Nine months ago, Amazon (AMZN) launched their new dynamic content delivery service in beta and two weeks ago, I posted details on how their product is coming along and outlined new features they have added since launch. Every since Amazon announced their new service, people keep asking me if Amazon will disrupt Akamai's DSA business and drive pricing down in the market as a whole. While Amazon still has a long way to go before that has the possibility of happening, make no mistake, they are gunning for Akamai, even though they won't call out Akamai (AKAM) by name.
Today, Akamai is still the undisputed king of the dynamic site acceleration industry and to date, no one has even come close to taking a large percentage of their web optimization business or knocked them from the top spot. But over the past four or five years, market dynamics have changed. Companies no longer have to spend hundreds of millions of dollars to enter this market, services are getting cheaper to deploy and scale and the old rules of how to build out web acceleration services has drastically changed. Cotendo proved this better than anyone else. In under three years, Cotendo was able to disrupt Akamai's dynamic site acceleration margins so much, Akamai was forced to acquired them, even though Cotendo wasn't doing that much in revenue and had only raised about $40M in funding.
While Cotendo drove pricing down in the market and pressured Akamai, the one thing Cotendo didn't do was generate a lot of revenue. Services can only scale and grow so much when you have $40M in funding, but it was still enough to impact the market as a whole and get Akamai's attention. Cotendo's service didn't have the scale or functionality of Akamai's service, yet it was still able to be a disruptor. In Amazon case, they have the opportunity to not only impact Akamai's margins for their services, but also generate a lot of revenue on top of it. Amazon has more resources than Cotendo, more money, more R&D, more marketing reach, a well known brand and a built-in customer base that is projected by Analysts to do at least $2B in revenue this year from their web services division, AWS.
That's not to say Amazon is ready to disrupt Akamai tomorrow, they won't. But don't be fooled by Amazon's approach, which may appear slow to some. Amazon has a very methodical way of rolling out products and services to the market and it typically takes them about 18-24 months before a product goes from beta to a full-fledged offering with a lot of the features and functionality of their competitors. Look at their CDN product, CloudFront, which went from a bare-bones beta product to one that could compete, by my estimate, for 75% of the commodity CDN market, in 18 months. CloudFront is estimated to have generated more than $100M in revenue last year and Amazon continues to build out additional services to support their CDN, announcing their video transcoding service last month.
From purely a features standpoint, Akamai's dynamic content delivery service still trumps Amazon's, by a wide margin. But that's not going to last for too long and little by little, Amazon is already starting to close the gap. Amazon's working on rolling out a lot more functionality and while they will never be able to compete for 100% of Akamai's DSA business, they will continue to get stronger and go after more of the business that doesn't require a ton of professional services. Amazon will never compete for 100% of the market, but they don't need to. All they have to do is continue to roll out features, add an SLA, lower pricing and prove their dynamic content acceleration services performs well and can scale, with reliability. Of course building all of that out to scale doesn't happen overnight, but it's not as hard as some vendors make it out to be and Amazon has the resources to make it happen and more importantly, has multiple lines of businesses to generate revenue from. Amazon can be patient and grow the business over time.
I don't expect Amazon to disrupt the market in the next one or two quarters, but come Q4 of this year and into Q1 of 2014, I expect we'll see signs that Amazon is starting to have a major impact on the dynamic content acceleration market and Akamai in particular. This is an interesting time for Akamai right now. For the first time in Akamai's history, that I can remember, they have a growing competitor they can't acquire. Akamai's competitive strategy has always been to simply acquire anyone who impacts their business and remove them from the market, but they can't do that with Amazon. And unlike two years ago when Cotendo was really the only competitor to Akamai for dynamic content acceleration services, Akamai now faces competition from more than just Amazon. Small startups like Yottaa want to be the next thorn in Akamai's side and more established players like EdgeCast and Level 3 are making moves to get into the market, or expand their focus.
The good news from all of this is that customers will have more options in the market for dynamic content acceleration services, at different price points, in different regions of the world, for small and large deployments. As a result, these services will become mainstream, demand will increase and prices will decline. Customers will become educated as to the business benefits and learn there is more than one way to deliver content on the web with scale and performance. For Akamai, this will cause a negative impact on their margins if Amazon can disrupt their business the way Cotendo did, but on a larger scale.
Keep in mind though that as dynamic site acceleration pricing declines in the market, it won't be at the rate video content delivery pricing declined. Unlike delivering video on the web, performance measured in fractions of a second does matter when it comes to delivering dynamic content. For video, customers aren't willing to pay a premium to have their video start-up half a second faster on one CDN over another. Half a second does not impact a video based business. But half a second of performance difference in the dynamic site acceleration market can mean the loss of revenue for a customer. So the good news it that customers will be willing to pay for different levels of DSA performance, which will help to keep prices from falling as quickly as they did for video.
Amazon does not charge any premium for dynamic content delivery, something Akamai has done for a long time. Amazon customers who have been previously reluctant to adopt dynamic content acceleration services due to the cost, will now be able to simply buy it as an add-on, without worrying about any type of premium pricing. It's hard to compare Akamai and Amazon's pricing side-by-side for dynamic content services, because there is still a wide gap in performance, and they both charge a bit differently, but it's a safe bet to say that Amazon's price is anywhere between 50-75% cheaper than Akamai's. That's a really big difference and will continue to be more of an apples-to-apples comparison, once Amazon's dynamic content delivery service becomes closer to Akamai's in functionality.
The bottom line is that Amazon still has to prove themselves in the market. They are still the new kid on the block and Akamai has first mover status and a proven business, but Amazon has a lot more advantages in the long run. Akamai may be at the top right now, but Amazon's following their tried and true method of methodically rolling out more products and services. To think they won't be able to disrupt the market, at some point in the near future, which would impact Akamai, would be foolish. It will happen, the question is how quickly and to what degree.