For the past couple of quarters, I've written many times that Akamai (AKAM) needs to be more aggressive on its CDN pricing or video, so the company can grow revenue, increase the volume of traffic on its network and make it harder on its competition. Many have said Akamai would be crazy to lower its pricing, as it would negatively impact the company's margins. But I've always argued that you make up that decline in profit with more volume on the network, which in time actually increases your margins. Economics of scale is what the CDN business is all about and that determines whether you win or lose in the market.
At the Streaming Media West show two weeks ago, I got to speak with dozens of content owners about who they were using for video delivery and what they are paying. I also got to speak with a lot of Akamai's competitors and it's very clear that Akamai started lowering its pricing, especially with contract renewals, when it comes to video delivery. While it's hard to pinpoint the exact frame time this started to happen, customers I spoke to said they saw the pricing shift around the September time frame. Content owners currently with Akamai said Akamai had dropped its pricing to be near Limelight's (LLNW) and Level 3's (LVLT) and in some cases, was matching their pricing for renewals.
At the Streaming Media West show, some competitors of Akamai also privately expressed to me their frustration over Akamai's lower pricing practice as they said they were losing deals to Akamai as a result of the pricing change and that it was now making it harder for them to close certain contracts.
While Akamai's not re-pricing everything across the board and still being selective, clearly any pricing change in strategy by the leading CDN is going to impact those competitors trying to take away their business. While some will naturally ask me how much Akamai has reduced their pricing on average, there is no way to say. I've seen deals where they dropped pricing by 50%, but then other deals where they have dropped it by even more to match Limelight or Level 3.
This shift by Akamai to adjust their pricing strategy is a smart one; I just don't know why it took them so long to do it. I think that after three quarters of poor growth in the company's M&E business, Akamai finally came to the conclusion that it would help jump-start their M&E business and that by doing it on the tail end of the year, at a time when traffic tends to grow going into the New Year, it would have a much greater impact.
So I'm not at all surprised that Akamai raised guidance today for the fourth quarter. I think we all knew that at some point, Akamai would re-visit its CDN pricing and when it did, the company would see pretty positive results quickly. It was just a matter of when it would start executing that strategy in the market.
For Akamai competitors, especially Limelight and Level 3, this is not good news. Limelight has shown no revenue growth at all for the past three quarters and has guided to a flat Q4. While Limelight believes it is ready to turn the corner with growth in 2010, a topic I will be posting about shortly, having to compete with Akamai's lower pricing only makes Limelight have to work even harder. By my estimates, Akamai still does 4x the revenue Limelight does when it comes to CDN, which I classify as software downloads, small object delivery, streaming and HTTP video downloads.
Last month at the Streaming Media West show, I presented the last pricing numbers from the video CDN market and I'll be posting those number to the blog this week.