Akamai (NASDAQ:AKAM), which operates the world’s largest content delivery network, serves major clients like Apple (AAPL), ESPN, CBS, Viacom (VIA, VIA.B) and MySpace, along with numerous e-commerce sites. Akamai has seen consistent growth in its customer count and revenue per customer in recent years, catalyzed by its value added-services.
However, content owners are increasingly shifting to a multiple vendor strategy, which could hurt Akamai if customers spend some of their content delivery budgets with other CDNs.
Apple, Netflix and Hulu are expanding their CDN vendor relationships
Apple (NASDAQ:AAPL) moved on to dual-vendor strategy in the end of 2008 when it added Limelight (LLNW) to deliver its content. Traditionally, Apple had relied solely on Akamai’s network. Similarly, Dan Rayburn reports in his blog that Akamai has been losing some of the Hulu traffic to Limelight and Level 3 (LVLT) networks.
Multiple vendor strategy leads to increased competition
Historically, Akamai has charged premium pricing to its customers due to its quality service but lately the company has resorted to a more competitive pricing. This can be attributed in part to the fact that content owners have now started moving to a multiple vendor strategy that encourages more competition.
Although one can argue that Akamai is both losing and gaining traffic with this trend, the net effect could well be increased competition and loss of traffic for Akamai. As Akamai is a leader in the industry, the multiple vendor strategy will allow smaller vendors to compete more effectively with Akamai.
Increased competition and diversion of traffic to multiple vendors may lead to pressure on Akamai’s revenue per customer
We estimate that Akamai earned about $170,000 per online shopping customer and $399,000 per media customer in 2009. If the trend for the content owners to adopt multiple CDN vendor strategy continues, increased competition for Akamai can lead to diversion of some of the traffic to other CDN providers. This can potentially reduce revenue per customer for Akamai. Another factor that can put pressure on this metric for Akamai is the company’s likely attempt to reduce pricing as it feels increased competition.
You can modify our forecasts above to see how Akamai’s stock depends upon revenue per online shopping customer and revenue per media customer, two of the major sources of value for its stock.
You can see our complete model for Akamai’s stock here
Disclosure: No positions