CDN business.

  • http://profile.typepad.com/6p01157157f7df970c Dom Robinson

    Dan: I think you are right that Akamai will need to more evenly lower thier pricing, however as an overlay network (one that exisits within other ISP networks) they always incur local charges from the ISPs and as an average this will mean that they have a fixed floor to thier pricing. THis means that the big negotiating strength they have is volume and not the ability to control network costs.
    Level3 (for example) can chase an overlay CDN through the floor since they buy thier GB at a price they more or less control: Akamai is simply subject to the ISPs agreed fees, and has no control. This is thier weakest point.
    Dom

  • Annonomous

    Level 3 is losing money in so many areas, to such a degree, that this is a ridiculous argument. Their debt load alone is killing the company and the stock. Whatever pricing advantages they have for that one small factor are irrelevent in the macro.

  • Shaun Noll

    i always hear that market that companies that own the backbone will have the advantage but AKAM has 80%+ cash gross margins and its value add services are 85-90% cash gross margins, that means they could really lower pricing quite a bit and still have just egregious profit margins. i’ve yet to see data on another CDN that had margins like that.

  • Jim B.

    Remember a company called AOL?-Same scenario-Giant market leader, deep pockets, big associations, and attitude. Hey guys, if you do not listen to the Big ‘D’(an), you’ll be in the same boat, up the creek without a paddle.

  • http://profile.typepad.com/6p01157159a004970c yaaker2001

    I agree with you! I think AKAM has to compete dollar for dollar against its competition so in a year or two there will not be any. I don’t know if they can make that happen but I would like to see more customer wins. It may be Paul needs to hire someone to take AKAMAI the next step.

  • Kevin

    Dan,
    Are you seeing more customer pay per megabit either commit or 95th percentile lately? I remember from one of your recent conferences I believe it was a representative from Viacom saying they paid based on the 95th percentile and you alluded to that being fairly uncommon (which I think was common knowledge anyway.)
    So I was surprised that you mentioned the $10/mbit customer leaving Akamai. I’m also amazed that Akamai offers such low pricing on such a low commit (800K a year at $10 per megabit is only about a 6.6 gig commit) I’m not totally up to date on bandwidth prices but it seems like it was just a year or two ago that Cogent, the wal-mart of bandwidth was making headlines by selling for $10 a meg for TRANSIT and that started at commits bigger than 6.6 gigs. So Akamai selling CDN at that price now? Wow. I wonder what Cogent transit is going for these days. This isn’t really a question just a ramble.

  • Anonymous

    Dan: This is true in my experience. I recently had to, in a pure cost-cutting move, shop around for an alternative to Akamai for streaming delivery. Our account is small – it was about $6k/month for our volume. We got a price from a major, stable competitor that was under $2k for the same service.
    In the past, Akamai’s superior customer service made it worth a premium to us. With recent layoffs, however, we found their customer service was no longer a differentiator.
    I offered Akamai an opportunity to come closer to their competitor’s price. All above board…I even told them what that price was. My switching costs are not zero, so Akamai didn’t have to match it; they just had to come close enough that it made more sense to stay with them.
    Nope. Their new quote was still close to 2x the competition. We just could not justify it and had to allow our Akamai contract to expire.

  • Marc

    Akamai’s dirty little secret is that they bill for every byte on their network, not just the edge to the end user bandwidth. So if you are doing 1 Gbps on Akamai this would often translate to 500 Mbps on the other CDNs….so even if Akamai meets the price, you might be paying double, and they may double your bandwidth in the billable traffic.

  • Kevin

    Marc,
    That doesn’t make any sense. Please elaborate on what you are trying to say.

  • Marc

    Kevin, Akamai charges for bandwidth from edge to origin, and their various mid-tier architecture. Most other CDNs only charge for the bandwidth from the edge servers to the end user, hence lower traffic reporting/lower billing.

  • http://www.ramprate.com Steve Lerner

    “Infrastructure bandwidth” is the term used for the charges on bandwidth within a CDN. It has been very common practice to charge for this for at least ten years. Charging for the bandwidth to download log files is also common practice.
    These aren’t dirty secrets.
    Remember, a CDN is a content delivery *network*. It sells network services, therefore everything relating to network is fair game for billing.

  • Gregg Simone

    Dan, I was paying nearly $12k a month for simple video streaming with Akamai. When my contract expired in Q2 I shopped around, tested other CDNS and got quotes for $4k a month. I asked Akamai to lower their price and they basically told me to get lost. It’s been 3 months now and the competitive service to Akamai’s has just as good if not better performance, is cheaper and has no pricing premium for streaming and the company does not have an attitude like Akamai does. Dealing with Akamai is flat out difficult, even if you are a nice, rational person. There are alternatives in the market to Akamai and based on their latest earnings, clearly others like me are finding this out.

  • Marc

    Steve, technically you are right but Akamai is the only CDN that charges for this “infrastructure bandwidth.”

  • http://www.BusinessOfVideo.com Dan Rayburn

    @ Kevin: Most contracts that are only for video are based on a per GB delivered model. Contracts that are for multiple CDN services like video, software downloads and small object delivery are typically on a per Mbps model. I don’t see more of one kind or another, really different contracts based on the type and volume of content being delivered.
    Today I see Cogent out in the market with $1 per Mbps pricing. They have been advertising $2 Mbps pricing in a lot of literature.

  • Anon

    Dan, what’s your take on Cogent and when do you expect them to roll over and die? Clearly they cannot survive selling transit at $1/Mbps, and I would expect many carriers to think about de-peering them?

  • http://www.ramprate.com Steve Lerner

    There are many CDNs who charge for infrastructure bandwidth. We charged for this at Speedera as well. It was one of the ingredients behind our profitability.

  • Toby

    Akamai is growing – not in terms of customers but in terms of traffic and bandwidth. They are growing with their customers and not by necessarily increasing the number of customers. They focus on key customers with growth and a lot of traffic and concenrate on quality of service. If they had more customers – especially many customers with little traffic – they would need too much staff for customer support and would not make any money with the traffic.