AT&T's Threat to Akamai Overblown

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Includes: AKAM, LLNW, T
by: Dan Rayburn

This morning, I had about half a dozen e-mails from analysts asking about AT&T (NYSE:T) and their CDN business. Yesterday, at AT&T's analyst day they announced that they will grow their streaming and caching services by 6x and said they were going to increase their CDN capabilities. Because of this, an analyst at Cowen and Co. downgraded Akamai (NASDAQ:AKAM) on concerns of greater competition from AT&T.

Now I am the first one to say I am not a financial analyst, I don't own shares in any company and I have no vested interest at all whether Akamai or any other stock goes up or down. And while I don't pour over the numbers like financial analysts do, I listen and hear what is really taking place in the market from customers. Numbers and spreadsheets only tell you so much.

For the past 4+ years AT&T claims to have been in the CDN market for the delivery of static content and video. Yet in that time, I have never spoken to or heard of a single customer using AT&T for any CDN services pertaining to video. I have never seen AT&T even bid on any RFP, have not seen any customers listed on their website, have not found a single customer case study, have not seen AT&T put out any data on their CDN business and have not seen anyone from AT&T speak at any conference or event about their CDN business. If AT&T is in the CDN business today, and I don't mean via the way of customers delivering content via AT&T's co-location or IP services, where is the business?

Could AT&T be in the CDN business? Yes. But are they today? No. I find it amazing that analysts are going to think AT&T is competition to Akamai or anyone else when they don't have a real offering today, and even by the analyst's own omission, AT&T would not be a competitor until late 2008. You're downgrading a stock based on what a company "may" do a year from now? Am I the only one who does not see the logic in this? It took Level 3 (NASDAQ:LVLT) acquiring the CDN assets of SAVVIS (NASDAQ:SVVS) and 12 months of build out just to get a basic offering out the door. If AT&T does not acquire anyone, how long would it take them to be at even 30% of the capacity Akamai is at today? They can't do that in a year. And what about streaming support? Whatever limited CDN service AT&T has today, it does not support delivery via streaming, live or on-demand, has no support for Flash, no content management system, no video reporting etc.... all things Akamai and others have today.

In the report the analyst wrote, "AT&T’s extensive network reach could shrink the average distance between a CDN node and a customer to as little as 100 miles versus Akamai's 25O-plus miles." Ok that may be, but what does that mean for Akamai? How does that affect them? That statement alone does not say how that is suppose to impact Akamai's business. Plus, AT&T is not going to place servers for CDN services at every location in their network, just like Akamai doesn't, so it's not valid to look at AT&T's entire network and say they can leverage that for one specific service offering like CDN.

If AT&T were to go out and acquire someone like Limelight Networks (NASDAQ:LLNW), which they should do if they are serious about being in the space, then they would have a real shot at the getting into the CDN business and providing real competition to the market in the next 12 months. But if they don't acquire any company or assets, they will have little to no offering when compared to Akamai or others 12 months from now.

Also, does anyone remember back around 2000 when Quest, MCI, AT&T, Sprint (NYSE:S) and others all had CDN offerings and divisions? They lasted about 12-18 months in the market before they all decided to no longer be in the CDN business. Yes, they had a lot of factors going against them in those years, especially being in the market in the wrong time, but how many people "assumed" they would make it just because they are big named networks?

In my opinion, many analysts are too quick to listen to what vendors tell them without doing enough research to really know what is taking place in the market. Speak to customers. Look at RFPs. Evaluate pricing trends. Know what products companies actually offer. Company product to product, not company to company. Anyone can say they are going to be a competitor in any market, but they don't get any creditability in my eyes just because they are a big company.