Akamai's Stock Tumbles: CDN Industry Still Strong

I've never posted news before about the stock price of any particular company (unless it was a new IPO) simply because to me, the fact that a stock went up or down is not news, it happens everyday. But over the past 24 hours, I have gotten many calls and inquiries from analysts and the media asking me if the fact that Akamai's stock price has gone done nearly $10 a share in the past two days is a sign that the content delivery market for video is slowing down. The simple answer is no.

The fact that Akamai has lost nearly 20% of their market cap in the past two days is reflective of many factors investors attribute to their earnings, growth projections and other factors that I don't even pretend to know all about. While I track the CDN companies very closely, I'm not an analyst in the sense that I don't track companies P&L the way money managers do, nor do I have the interest in doing that.

The fact that so many analysts, media and industry folks are asking about Akamai's stock price and the content delivery industry shows us just how much people don't truly know about what services vendors provide. These days, everyone thinks of Akamai or references Akamai as the streaming company or video delivery company. Yes, they are. But that is just one of many services they provide. While we don't know the exact percentage of revenue that content delivery for audio and video provides to Akamai's total revenue, the consensus in the industry is about 40-45% of their total revenue. That would mean last year they did just under or around $200 million for CDN services for audio and video content. And since Akamai did over $400 million last year as a company in total revenue, the other 50+% of their revenue comes from other non CDN products and services like EdgeSuite, Dynamic Site Accelerator, Web Application Accelerator, Electronic Software Delivery and professional services. But when Akamai's stock drops nearly $10 a share, why is it that no one is asking about those products and services and those industries? Why is it that so many assume that the CDN product line and the video industry is at the root of the problem?

My suggestion, relax. This is not the first time this has happened where a company that provides services in the online video industry has seen a major change in their stock price and it won't be the last time either. The content delivery market is as healthy as ever and the growth of the consumption of online video for longer time, more frequently, at higher bitrates and on multiple devices shows no signs of slowing down.

But I would also suggest that everyone do their homework and become more educated about what services each vendor provides and what percentage of their business is made up from that service. For instance, not a week goes by where someone doesn't compares Akamai's $428.7 million in revenue last year to Limelight Networks $64.3 million in revenue and says Akamai did nearly seven times more revenue than Limelight Networks for content delivery pertaining to audio and video content. That's wrong. They are comparing revenue from products and services Akamai offers against ones that Limelight Networks does not offer. Learn what products and services both companies offer and then compare just those products and services on an apples to apples basis and not the entire company.

It's the same on the network side. People always says Akamai has over 25,000 servers for streaming and video delivery. No they don't. They have over 25,000 servers for all of the types of products and services they offer, but not all 25,000 are setup to deliver every type of content. The servers that deliver Windows Media videos via a streaming protocol are not the same servers that are then delivering a Flash video via streaming. Separate servers are required to deliver content for each streaming platform chosen. What percentage of Akamai's 25,000 servers are setup to support what formats, protocols and geographic locations, they won't say. But if you are going to compare any CDNs infrastructure for streaming to another CDN, then you have to compare the infrastructure that is specific to that type of service. Even if you don't know or the company won't say, you still can get a good estimate if you do some research.

My point is this, if you are going to compare any vendors in the space one to the other, you have to do it in a fair apples to apples comparison as much as possible, which right now, when it comes to streaming and CDN, is not being done by most analysts and investors.

Comments

[Karthik]

dan
why dont u say akamai profits almost doubled and revenues increased 50%. still the stock is going down because analysts wanted akamai to overexceed expectations. Also, there was a question that their margins are reducing due to competition.

[Dave Burstein]

Dan

Whatever the details at Akamai (which I don't know), I believe there is an extraordinary challenge facing all content delivery networks. p2p video delivery is now working well enough to change the market, even if it's not appropriate for every purpose. Akamai knows that, and bought Red Swoosh to get into the game. They may do fine, but I think everyone has to adopt to major changes coming. (I don't claim I have the answers myself.) Here's how I wrote it

“We can deliver high definition television over the net for pennies.” Gary Croke of CacheLogic, echoed by Pando and other vendors

Web video is ready to migrate from 200K YouTube shorts to full screens at megabits. This is major. Gary Croke offered to deliver 6 megabit high definition TV over the Internet at a modest price around six cents a program. Web video is entering it‘s third era, TV quality. We wowed the audience at Web Video Summit with a live HD demo supported by Microsoft. Costs to deliver video are coming down 70-90% over the next 12 months if you can accept a delay of a few seconds. Most connections in France and soon England and Germany will be more than 10 meg downstream, with Verizon FIOS and most U.S. cable heading there as well. Xboxes, Playstations and set tops are connecting the web straight to the TV, and 30% of the U.S. already has an HD set.

Even standard definition streaming cost 8-15 cents per hour just six months ago, but peer to peer hybrids are working well enough major media like ABC are jumping on. Hybrids begin the show within seconds, quickly build a buffer, and if well designed gracefully cut over to host server if the needed video isn’t available from a peer. Akamai, #1 stream hoster, invested $15M to buy Red Swoosh because the service is so attractive. Some of the “love for sale” crowd in D.C. are scaremongering about how video will bring down the net unless the telcos get paid more. The data, even assuming video growth, absolutely do not support the claims. Future articles coming.
=======

CacheLogic and Pando I believe are "forward pricing", but several others tell me they are headed that way.

db

[Dan Rayburn]

Hi Dave, thanks for the comments. While I think it is great that P2P has the "potential" to disrupt, until it actually does, in a mass-market setting, it's all speculation. Too many people talk as if P2P has already won, when to date, it has not even been adopted. Will it? Yes. But in what form is the question. P2P is not going to replace traditional CDN delivery.

I think a lot of people tend to forget that the best technology is not always what gets adopted. P2P is like multicasting in that multicasting was for years going to revolutionize the industry, deliver more data, cheaper, to a wider audience. But it never materialized. Does it work better than unicasting, absolutely. But no ones uses it.

Many of these P2P companies are also forgetting that it's not just about cost. All of them only pitch "lower cost" as the value. Well cost is not the sole thing customers buy on. Customers buy on more than just cost and performance. Notice everyone only talks about P2P when it comes to media and entertainment based content? But that's only one type of content on the web amongst others. Yes, P2P may work in the long run for entertainment content, but it won't for many of the other verticals like enterprise, education, government etc..... I agree, P2P will play a role, but in this industry, everyone wants to talk about replacement instead of compliment. The Internet is not replacing TV, P2P is not replacing CDN etc.. we're talking about complementing technologies. There is no one solution that works for every type of content, for every user, to every device, in every region of the world.

[Vidya]

Dan, quite a few points you have raised on this post. The main one being the street analyst's speculation over Akamai's performances. Though I myself am not an equities analyst, I find the street expectations far too unreasonable. I am increasingly finding people backing companies which make a din about ideas and have new technologies than companies that are sturdy and consistent...But thats the way the market is.
About market sizing- ahem- I couldn't have agreed more...my own valuations for every vendors' CDN business is more conservative than what the industry likes to believe. "comparing apples to apples" is our favorite but extremely extremely difficult phrase of usage.

[KwangErn Liew]

Anything can happen these days online. It's like how Google storm through every household. Being in the business for a long time doesn't mean much sometimes...

But I hope that Akamai's management team will continue to strive ahead yet not forgetting potential competitors.