About 45 days ago, I noticed Akamai (NASDAQ:AKAM) was being more competitive when it came to pricing CDN deals and around that same time, Akamai's sales reps were highlighting this pricing reduction in emails to potential customers. One of the emails I received from an Akamai sales rep said, "as we are at the end of 2011, I wanted to keep you informed that we are significantly reducing bandwidth costs to be at a competitive stance." Initially I thought this might be an end of the year thing as many CDN vendors tend to lower pricing on selective deals in a bid to close as much business as possible in December. But in this case, that doesn't seem to be the case.
In checking these latest pricing trends with Akamai, last month, the company confirmed to me that they have lowered pricing, with the reasoning behind it being that they have reduced their internal costs and are passing those savings on to customers. While the company agreed to provide me with more details on which costs have been lowered, to date, I haven't received any of that info. It's possible that Akamai's costs associated with their CDN services have gone down, but since the company doesn't break out operating costs based on product, there's really no way to know if that's the case. Clearly Akamai is looking to try and gain more CDN market share and add more volume on their network by offering lower pricing and it just may work.
In a check with Akamai's competitors for CDN services, many of them stated that they have seen Akamai be much more aggressive in the last 30 days. What percentage of Akamai's M&E revenue is directly attributed to CDN services we don't know, but running a CDN is all about the economics of scale. If Akamai can get enough new business on their network fast enough and grow their traffic at a high enough rate, that can offset the decline in margins that comes from lowering pricing. And if any CDN can also lower their own delivery costs at the same time, that only accelerates the CDN cycle of lower pricing and higher volume. That's the underlying fundamentals of how a successful CDN operates but we won't know for some time how this lower pricing strategy will impact Akamai.
Naturally, many are going to ask me by what percentage Akamai has lowered their pricing. While I don't have an exact number, since multiple deals I have seen vary in size and commitment levels, it's enough of a decline in pricing to where Akamai is now pretty much at the same price as Limelight, Level 3 and EdgeCast, for the right sized deals. One of the last deals I saw, Akamai had quoted the customer $0.05 per GB for a monthly commit of 250TB a month. Previously, those sized deals, amongst all the vendors, was averaging about $0.07 per GB.
Akamai's year over year media and entertainment revenue declined or stated flat for the first three quarters of 2011 and the company has stated that the rate of volume growth on their network has slowed. So it's not surprising that Akamai is now looking to try and win back some wallet share with a lower CDN pricing strategy. This is the exact same approach Akamai took in Q1 of 2010 and they did gain some share last time they got aggressive, but they didn't grow traffic fast enough to make up for the pricing decline in their M&E business. Whether or not they can be successful this time around it's too early to know, but something to keep an eye on.
I'll be doing my annual CDN pricing survey with customers next month, which typically collects data from 500-800 CDN customers, so I'll have more detailed pricing trends to share at the end of Q1.
Disclaimer: I have never bought, sold or traded a single share of stock in any public company ever.