Goldman Has It Wrong: Akamai Not Affected By Network Operators and P2P

With the Streaming Media East show ending yesterday, I was hoping to spend today trying to catch up on all my e-mails but I’m already getting lots of calls this morning about Goldman’s downgrade on Akamai. While I am not a financial analyst and don’t look at the numbers like those on the street do, I can say that I disagree with the reasons why Goldman downgraded Akamai this morning. The reasons given were large network operators entering the space, acquisition by smaller vendors by network operators and the potential entry of P2P offerings.

That all sounds scary on paper, but that’s where it ends. Right now, there are only two network operators in the CDN space. Level 3, who I have been saying all along is a real threat to Akamai and AT&T. Based on my briefing with AT&T and the details I gave out about the scale of their build-out, if they end this year with the 400Gbps they are aiming for, across all of their CDN service, video, software downloads, app delivery etc… that would give them a fraction of what Akamai has. Not to mention no transcoding service, content management, DRM and all the other functionality that Akamai’s Stream OS product has. Level 3, yes, they will challenge Akamai but we have know that for months now, so that’s not new news.

The second reason Goldman gave was that some network operators may acquire some of the smaller CDNs and then compete with Akamai on that level. Again, sounds good on paper, but who are they going to acquire? After Limelight, no other CDN has even half of the revenue Limelight does. Most will do anywhere between $10-$40 million this year. At $40 million, that is about 10% of Akamai’s CDN revenue. Not a big threat. And even if they acquired two or three CDNs and bundled them all together, none of them sell into the government market, offer application delivery or have the tools and APIs Akamai has.

And as for P2P, right now, P2P is not getting traction. It will get some traction down the road, but P2P is NOT a replacement for CDN, it is a compliment. Just like Amazon’s web services are not a replacement for CDN, they are used in conjunction with a CDN. Kontiki who is one of the longest running P2P solutions on the market did $6 million last year when they were owned by VeriSign. Is that a revenue number that’s got Akamai worried?

If Akamai was getting downgraded due to issues with ARPU, CAPEX or other issues like that that I don’t track very closely, then I’d have no comments. But to downgrade Akamai for the reasons mentioned today, when the data does not back it up, I have to disagree.   

Note: I have never bought, sold or traded any stock in Akamai or any other public company ever.

  • And what about CDNetworks – who was cited on the Reuters article that was released on this? Why is it you seem to not like this group? I really have not seen you do anything positive (but you do dance well when this question is asked) on this group & they appear to be attending all of your events and others?
    And when did you start doing financial perspectives on your blog – I thought you were not a financial analysis type of guy?

  • What about CDNetworks? Show me any question about them I have been asked in a public forum that I have not answered. You want to ask a question about them, go right ahead, I’ll answer it right here.
    CDNetworks is new to the U.S. market and to date they have put out a few announcements. Until many of the new guys in the U.S. get some traction and get their business off the ground and running, be it CDNetworks, Highwinds, EdgeCast etc… there is not too much yet to write about.
    You see me doing any “financial perspectives” in my post today? Nope. Read what I wrote. “If Akamai was getting downgraded due to issues with ARPU, CAPEX or other issues like that that I don’t track very closely, then I’d have no comments.”

  • Kid Cramer

    Good analysis in my opinion. I agree that the downgrade seems to be based on a bunch of FUD that has existed for a while…not much new.
    One question I have for you. You say Level 3 will compete with Akami. Is that based on your belief that Level 3, unlike At&T, has a competitive offering to stream OS? I am not challenging the assertion, rather just looking for some more detail behind it because I have been hearing about Level 3 for months now but they don’t seem to be getting any real traction in the market according to my (albeit limited) sources.
    follow on questions would be when will this competition show up/impact Akamai? We all heard about the “price war” in CDN 6 months or so ago, but it seems to be a lot of wall street analysts writing about it and very few industry insiders.

  • D

    Actually – the downgrade was due principally to valuation. The competitive concerns were also mentioned but the primary reason was that Goldman assessed the risk / reward as no longer compelling given the stock price.

  • I completely agree with you Dan. I was at streaming media east and spoke to a lot of customers and their comments resonated with your observation.

  • “Kid Cramer”, my answers.
    Yes, Level 3, unlike AT&T will have an eco-system offering. AT&T could get an eco-system offering, but right not is not working on that. Level 3 bought a small European company Servecast who has some nice apps. When Level 3 ties those apps into their VyvX business and the network, it starts to become an offering that does more than just deliver bits. Won’t happen overnight, but they are working towards it.
    Over the next few quarters, Level 3 will put out more details to the market on it’s CDN customers, revenue and product portfolio. A lot of what they share with me is off the record, but much of what they tell me now will become public info later in the year. That should help the market see what Level 3 is doing for CDN and what their strategy is moving forward. I like the fact they don’t talk about what they do until “after” they have done it. Unlike most CDNs who say they are going to do something, and talk a lot about it, before it is even done.
    Hard to know when it will impact Akamai, and keep in mind Level 3 and Akamai will only compete on CDN at some point. The rest of what each of them do is very different. I think Q4 of this year is when Level 3 will be in the spotlight more.

  • Great post. I totally agree with the right proportion Dan is assigning to P2P. I believe that in the near future, successful P2P based CDNs will be acquired by the big guys, and may be used mainly to offload traffic from the main network. competing in the big buys field require P2P CDNs to provide level of service, customer support and other stuff they are not really geared to provide

  • all of your thoughts may be accurate but any comments on the downgrade should focus on the financial fundamentals and current vs projected future valuation. That’s what the downgrade is base on…

  • David Ringle

    Any thoughts on what the smaller and newer players like and are going to do to the market?

  • Hi David, WinkStreaming is not a CDN in my eyes. Not global, not in the Flash hosting program and has no details on their website of who they are. Also, most of the language on their site is written as if English is not their first language.
    EdgeCast is winning some business and I hear all good things so far from their customers. They should be able to do well in the market, but probably won’t do more than $10 million this year. Nothing wrong with that, but not going to take a huge percentage of Akamai’s market share.
    Internap is still having some integration issues. Their CDN revenue has gone done the last 3 quarters in a row, so they still have a lot of work to do before their CDN revenue is going to grow.

  • Rue

    I also think the GS downgrade is rubbish. These guys really don’t know what they are talking about. Just to be clear, an equity-research analyst is usually a completely unexperienced undergrad from an Ivey-league school who joins GS or ML or any other big bank, gets drilled in how to make spreadsheets and maybe sees the CFO-team of a client once a quarter. Those guys have usually no operational industry experience and don’t know anything except Excel and how to model a target-price. It’s a shame that these guys actually “recommend” to investors who themselves also don’t have a lot of hands-on industry-experience.
    And why would we assume the CDN market could vanish due to P2P anyway? Will P2P ever be able to manage corporate firewalls? And will telco’s be able to manage the ever-increasing large content volumes? Can telco’s afford again to invest into building another “network-upgrade”. I am European and e.g. still wonder if they ever paid-down their UMTS licenses in Germany in the first place.
    And by the way, GS invested in both Limelight AND CDNetworks in Korea, if I remember correctly. So shooting down Akamai’s stock seems like a very reasonable internal explanation to me.
    Dan, what do you think about the neutrality-aspect of the CDNs vs. the telco’s?

  • >Note: I have never bought, sold or traded any stock in Akamai or >any other public company ever.
    Just curious, why the hell not? You are most likely missing out.