As I am getting more calls and emails than I can possibly return about my earlier blog post about Akamai (NASDAQ:AKAM) and Netflix (NASDAQ:NFLX), and because both companies are now willing to go on-record just a little, I've decided to give out more details on my post. Folks may still have questions after reading this post and I'm happy to answer them, if I can. All the emails and comments I am getting from crazy shareholders threatening me with bodily harm will be ignored.
Also, it should be noted that far too many websites that have picked up on my post have taken a lot of what I have said out of context or have implied things I never said. At no time did I say Netflix is, "no longer a customer of Akamai". Nor did I imply that, "Netflix won't have any relationship with Akamai in the New Year". I chose my words very carefully and third party sites need to use those exact words and not take what I said and imply something else from them.
Netflix is shifting their current video traffic from Akamai and over to Limelight (NASDAQ:LLNW) and Level 3. Akamai has not denied it and neither has Netflix. Akamai did say for the record that, "it's no secret that Netflix has a multiple vendor strategy for its video service. It's for Netflix to decide how much traffic should be carried by each vendor based on their business needs. Our focus is always to work with our customers to ensure the best possible results for their business."
There is also the strong and likely possibility that Akamai still gets some Netflix video delivery business for traffic not allocated to current contracts, new traffic from Netflix's expected International expansion and other video related offerings. Netlfix is constantly in contract discussions with many of their vendors throughout the year.
Akamai provides more than just streaming and they can lose a portion of Netflix's traffic, like video, while still retaining other portions of the business. The real debate seems to be why Netflix is shifting their video traffic to Limelight and Level 3 and whether or not poor performance is to blame. Normally I would not say how I got my info for my original post, but in this case I think it is important.
Technical folks inside Netflix have been telling me that in head-to-head tests between Akamai, Limelight and Level 3, Akamai has not always performed well. They have not always been the worst, but they have not always been the best. They have also told me that they have seen performance issues on Akamai's network, specific to video.
Some of the folks I spoke with at Netflix are also the same ones who told me earlier in the year that Netflix was moving their video traffic off Level 3 and over to Akamai. Two weeks after I wrote that post, talking about the change, Akamai announced that Netflix was a new customer. So my source for today's post inside Netflix has been accurate in the past. I don't see any reason why they would lie to me.
Interestingly enough, when I wrote back in March that Level 3 was losing all of Netflix's video traffic to Akamai, no one asked me for my source. No one even questioned the news. But this time, when the shift is from Akamai back to Level 3, everyone seems to want to know who the source is.
So let's get right down to it, has Netflix had performance issues with Akamai? Akamai says no and went on record to say, "as both companies have stated publicly, I’m happy to confirm that there have never been any performance issues re our support of Netflix’s business." A corporate communications person for Netflix went on to say that, "Akamai is a vendor and continues to be a vendor for Netflix. Reports of performance issues with Akamai are inaccurate; we are and continue to be satisfied with their service. Netflix has a multi-CDN strategy."
While I appreciate the quotes from the companies, Netflix's is very generic. Netflix says they are satisfied with their "service" but don't say what service they are talking about. Akamai does more than just streaming for Netflix, so Netflix can be happy with one service but not happy with another and their quote would still be accurate. Netflix says that Akamai is a vendor, but I never said they weren't. I didn't say Netflix was no longer a customer and my post was specific to Netflix's streaming only service.
Also, if Netflix had issues with any vendor, would they call them out in public? I doubt it. Netflix has had some major outages over the past year, not pertaining to CDN, and they won't give out any details on what the problem was, what caused it or what vendors had the problem. It is not in Netflix's best interest to speak badly about any one provider when they have a multi-vendor approach as they then lose leverage when it comes to negotiating.
But the real question to ask here is if Netflix is so happy with Akamai's service and hasn't had any performance issues, why are they shifting their video traffic to Limelight and Level 3? Why did Netflix not only sign a three-year contract with Limelight last month, but also allow Limelight to mention on their Q3 earnings call last week that Limelight would be, "expanding their role as one of Netflix's core delivery partners". Why is Level 3 spending $14M in CAPEX costs this quarter for one customer whom Level 3 didn't call out by name, but whom they said they signed a new contract with in October for business that will ramp up in the New Year? Neither Netflix nor Akamai will say why Netflix is shifting their video traffic from Akamai to others. If it's not performance and not price, why are they moving?
Is it a performance issue? I'll let you decide. I know what I was told from some tech folks at Netflix and I also know what Netflix and Akamai have now said on-record about the topic. We could cut through all this right away if Akamai and Netflix were to go on record with non-generic quotes, but neither company is willing to do that, which is pretty typical in these circumstances.
A few other things that I think are important to discuss is the idea that some are telling me the news could not possibly be accurate as Akamai could never lose such a big customer. Yes, Akamai is the leading CDN in this space based on revenue, but many content owners jump from one CDN to another each year. We already know that Netflix was with Limelight, then Limelight and Level 3, then Limelight and Akamai, now Level 3, Limelight and Akamai, and soon Limelight and Level 3, and possibly Akamai again as well. And that's all within a span of about three years. For many content owners, that's simply the nature of the business.
I have been sent so many links in reference to my blog post today (Tuesday) that I have not been able to read many of them yet. But I did see one that said Jefferies analyst Katherine Egbert wrote this morning that her checks find that, "Limelight likely has probably won back all of Netflix streaming, most likely due to performance issues, contrary to what Akamai is saying". Who her source is I don't know and I have not spoken to her, so you'd have to ask her directly. But the idea that I wrote this blog post based on a hunch or assumption is not accurate. I was given info directly from the customer, whose info has been accurate in the past and public data put out by other vendors last week only helped confirmed a change.
What I make from all of this is that Netflix has decided to shift their current video traffic from Akamai to other providers for reasons that can be debated. As I said in my earlier post, I don't see this as a trend at Akamai, and unless I do, losing the video portion of traffic for one customer-- to me-- is not a big deal. It would be a much bigger deal and impact to Limelight if they were to lose their share of Netflix's business.
Also, I think it is important for me to let everyone know that Akamai was very responsive with regards to talking to me about this topic. We probably traded more than a dozen emails today (Tuesday) about my post. Almost all of what we spoke of was off-the-record, but Akamai did a very good job of reaching out to me, being proactive and responding to my requests. I wish they could have said more on-the-record, but that's the nature of the business.
I also want to go on record once again for all of the folks who keep emailing me asking me if I made money from the news I put out today. For the record, I have never bought, sold or traded a single share of stock, in any public company – ever. And for those that have asked, yes, that applies to my wife as well. I don't trade stocks, never have and I don't write any post with the intention of thinking what it will or will not do to any company's stock price or value in the market.
If you have follow up questions, please put them in the comments section. If you want to disagree with me in any way, you're welcome to, but keep it professional.
Update 6:58pm: Level 3 Now Confirms It Has Secured A "Multi-Year CDN Agreement" With Netflix
You'll hear more about in the coming days, but Level 3 has now gone on record with me and other news outlets to say that they, "have secured a multi year CDN agreement with Netflix." They also go on to state that, "the capex mentioned on our earnings call associated with a large customer is for Netflix and the large customer is Netflix."
Disclosure: No positions