Goldman Has It Wrong: Akamai Not Affected By Network Operators and P2P

With the Streaming Media East show ending yesterday, I was hoping to spend today trying to catch up on all my e-mails, but I'm already getting lots of calls this morning about Goldman's downgrade on Akamai (AKAM). While I am not a financial analyst and don't look at the numbers like those on the Street do, I can say that I disagree with the reasons why Goldman downgraded Akamai this morning. The reasons given were large network operators entering the space, acquisition by smaller vendors by network operators and the potential entry of P2P offerings.

That all sounds scary on paper, but that's where it ends. Right now, there are only two network operators in the CDN space. Level 3, who I have been saying all along is a real threat to Akamai and AT&T. Based on my briefing with AT&T and the details I gave out about the scale of their build-out, if they end this year with the 400Gbps they are aiming for, across all of their CDN service, video, software downloads, app delivery etc... that would give them a fraction of what Akamai has. Not to mention no transcoding service, content management, DRM and all the other functionality that Akamai's Stream OS product has. Level 3, yes, they will challenge Akamai but we have know that for months now, so that's not new news.

The second reason Goldman gave was that some network operators may acquire some of the smaller CDNs and then compete with Akamai on that level. Again, sounds good on paper, but who are they going to acquire? After Limelight, no other CDN has even half of the revenue Limelight does. Most will do anywhere between $10-$40 million this year. At $40 million, that is about 10% of Akamai's CDN revenue. Not a big threat. And even if they acquired two or three CDNs and bundled them all together, none of them sell into the government market, offer application delivery or have the tools and APIs Akamai has.

And as for P2P, right now, P2P is not getting traction. It will get some traction down the road, but P2P is NOT a replacement for CDN, it is a compliment. Just like Amazon's web services are not a replacement for CDN, they are used in conjunction with a CDN. Kontiki who is one of the longest running P2P solutions on the market did $6 million last year when they were owned by VeriSign. Is that a revenue number that's got Akamai worried?

If Akamai was getting downgraded due to issues with ARPU, CAPEX or other issues like that that I don't track very closely, then I'd have no comments. But to downgrade Akamai for the reasons mentioned today, when the data does not back it up, I have to disagree.

Note: I have never bought, sold or traded any stock in Akamai or any other public company ever.

Comments

[Jeff Hill:]

Dan: Good comments. Add this one to the list.

I always get a little kick when some analyst, covering a market leader, compares what the leader is TODAY to what the upstarts are expected to become somewhere DOWN THE ROAD. It is always an Apples and Oranges deal.

Akamai today is very different than they were 6 years ago when we first began using them. Why does Goldman assume that they have done all the new development they are ever going to do?

You and I have both seen upstart CDN's come and go, almost as fast as Webcasting Providers. The leaders have staying power...that's why they're leaders. I wouldn't count Akamai out anytime soon (nor am I selling my AKAM stock).

Jeff

2008 May 22 01:01 PM

[Akaman:]

It is rather "Old Story" to get these kind of comments at this time. I have observed an almost perfect correlation between better than expected quarterly numbers, a upswing in the price of the stock and a subsequent sharp decline. I have no evidence to support this theory scientifically, but by random observation, it never fails. AKAM will continue to defy expectations if only because its business and market are little understood. When and if analysts will be willing to spend the proper amount of time "analysing" then they will realize the nature of they business in question.

2008 May 23 09:31 AM

[Jonha's Pop:]

Dan,
Cudos for coming forward. Goldman is a formidable opponent, but you're right and they are wrong. Akamai is so far ahead of all the rest, it's hard to believe. The street just doesn't recognize it.

2008 May 24 05:40 PM