Reports on Deflation and Growth in the Communications Sector Inaccurate?

Includes: AKAM, LLNW, LVLT
by: Michael Mandel

Operating with limited funding, the Bureau of Labor Statistics does a great job tracking prices in most of the economy. However, the BLS understandably has a hard time keeping up with innovative industries which are rapidly changing.

Case in point: The communications sector. The producer price data for November were released on Tuesday. According to these numbers, prices for the telecommunications industry were up 0.6% compared to a year earlier.

But is the BLS correctly tracking the prices charged for the delivery of video by content delivery networks (CDN) such as Akamai (NASDAQ:AKAM) ? In a post titled “Deflation? Akamai Will Show You Some Deflation” Paul Kedrosky writes:

Check these deflationary statistics from a note on Akamai tonight by Citi’s Mark Mahaney:

  • Pricing declines:

    • 2009: 40-45%
    • 2010: 20-25%
    • 2011(f): 15-20%
  • Volume increase

    • 2010: 40-45%

In short, Akamai has grown revenues in a market sporting 20-25% price declines by increasing volumes by 40-45%.

Dan Rayburn reports that

For the average customer delivering video via a third party CDN they saw their pricing decline by 20-25% in 2010. Compared to 2009, when pricing fell on average of about 45%, 2010 was a good year for the CDNs. The rate of decline for pricing was much more stable and traffic volume on average grew about 50% in 2010

These sorts of declines show up nowhere in the BLS telecom stats.

The more general question is whether the telecom companies in general are being given full credit for the vast improvement in bandwidth and capabilities over the past few years. If not, then the government is undercounting the contribution of the communications sector to economic growth.

Disclosure: No positions