Netflix Deal Signals New Attitude at Akamai

by: Trefis

Akamai (NASDAQ:AKAM) has found a new client in Netflix (NASDAQ:NFLX), and it will soon be delivering more than half of Netflix’s online content through the Akamai content delivery network (CDN). We believe that the Netflix deal is indicative of how Akamai has become more price competitive and that similar wins can help Akamai’s media business.

Netflix, which competes with movie rental companies like Blockbuster (BBI), has historically delivered its streaming content via two vendors, Limelight (NASDAQ:LLNW) and Level 3 (NASDAQ:LVLT). Netflix is moving some of its content to Akamai, which now offers comparable service at a competitive price.

We estimate that Akamai’s media content delivery business constitutes 27% of $26 Trefis price estimate for Akamai’s stock. Below we discuss how competitive pricing will attract more media customers to Akamai and how this can impact Akamai’s stock.

Competitive Pricing Can Win Akamai More Deals Like Netflix

Akamai has historically charged premium prices to its customers for fast and secure delivery of their web content. However, the company is increasingly competitive on pricing, particularly on video content, in an effort to attract more customers and traffic to its network.

Dan Rayburn states in a recent post that Akamai, as an incentive, will charge Netflix a content delivery price for the first few months that is one third the amount charged by Limelight. We believe that improved pricing can help Akamai attract more media customers. You can modify the forecast below to see how Akamai’s stock may be impacted if it were to win more media customers than we estimate.

Although reducing prices can hit Akamai’s gross margins, the increasing customer base can help the company to make more from other value-added services. Higher margins on value-added services should offset the gross margin reduction to some extent and should increase overall absolute profits for Akamai.

You can modify the forecast below to see how Akamai’s stock price would be impacted by an increase in gross margins for its media content delivery business.

For additional analysis and forecasts, here is our complete model for Akamai’s stock.