Stay Tuned for an Akamai-Google Clash

The WSJ discusses (free link) Google's (GOOG) push to mend fences with content owners and creators and strike advertising revenue sharing deals. Google is the undisputed efficiency and size leader of connecting on-line advertisers with on-line consumers, with the exception of Yahoo! (YHOO) in banner advertisement.

Akamai (AKAM) is the undisputed leader (80% share) of content distribution infrastructure. When you stream video or iTunes, it is probably coming from an Akamai server and not NBC or Apple. Akamai simply takes bits from one of its customers, like NBC, and ensures a quality viewer experience. NBC puts the ads into or around the video you watch.

No one, as of yet, has really started to successfully implement user-targeted video advertisements. Brightcove is trying to do this, but most online video advertisements are sold by the content creators themselves. If you watch the Sci-Fi channel online, you see ads that NBC sold to its existing advertising partners. In the web world, most sites outsource the selling of ad space on their sites to Google, Yahoo, etc.

It is this transition that will catalyze an inevitable conflict between Akamai and Google.

We are believers in the disintermediation of media. Just as most web content owners contract with Yahoo or Google to provide context and user sensitive advertisements, so will video content owners. Video content owners will specialize in producing content that people want to watch, and outsource the distribution and monetization (advertising) of it to others.

As a provider of content distribution to big media players, Akamai fits this vision well. They provide the technical infrastructure to ensure high-quality broadband video anywhere in the world, but they are transparent to the consumer. The content owners retain control of the presentation and monetization of the product.

We are still investors in Akamai, but it appears that one of our core reasons has now become invalid.

Originally, we assumed that the major (i.e. not The Long Tail, but that fat profitable part) video content authors would want to retain control over the advertising portion of their business, and not outsource to a third party. We assumed they specifically would not outsource to Google because they would want to ensure a number of competitive alternatives for their business existed first. We also believed they viewed Google as a competitor rather than a supplier. This delay would give Akamai the time to build a business providing advertising services to run atop its hosting infrastructure by leveraging its strong ties to media companies.

Our assumption appears to be breaking down, as Google deftly repositions itself as more of a mediator of video content rather than an author/owner. The WSJ article captures the leading edge of this trend very well. Google appears to be convincing major networks like CBS to allow them to host and monetize high value content. This is very negative for Akamai.

Akamai never tried to monetize content and lacks the experience in this area - Google is the recognized leader. Akamai does have other competitive advantages, primarily its strong sales relationships with major media companies and a well tuned hosting infrastructure. But it’s hard to argue that Akamai would be more efficient at operating infrastructure than Google, and I’m certain that Google salespeople can get an audience with Disney, NBC, etc.

Akamai flourished as an independent supplier of broadband publishing for major media providers. If these major media providers decide that they no longer want to be responsible for pairing advertising with their content, and would prefer an outside company to do this for them and share revenue, Akamai’s business model will need to expand to include this capability.

Our hope was that this would be a proactive move (see ‘Brightcove vs. Akamai‘) and not a reactive move. Given Google’s successful courtship of major video content producers Akamai needs to react now.

AKAM 1-yr chart:

Comments

[Travis Johnson:]

Interesting analysis -- I'm an Akamai shareholder (and a Google shareholder) as well, and I haven't ever built my assumptions about Akamai's growth around their ability to sell advertising on top of their served data. It might be an interesting business for them, but I think their core businesses should do well as more and more commercial high bandwidth data moves online, with or without advertising. Those providers who are selling audio or video content (a la itunes or movie downloading) are relying on the best service, not on help in advertising, and likewise I don't think those who sell software online are going to rely on advertising or on Google's automated service. As long as there is a large market for purchased online downloads (as opposed to ad-subsidized), it would be hard to beat the reliability and speed of the Akamai network. I sometimes think about selilng a small portion of my Akamai because it has come so far so fast, but not because I"m worried about their lack of an advertising product.

2006 Aug 16 11:49 AM

[Sandeep Reddy:]

very interesting article. But i was keen on knowing how 'GOOG' utilizes its infrastructure at present? We all know that it has server farms to store content (with its growing set of applications) and delivering search results. Are they using it to host content also? Beacuse i was under the impression that GOOG itself could be a prospective client of AKAM.

2006 Sep 18 02:27 AM