Over the course of the past ten years, Akamai has seen various competitors come to the market, typically looking to compete on CDN services. Most of these competitors didn't last long or in the case of someone like Speedera, Akamai acquired them, thereby re-affirming their leadership position in the industry. While Akamai's CDN business has taken a hit over the last few years, revenue from their value add services business has been growing and has really helped diversify the company's revenue.
But over the past 3-4 quarters, Akamai's business is, for the first time, being impacted on multiple levels. Their CDN business, value add services business and their network technology is all feeling competitive pressure and Akamai has been slow to react to changing market dynamics. While it use to be easy for them to say that new entrants were just competing on price, that's no longer the case. Competitors are competing on performance and in many cases, winning deals based on that alone. Content owners know that Akamai is not the only option in the market and we've all learned that there is more than one way to deliver content with great performance. Level 3 and Limelight combined will have north of $200M in CDN revenue this year. Clearly, Akamai's not the only game in town anymore and performance is about much more than the number or servers a CDN has or what kind of network architecture they have.
While it's very clear to see the impact that Level 3, Limelight (and soon Amazon and Verizon) are having on Akamai's CDN business, many have felt that Akamai built a moat around their value add services business, thereby keeping others from truly competing. What we have seen is that Cotendo and others are in fact winning business from Akamai based on performance and price for these services and this trend will only continue. I've been hearing from a lot more customers lately who have left Akamai for Cotendo for things like app acceleration or DSA and these customers say that on average, Cotendo is 20% faster and 30% cheaper than Akamai.
Of course this is not always the case for every product and every customer, but Cotendo is enough of a threat that Akamai feels the best way to try and stop them is to sue them for patent infringement. Akamai knows that Cotendo and others are only going to continue to put the pressure on the value add services portion of their business and drive the price for these services down over time. Based on Akamai's recent earnings and guidance, we are already starting to see this happen.
While Akamai's CDN and value add services business is now under attack, changes in the market also mean that Akamai's position inside the last mile is also facing trouble. As more telcos, carriers, ISPs and MSOs start to build and deploy their own CDNs, Akamai's value inside many of these networks is diminishing. While Akamai won't come out and say there is a problem, the whole reason Akamai is now trying to create a licensed CDN (LCDN) product is to try and stay inside the last mile and provide more value to the carriers.
While it has been clear for some time that the CDN market is evolving, Akamai has been very slow to respond to these market changes. Two weeks ago, EdgeCast announced that their carrier grade CDN solution, which has been on the market for two years, has now been licensed by Pacnet, the tenth carrier to sign up with EdgeCast. Meanwhile, Akamai does not have any carrier product out in the market and is still searching for senior people to work in the LCDN group. These open positions list job functions including, "responsible for defining strategy, target markets, product requirements, pricing and financial models, managing product launches, and providing management updates on their product."
The future of the CDN business lies with the carriers and telcos and while Akamai is still developing a carrier CDN solution in-house to bring to market, with no ETA as to when it will be ready, Akamai continues to get beaten by the smaller and more nimble EdgeCast, a company that is doing only 5% of Akamai's total revenue. Why Akamai is trying to build everything in-house I don't know, but if I was them, I would acquire EdgeCast and then acquire a transparent caching provider, ideally PeerApp, which would then give Akamai an instant carrier grade CDN and transparent caching solution for telcos.
Such a product would be a very strong offering in the market and with Akamai's reach and marketing exposure, competitors would have a hard time selling against it. Especially since Akamai could also offer off-net CDN services in addition to the on-net software. Such a platform would solve all three of the delivery needs for telcos, carriers and ISPs. It would be a true carrier grade CDN and transparent caching solution, all in one platform. And if anyone wonders if this is the way the market is headed, last week, EdgeCast and PeerApp both announced they were working to create one platform for both their services, based on demand from their telco customers. The carrier market is telling the market what they want in the way of solutions, but Akamai has yet to deliver.
With EdgeCast doing north of $50M in revenue this year, it would be a simple acquisition for Akamai and one they could easily afford. Some might say that Akamai has tried these types of acquisitions in the past and not fared well, which is true. In 2006 Akamai spent $160M, or nine times revenue to acquire Nine Systems and then stopping selling the StreamOS platform about two years later. By all accounts, that acquisition was a failure. But unlike Nine Systems which changed their business model and focus quite a bit before they were acquired, EdgeCast has been focused on the licensed carrier CDN model from day one. And with ten telcos and carriers already relying on EdgeCast's technology including AT&T, Telus, Deutsche Telekom, Global Crossing and Dogan Telecom, you know it works and works well. Not to mention, EdgeCast has a nice list of non-carrier customers including Yahoo!, ESPN, JetBlue, Wordpress, LinkedIn, Kellogg's, IMAX and Lifetime Networks.
Aside from getting beaten by EdgeCast on the carrier side, Akamai is also getting beaten by Cotendo on the mobile acceleration front. While Akamai announced in February a "strategic alliance" with Ericsson to develop some kind of mobile acceleration product, to date, no real details have been released of when the product will come out or what it will look like. Akamai has a very generic and high-level marketing video on their website, but there is no real product info. Meanwhile, Cotendo launched their mobile acceleration suite three months ago, have given out very detailed information of how it works, and announced customers who are already paying to use it. Once again, Akamai is getting beaten by the little guy with a new product in the market.
While competitors like EdgeCast and Cotendo are smaller than Akamai, they are more nimble and have been faster at rolling out new products and platforms. One of the things I have found very strange is that over the past fifteen months, Akamai has been super slow in rolling out new products and services. If you take a look at all of their press releases over the past year and half, you'll find very few announcements of new products and platforms. I find only three releases talking to new services, which pertain to their Edge Tokenization service, Electronic Software Delivery for Gaming and Edgeview. While Akamai has announced a bunch of "alliances" (Brightcove, Rackspace, IBM, Riverbed), these haven't been new products or platforms. At Akamai's customer conference last year, Akamai said they would soon have a new version of their DSA product on the market, but a year later, I have yet to see them announce it.
At a time when Akamai's business is clearly being impacted by competitors, big and small, as well as fundamental changes taking place in the market, Akamai's management has been very quiet. They aren't saying what they are working on, what their product road map looks like and haven't outlined what they plan to do to get their business growing again. They aren't telling Wall Street any story, aren't opening up to customers and are simply conducting business as usual. Why Akamai isn't making key strategic acquisitions in the market I don't know, but unless they make some serious changes in how they do business, Akamai's going to continue to have tough times going forward.
Simply put, Akamai needs to evolve. The market has changed and Akamai is not changing with it. They need to change their message, they need to open up to customers, they need to respond to RFPs faster and they have to stop operating their business with the attitude that no one can possibly compete with Akamai's network technology. I was hoping that once Akamai felt that Cotendo might seriously compete with them, Akamai would change their way of thinking and simply roll out a better platform than Cotendo and compete on the merits of the product. Instead, they fell back to their usual way of thinking and instead of innovating, simply filed a patent infringement suit against Cotendo.
While I know Akamai won't agree with me, their arrogance is at the heart of the problem. Even customers whom I speak to that like Akamai's products and services, say the company is arrogant. And while I'm sure some will want to argue with me on that point, people know it's true and it can't be debated. To Akamai, they are never wrong, no one can do what they do, everyone else's technology is outdated and no one can truly compete with them. Until management changes the culture of the company and changes their current message to the market, and by that I mean customers and Wall Street, Akamai is going to have a had time growing their business at the rate they use to.
Disclosure: No positions.