There isn’t a soul in the world who doesn’t believe that Internet traffic will grow over the next few years so the growth prospects for Content Delivery Network (“CDN”) provider Akamai is enticing. But since the start of 2011, investors have dumped the shares of the company over concerns of pricing power and growth potential. But I believe investors are overlooking the additive growth into the company’s revenue model. The company’s contracts are setup that there is a base monthly fee for Akamai’s services regardless of how much traffic is actually consumed. Consider this similar to paying a gym membership; you pay regardless if you actually lift a weight. You are essentially paying for the right to go whenever you want. The unique aspect of the CDN contracts is that any usage above the monthly minimum is charged additional fees, or bursting fees on top of the monthly fee. I can only assume that when the company signs the contracts with the customers, the base monthly fee, and maybe slightly more growth is priced to allow Akamai to earn a rate of return. Any incremental usage is revenues that are essentially unexpected. This type of model allows investors to monitor potential revenue surprises.
Luckily for Akamai investors, the evolution of Netflix’s business over the Internet has become a hot topic debated by analysts and even professors. Popular hedge funds have also taken notice of the company’s challenges prompting public responses by Netflix management. The beauty of all this chatter is that it has put Netflix on the defensive to release statistics that show their Internet adoption is growing. Netflix often will provide this information in their quarterly management assessments and they even have a blog that will provide interesting tidbits. Click here for the 3rd quarter 2010 management’s discussion, it notes that the percentage of subscribers who watch “instantly” or streaming content, have increased from 37% in Q209 to 66% in Q310. This coupled with subscriber growth increasing from 10 million to almost 17 million in the same time period. Not only is Netflix adding more users, but the users are increasingly watching content online. Commentary from Q4 2010 and Q1 2011 also demonstrated Netflix’s desire to go streaming with its increased online licensing deals. This trend can only help Akamai earn additional revenues. Investors should watch Netflix closely for any information provided by the company that could give a clue of further Internet adoption.