Over the weekend, details of what I have been hearing about for over a month finally made it out into the media with multiple news outlets reporting that Cotendo may be acquired. Talks between Cotendo and Akamai have taken place multiple times over the years, but only recently heated up when executives from Cotendo met with Akamai back in October. After hearing about the meeting, I reached out to Akamai for comment and on November 4th, as expected, Akamai said they “don’t comment on any rumors or speculation“. Executives reached at Cotendo said they were not for sale but didn’t dispute or deny some of the details I had about the discussions taking place in the market.
To date, I had not heard of the valuation Cotendo and Sequoia were looking for, but news outlets over the weekend pegged the evaluation at between $300M-$350M. I don’t know if those numbers are accurate as I don’t have any first-hand details on the numbers, but valuing Cotendo at more than $300M seems a bit high to me in today’s market. The details I heard was that a deal with Akamai had been agreed upon and that AT&T, who had the right of first refusal to purchase Cotendo, wasn’t willing to offer a high enough price. Others are reporting that Juniper, an investor in Cotendo, is also in talks to acquire the company, but to date I have only heard of Akamai making a real offer.
While various news sites are reporting on the Cotendo sale rumors, some aren’t getting the basics right. The Globes article says that Akamai “controls 90% of the content management and streaming market” with Cotendo and another competitor controlling the remaining 10% except that Cotendo doesn’t even offer any streaming services. And Akamai does not control 90% of the content delivery market for streaming. Also, by my last count, Cotendo has more than 400 customers for their services, not the “50 paying customers” as of this past June that the Globes article reports. In May of last year, the company already had 120 customers and has been blowing through their own internal customer growth projections each quarter.
Another Globes article incorrectly says that Cotendo offers “Dynamic Spectrum Access (DSA)” as a service, which is not what DSA stands for. Dynamic Site Acceleration is the service that Cotendo is known for along with application acceleration and mobile content acceleration. (see: How Dynamic Site Acceleration Works, What Akamai and Cotendo Offer) The article also incorrectly says that “Cotendo’s prices are half the prices of Akamai“, but that’s not the case. On average, Cotendo’s DSA pricing is about 25%-30% cheaper than Akamai and many customers tell me the performance of Cotendo’s DSA product is about 20% better than Akamai. Cotendo has been selling on performance and does not need to cut Akamai’s pricing in half to win deals since customers care about and measure DSA performance very closely. Reuters reports that Cotendo was the “first to offer web surfing services for cellular devices“, whatever that means and others are incorrectly calling Cotendo a “startup”. If there is one thing that is clear, it’s that the media really has no clue what services Cotendo offers.
If Akamai acquires Cotendo it would be a great win for the company on multiple levels. Akamai has really fallen behind when it comes to launching new products in the market and is getting beaten by the smaller and more nimble Cotendo. Akamai has yet to launch their joint mobile content acceleration product with Ericsson, yet Cotendo already has their mobile content acceleration product out in the market, which they launched back in June. (see: How Mobile Acceleration Works: An Inside Look At Cotendo’s Newly Announced Service). Cotendo also has their joint product with Citrix out in the market, launched last month, again beating Akamai to the market with their joint Riverbed product, currently in beta. And a year ago, Contendo worked with Google to deploy and commercialize a new Page Speed Automatic service, based on an open source project developed at Google. In the two and half years since Cotendo launched in the market, they have really proven their technology and platforms expertise and recently, have really been giving Akamai some serious competition, for certain deals.
In September, I wrote that the pressure on Akamai was growing and that the company needs to make some acquisitions to jumpstart their business. Acquiring Cotendo would be one of the best acquisitions for Akamai that they could make as it would allow them to take their number one competitor for non-CDN services out of the market. As a result, Akamai would see almost no pricing pressure for their value add services going forward, margins would remain high and they would capture a larger share of the market for value add services. Of course while all of this would be good for Akamai, it would be bad for the industry and customers as a whole since no other vendor is yet able to compete with Akamai on these services at scale. The outcome would be higher pricing in the market and not a lot of alternatives other than Akamai for customers to use, although Amazon will help drive prices down in the market for services like DSA when they enter the market.
When Cotendo launched in the market, the industry was already crowded with far too many CDNs primarily focused on delivering video. While many of the other CDNs in the industry were trying to change their product portfolio to provide value add services and diversify their revenue, Cotendo was already blazing a trail, focusing on these services from day one. Less than three years later, the company has a lot of blue chip customers, a major deal with AT&T (see: AT&T Partners With Cotendo For App Acceleration, Will Challenge Akamai) and is quickly ramping revenue and getting a very good reputation in the industry. Cotendo is exactly the kind of company that Akamai should be using some of their cash to acquire as it allows Akamai to protect their margins and gives them access to some really good technology platforms to expand their product portfolio moving forward.
Of course, if someone were to step in and somehow match Akamai’s price, which I don’t think will happen, or Juniper makes an offer for Cotendo, which I don’t think they are serious about, Akamai will no longer benefit. But from what I hear, Akamai is in the driver’s seat on this deal and other potential suitors would have to get a lot more serious than that are now if they want to beat Akamai from acquiring Cotendo.