Akamai Slashing Media Pricing In Effort To Fill Network, Won’t Fix Their Underlying Problem

With Akamai’s top six media customers have moved a large percentage of their traffic to their own in-house CDNs over the past 18 months, Akamai has been scrambling to try to fill the excess capacity left on their network. Over the past few weeks I have been tracking media pricing very closely and now have enough data points directly from customers and RFPs to see just how much Akamai is undercutting Level 3, Amazon, Verizon and Limelight on CDN deals.

On average, Akamai is coming in about 15% cheaper trying to win new CDN business or keep the traffic they have. The lowest price I have seen Akamai quoting is $0.002 per GB delivered. To date, that is the lowest pricing I have ever seen on any CDN deal ever. That price is for very large customers, but even for small deals where Level 3 is at $.005 and Limelight will be at $0.0045, Akamai has come in at $0.003. Akamai is making it clear with renewals and with new deals that they want to keep/win the traffic. And while lower pricing might help them with some RFPs, I see deals where they don’t win it, even with the lower price. And many times if they do, it’s harder for them to keep all the business they have, even with lower pricing, because many content owners are now using a multi-CDN strategy, sharing traffic amongst multiple CDNs. So in many cases, even when Akamai keeps a customer, they are keeping less traffic, at a lower price point.

While selling on price alone has the potential to give Akamai a little bump in revenue if they can grab some more market share, it’s not a long-term strategy. When you can no longer sell media delivery based on metrics like performance and have to win business based solely on the lowest price, that’s a recipe for lower margins. In the first six months of this year, Akamai’s margins were down 150 basis points. Value add services which have healthy margins can make up for a lower margin service like CDN, but Akamai’s year-over-year growth in their performance and security business has also slowed.

Akamai, and all CDNs for this matter, can also get burned if they offer too low of a price and then realize a large percentage of the customers traffic is coming from regions like India, China or Australia. In those regions, it costs them substantially more to deliver the traffic and when they give a customer CDN pricing, it’s a number they are picking based off of blended traffic coming from a global audience. Get that wrong and your costs are higher, for business you already quoted at such a low price. While we don’t know Akamai’s true cost to deliver content since they don’t break out CapEx dollars, I guarantee that Akamai is not making money on a CDN contract priced at $0.002. That’s not a deal that is profitable to the company, standing on its own. Maybe it has a bigger overall impact based on who the customer is, or it gets them other business, but many of the deals I am seeing are for straight CDN, nothing else. Akamai is sacrificing margins on their media business, just to add traffic to their network. That’s not healthy for any business.

Akamai is also facing a massive CapEx problem, where they have to spend a lot of money to constantly refresh their network and the number of servers they have. Akamai has said they have 200,000 edge servers and Limelight has said they have 10,000 edge servers. Limelight has 1/3 the capacity of Akamai, but spends far less in CapEx. In the first six months of this year, Akamai spent $160M in CapEx, Limelight spent $5M. Even if half of Akamai’s CapEx is directed at their media business, it’s $80M or 20 times Limelight’s  CapEx spend. Based on those numbers and other data I have, by my estimate, it costs Akamai about $5M in CapEx to add 1Tbps of capacity to their network. Compare that to Limelight and Level 3 where I estimate it costs them about $1M in CapEx per Tbps of capacity, in the U.S. or Europe.

Highlighting this point even further is that on Limelight’s last earnings call, the company talked about their CapEx costs and capacity, when compared to Akamai. Limelight has less than 1/20th the infrastructure to deliver 1/5th the revenue, when compared to Akamai. We don’t know the exact capacity of Akamai’s network, but Limelight’s current egress capability is just shy of 15Tbps. And I think Akamai has said they hit a record 40Tbps. Also, Limelight added almost as much capacity in the first half of 2016 than they did in the full year of 2015, while spending $7.6M less in CapEx year-to-date. Meanwhile, Akamai’s CapEx costs are accelerating, while traffic growth has slowed, with declining growth in revenue.

Akamai’s got a short and long-term problem with their media business and really needs to decide if they want to be in a business that is so volatile, with little to no margins. You have a commoditized service offering, customers that now compete against you, cloud providers that have more scale and ways to make money and competitors that own and operate the network, and others with distinct CapEx advantages. Akamai would be better off getting out of the media business over time and putting all of their efforts into their web performance and security product lines.

On a side note, Twitter’s NFL stream, taking place Thursday Sept 15th, will be delivered by Akamai and Level 3 and I do not expect it to have a large simultaneous audience. My estimate is under 2M simultaneous streams. Also, Apple’s iOS 10 update that came out on Tuesday, the vast majority of that is being delivered by Apple’s in-house CDN, with only a small percentage of the overall traffic going to third-party CDN providers.

  • Media Customer

    Dan, I haven’t seen the pricing you speak of as my company is probably not as big as some, but in the past month, Akamai did offer us the lowest pricing tier all time. They are a lot more aggressive in the market on pricing and came in at $0.06 when other vendors were at $0.08, so we stayed with Akamai, for the portion of traffic we had with them.

  • Gagan

    Hi Dan, would you be able to entail as to why there is a factor difference of almost 5 in CapEx with respect to increasing capacity by 1 Tbps by Akamai and Limelight? is it purely technology based or there is a business model innovation taking place in the value chain?

  • Alexander Leschinsky

    Dan, I couldn’t disagree more with you that Akamai would be better off getting out of the media business. If Akamai was getting out of the media business then the media business had a major problem. Their global reach, scalability, service level, and depth of portfolio are unmatched. Based on our extensive distributed monitoring with Touchstream we also have independent evidence that they easily beat any CDN in terms of availability and speed, even and especially under peak load during FIFA world cups, UEFA Euro cups, and the Olympics. With the Euro 2016 final on July 10th we delivered the highest ever video peak into Germany. And I am sure that with their current OTT products and roadmap Akamai is going to shape the market, again.

    Two more things I’d like to comment on:

    – You are comparing Limelight’s theoretical egress capacity with an actual Akamai traffic peak, which are two very different metrics. You can assume that Akamai’s egress capacity is way above any of their documented peaks. Also Akamai has presented their roadmap about how to accommodate for streaming audiences that are an order of magnitude larger than today’s without just deploying more servers.

    – Even if one of Akamai’s top six media companies has moved traffic to their in-house CDN, for delivering their September 7th keynote they still used Akamai so much that the live stream was “the highest ever peak video traffic event for Akamai.” (https://mobile.twitter.com/Akamai/status/773991527873908736)

    • danrayburn

      The media business does have a major problem. The numbers are the numbers. CDNs struggle to make money delivering video. OTT providers struggel to make money from their video offerings. The media business has a major problem on their hands, and it’s getting worse.

      Please, we don’t need more marketing double-speak, “Their global reach, scalability, service level, and depth of portfolio are unmatched.” That means nothing. Those are purely marketing terms, with no definitions.

      “they easily beat any CDN in terms of availability and speed”. Define speed? And I can show you just as much third party data from guys like Cedexis that says Akamai doesn’t always have the best performing service. Again, that’s just a marketing phrase you are using.

      “With the Euro 2016 final on July 10th we delivered the highest ever video peak into Germany.” What were the numbers?

      “Akamai is going to shape the market, again” – what does that mean exactly?

      “You are comparing Limelight’s theoretical egress capacity with an actual
      Akamai traffic peak, which are two very different metrics.” I know LLNW traffic peak, but am not allowed to disclose it, but I do know the number.

      It’s not “one” of Akamai’s top six customers that are moving traffic to their in-house CDN, it’s SIX of them.

      Yes, Akamai has their highest peak ever, for Apple live stream, that lasted two hours. Revenue impact to Akamai? Not even a blip on their radar. One off live events, don’t generate substantial revenue.

      • Alexander Leschinsky

        Dan, I agree that the numbers are the numbers. As you mention Limelight, “CDNs struggle to make money delivering video” seems to be especially true for them, having generated annual net loss between $35.4M and $20.35M for the last six years straight which is a total of $162.48M burned. Compare that to Akamai’s $148.49M net income in Q1 + Q2 2016 only. If the media business has a problem on their hands, Akamai still seems to manage it way better than others.

        And when I said “Their global reach, scalability, service level, and depth of portfolio are unmatched” this is no marketing speak at all. Global reach? Akamai has well over 200,000 servers in more than 1,300 networks in 100+ countries. They have the spinning globe at http://wwwnui.akamai.com/gnet/globe/ which gives you the number of active servers deployed in each region, including the current traffic in hits/second. You don’t believe them? Well, you don’t have to. You can get a pingable IP for any ASN with services like https://radar.tools.cdn77.com and perform an MTR from Akamai using their Diagnostic Tools API (https://developer.akamai.com/api/luna/diagnostic-tools/overview.html). You can closely monitor routes and DNS resolutions from multiple ISP networks and count the number of servers that Akamai services are mapped to. We are doing it all the time for tenders.
        On holiday on a small island in the middle of nowhere? Seychelles? Mauritius? Reunion? Fiji? Everywhere are active Akamai servers. Or in Germany, where I am from? While other CDNs just have servers in one location, Akamai is present in not less then 20 cities, with multiple locations in most of them.

        Scalability? In 17 years of doing business with Akamai we have not once received less egress bandwidth than we had asked for, including all major sports events, with multiple terabit/s into Germany only. Other vendors instead called us in the middle of events and advised us to quickly add other CDNs as they were not capable of handling the load. Or that we could use their network, but not during peak time into certain ISP networks. This does not happen to you with Akamai.

        Service Level? Akamai has industry-leading SLAs for most of their services. You can choose between 4 support levels down to 30 minutes response time, they are providing several professional and technical advisory services, and they have an industry leading customer training through the Akamai University and by far the most sophisticated partner training and certification in the CDN and OTT world. Have you seen their BOCC demos at one of the last trade shows? That’s OTT at broadcast level.

        Depth of portfolio? Well, if we only restrict the list to media services we have Adaptive Media Delivery, Download Delivery, China CDN, Broadcast Operations Control Center, the whole family of former Octoshape products under the Infinite label, Media Analytics, NetStorage, Media Players and Player SDKs. And their core services Media Services Live and Media Services On Demand have options for Stream Packaging, Transcoding, and Encryption either in production or on their immediate roadmap. And for most services they publish APIs at https://developer.akamai.com/api/ with copy & paste code examples in Java, JavaScript, Node.js, Perl, Python, PHP, Ruby, Go, C#, Visual Basic, Groovy, ObjectiveC, Swift, Raw and cURL. And as you talk about Encoders in your recent blog post http://blog.streamingmedia.com/2016/09/best-practices-webcasting-tips.html: Akamai has a unique Encoder qualification process. They have actually seen, tested, and qualified encoders for the full set of RTMP, HDS, HLS, DASH, and Smooth push ingest. This is way beyond everything else we see in all the CDNs that we evaluate on a regular basis.

        Speed? That’s kilobit/s per user usually. We closely measure minimum, maximum, and average speed that we get per ISP and transmission network. We measure it with touchstream, Media Analytics, and our own internal tools. We have long-term proof that Akamai has much more consistent performance in all these metrics than any other CDN we are testing, around the clock and in all networks that our clients use. We are happy customers of Cedexis and rely on their DNS solutions in several projects, but their CDN performance comparison has to be taken with a grain of salt.

        Concerning the one off live event of Akamai’s big media customer: I have no idea what revenue the traffic and the necessary bandwidth reservations will mean for Akamai. The point was that those media customer, despite all of their DIY CDN efforts, was not able or willing to deliver this event themselves. The business relationship with Akamai does not seem to be as bad as some people want to make us think.

        We see very few occasions where a multi-CDN strategy actually makes sense and even fewer that are implemented in a way that really works. In our experience, most of these setups are based on marketing fads from inferior CDNs that are not capable of doing the job themselves. We see many publishers that struggle with the complexity and TCO of multi-CDN configurations. If you only combine commodity CDNs you only get commodity performance and reach. The way Akamai works in fact is a multi-CDN already. A day spent negotiating with Akamai is a better investment than a day spent in trying to struggle with multi-CDN risks and complexity.

        • danrayburn

          While I appreciate the comments, I can’t have a rational discussion with someone who can’t separate facts from their opinions and simply doesn’t understand so much of the realities of what is actually taking place in the market. Your “opinion” doesn’t make something real, only the facts are real, many of which you completely ignore.

          You comments read like a product pitch for Akamai, which I understand because you re-sell the companies services. So you are not impartial, you are their partner and you make money from their services. Trying to cram in a sales pitch for Akamai by listing out products and services and features in a long comment is silly and comes off as a pitch. It’s hurts all of your arguments, it doesn’t help them. But lets put that aside and look at the facts.

          You say that Apple’s “business relationship with Akamai does not seem to be as bad as some people want to make us think.” Akamai has disclosed to the market how much revenue, with numbers, that they are losing from Apple and others doing DIY. We know how bad is, we have real numbers. DIY has had a material impact to their media business for multiple quarters and continues to do so. Implying anything else is simply going against the data Akamai has provided to wall street.

          You say you have “no idea what revenue the traffic and the necessary bandwidth reservations will mean for Akamai.” Then you can’t comment on what the impact is to the company for a one off live event. I can, I know the numbers. It’s not hard to calculate what it costs to deliver events when you know how companies buy the services, what they pay, and how much traffic these events generate. The math is the math.

          You say that you “see very few occasions where a multi-CDN strategy actually makes sense”. That’s your opinion, that’s not a fact. All of the large CDN customers use a multi-CDN approach. It may not make sense for your business, but you are a “systems integrator and software developer”, you are not a content owner. So you’re not in the same category as MLB, Microsoft, Apple, Facebook, Viacom, etc. who all use a multi-CDN approach.

          Saying that “most of these setups are based on marketing fads” when it comes to multi-CDN shows just how out of touch you are with reality. We know exactly who uses a multi-CDN, it’s all public info you can see with traceroutes, or by talking to the companies directly. It’s not a “fad” by any means. The largest content owners on the web all use multi-CDN approaches. Then you say “the way Akamai works in fact is a multi-CDN already”. Please. Enough. Akamai is not a multi-CDN in ANY capacity. All CDNs buy transit from multiple providers, have many interconnect deals, peering etc. and route traffic in various ways but that does not make them a “multi-CDN”. To imply that is so wrong, and so out of touch with reality, is nothing but blatant marketing garbage.

          “If the media business has a problem on their hands, Akamai still seems to manage it way better than others.” Based on what data? Akamai doesn’t break out P&L per product line of the company, so media could have very low margins, which is made for up by other services, like security, that have high margins. Which in Akamai’s case is what’s happening. Remember that 50%+ of Akamai’s revenue doesn’t come from media. If Akamai’s media business is that healthy, on it’s own, why doesn’t the company disclose it? Where are the numbers?

          Who cares how many servers Akamai has, that stat alone means nothing. Server count does not equal quality or capacity by itself. When actual customers like Netflix, Microsoft, MLB and others do presentations where they say they put half their traffic on Akamai and half on Level 3 or Limelight as the performance is identical, that says it all. Who cares what the vendor says, the CUSTOMER knows better than anyone. Being present in a lot of cities does not guarantee a better performing service. Third party monitoring services like Cexedis, proves this point: http://blog.streamingmedia.com/2016/04/akamais-cdn-no-performance-advantage.html

          Again, I’m not interested in marketing language like “industry-leading SLAs” as that means nothing. That’a total marketing garbage. They are not the only CDN to offer professional services, or customer training or SLAs.

          If you want to discuss real data, actual use cases, I’ll discuss it. But I’m not going to spend any more time responding to marketing speak, product pitches, marketing spin etc.

          • Just Another Akamai Employee

            I am an Akamai employee and an ex-Level3 employee as well. First thing you should know before I want to comment this great discussion.

            Dan you replied with:
            …Trying to cram in a sales pitch for Akamai by listing out products and services and features in a long comment is silly and comes off as a pitch…
            …Then you say “the way Akamai works in fact is a multi-CDN already”. Please. Enough…
            …To imply that is so wrong, and so out of touch with reality, is nothing but blatant marketing garbage…
            …Who cares how many servers Akamai has, that stat alone means nothing…

            Is it just me reading lots of emotions here?
            When I read your feedback, it sounds to me emotional.
            The fact you are saying ” Akamai would be better off getting out of the media business over time and putting all of their efforts into their web performance and security product lines.” could also make me reply emotional here. Why? Well, then I would loose my job!
            But I am not getting emotional…At least I will try 😉

            The first question which comes to my mind is “what is the driver of this blog post? Why is someone well-known in the media industry making such advises for a well-known company?

            I am not responding to my questions as I would like you to make your own thoughts. Anything I would respond might sound today pro-Akamai. So, I am leaving my feedback with some open questions.

            And it looks like I might have red this in a similar way almost 7 years ago? http://blog.streamingmedia.com/2010/01/akamai-gaining-market-share-with-their-lower-cdn-video-pricing.html

            I have no facts to rely on. The only fact I see is that the media industry within the online world is shifting! More people go online, more content is being delivered, more innovations are knocking on the door. You all know…That said the business models we are used to -might not fit into today`s shifting media industry.

            Wouldn`t it be more useful to make advises on new possible business models than telling a company to give up their services? Maybe you have done this already and we all can benefit from it…

            It might be that I also sound almost a bit esoteric to you. Well – it is my feedback 🙂

          • danrayburn

            Hi Ilker, thanks for the comment.

            Yes, you are right that I am passionate about the industry, I care deeply about the space and want to see all companies set proper expectations in the market. That applies to ALL companies, not just Akamai. There have been many times when I have used my blog to correct inaccurate statements or ideas others have made about Akamai, so it goes both ways.

            When EdgeCast came to the market and said they were going to “change content delivery forever” and disrupt Akamai, I did a blog post saying they won’t: http://blog.streamingmedia.com/2007/08/edgecast-networ.html

            When AT&T came to the market with a CDN offering and reports started about how it would hurt Akamai, I wrote a post entitled “AT&T’s CDN Offering Not Displacing Akamai or Limelight Anytime Soon”:
            http://blog.streamingmedia.com/2008/06/atts-cdn-offeri.html
            Then I did a second follow up post: http://blog.streamingmedia.com/2007/12/analysts-coveri.html

            When Wall Street said Akamai would be badly impacted by P2P providers and network operators, I did a post saying entitled “Goldman Has It Wrong: Akamai Not Affected By Network Operators and P2P”: http://blog.streamingmedia.com/2008/05/goldman-has-it.html

            When Barron’s wrote a post saying Internap would be the next Akamai and challenge them, I did a post entitled “Internap Is Not The Next Akamai”: http://blog.streamingmedia.com/2007/07/barrons-is-clue.html

            When a wall street firm put out a new flash saying Akamai had a major network outage, which was not accurate, I put out a post saying “Akamai Confirms No Outage Of Their Web Acceleration Network”: http://blog.streamingmedia.com/2008/04/akamai-confirms.html

            When a ZDNet story said Akamai lost the BBC to Level 3, I put out a post entitled “News Reporting On CDNs Getting Shoddy: Case In Point, Akamai And The BBC” where I explained that the news was not accurate: http://blog.streamingmedia.com/2008/08/news-repoting-o.html

            When there was a streaming problem for one of Apple’s live events on the Akamai network, people started reporting it was an Akamai capacity issue. That wasn’t the case and I did a blog post entitled “Inside Apple’s Live Event Stream Failure, And Why It Happened: It Wasn’t A Capacity Issue”: http://blog.streamingmedia.com/2014/09/why-apples-livestream-failed.html

            These are just a few examples and you can find more on my blog over the past 8 years.

            You are correct in that I have done blog posts previously about Akamai’s CDN pricing, but that’s the reality of the market. Pricing changes, and when it changes quickly, or lowers by a large percentage, it impacts CDNs. Akamai has disclosed in the past how they had to re-price 8 of their 10 largest media customers and the impact it would have on their business. Akamai has talked about spending CapEx for expected OTT traffic, only to announce two quarters later that the traffic never came. Akamai has put out a lot of data points on pricing over the years and it’s a important topic to look at. The media business is all about pricing and volume, that’s it. So pricing, and drastic changes in pricing are news, it has an impact on Akamai and sometimes on the rest of the market.

            The reason I suggest Akamai exit the media business is because the margins on the business are low and Akamai has already made the decision to diversify their revenue away from media as much as possible. This is smart. I have said many times on my blog, Akamai was the first CDN to realize the business would get commotizied over time and started to get into value add services. They did this years before their competitors and are in a better position today because of it. If they focused more on value add, and less on media, long term, I think the company would benefit even more. Akamai does a lot of things, is in a lot of market, selling to many verticals. I think more focus would help the company, and focusing on a media business that is growing in single digits, (minus the DIY customers), isn’t a great business The numbers speak for themselves.

            You ask what the driver of this blog post was. Simple. To educate the market on the pricing cuts Akamai is making as that impacts Akamai and others in the market, customers and vendors. It also impact their numbers, those on wall street that track Akamai and analysts whom work on reports that define the size of these markets. Pricing has a big impact on all of these segments.

            I have no alternative motive with any of my posts. I don’t own stock in any CDN, so I don’t make money or lose money based on news. I don’t get paid on my blog based on page views, so more traffic to my blog based on a post or headline earns me no additional revenue. My only job, as I see it, is to inform, educate and empower customers, vendors, investors and members of the media. I don’t play politics, I’m not interested in the “spin”, vague marketing language and words with no meanings. I rely on real data – actionable intelligence from customers. I can’t please everyone, nor am I trying to.

            Akamai has a major messaging problem, on all fronts, which is why the company has recently hired a new CMO, which I am excited for. I have already spoke to the new CMO and I am encouraged by what I hope are new steps Akamai will take to bring more transparency to the market, which would benefit everyone, on all fronts.

  • Walter Sturm

    Dan, thanks for keeping us all honest… great analysis. I have a few comments that I hope will spark additional thought and comments among the community:

    Other than continued pricing pressure, the two trends you mention that I’m clearly seeing when speaking with media publisher’s are… the increasing adoption of multi-CDN, and DIY-CDN. To some degree, these trends are co-dependent. As the intelligence of multi-CDN load balancing systems increases, so does the feasibility of DIY, and as DIY becomes easier to implement and maintain, the value of multi-CDN is elevated.

    It’s pretty well known that companies like Netflix and YouTube have made a significant investment to move in this direction. Yet as commercially available solutions have made it less costly and easier to implement each solution, the bar has lowered with more large companies undertaking these initiatives. Of course not many companies will have the scale to build a complex CDN on their own but the hurdle for leveraging hosted infrastructure (1 or 2 locations) as an alternate CDN is much lower. An even easier approach is to partner with at least one CDN that maintains a very low cost-structure in lieu of building your own.

    Lower price points highlight the existing business model challenges you mention for all CDNs and puts pressure on those that are less efficient. It would be great for you to do a follow on piece or comment on the other side of the cost equation (op-ex) if you can share any insights.

    In any case, as pricing in the media delivery market becomes more and more competitive, it’s critical for publishers to do the following wherever feasible:

    1). Structure their commercial agreements to allow flexibility within a dynamic market
    2). Deploy the best multi-CDN load balancing tools with which to exploit increasingly competitive pricing.