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WIKI ANALYSIS
Akamai Technologies (AKAM) helps companies speed up their websites by using Akamais own high-speed network to copy clients' websites to servers that are physically close to the company's users, and therefore increase download speed. This process, known as caching, is especially important for Online Video websites, which are particularly bandwidth-hungry.
The key to Akamai’s success is its de-centralized computer nework, which improves the speed of its clients websites. BestBuy's offices are in Southern California, but their users are around the world. Akamai's network means BestBuy's users can always connect to a BestBuy server that's close by, and therefore faster.
From a technical standpoint, AKAM’s internet traffic footprint is large. The company operates the world’s largest distributed computing network with more than 20,000 servers in 1,000 networks across 71 countries. According to its own estimates, Akamai delivers 20% of the world’s non-email web traffic.[1] The company sells its services to many of the internet’s top players, including over half of the top 50 web retailers such as Best Buy (BBY) and Sony (SNE). In media, the company counts 29 of the top 30 websites as clients including media-heavy sites such as MTV and Comedy Central. [2]
Akamai's customer base is in e-commerce and online video, so Akamai benefits from the expansion of these services. However, AKAM is exposed to risk as its service becomes commoditized - servers and bandwidth are cheaper than they once were, and other companies such as Limelight (who recently updated a cross-licensing deal with Microsoft) and Internap Network Services (INAP) have now compete in the market which Akami used to dominate. As the fixed costs to setting up infrastructure drop, so do the barriers to enter this industry, leading to more competition. Akamai's market share dropped from 67% to 64% in 2007 as a result of this competition.[3][4].
Financial Overview
Akamai earns revenues from the hosting and delivery of internet content and media from its clients websites to end-users. The company is able to charge a premium for its services for two reasons. First, the company provides data delivery to end users, handling actual internet traffic. Secondly, the company helps to manage the technical demands and consult its customers as to how to effectively deliver their content. Moreover, the process of website caching means that Akamai backs-up many of its customers websites.
Akamai's revenues have grown 48.46% and 51.41% in 2007 and 2006, respectively, and its operating income has grown 74.39% and 13.26% over these two years. The strong operating income has been attributed to the scalability of Akamai’s revenues. This makes sense, as a significant portion of Akamai’s costs come from servers, which are fixed in time regardless of revenue - as Akamai grows its customer base, the cost of operating and installing servers becomes more economical. As CFO J. Donald Sherman says, “basically scale benefits us tremendously and as we grow very rapidly in a quarter, we tend to see pretty strong gross margin results.” [6] Earnings contracted in 2006 by 82.50%, largely due to a tax benefit received in 2005, but grew again in 2007 by 75.90%. As the #Market Share Information|market share graph in the competition section, Akamai's revenue growth has been consistent with the wider markets'.
| Akamai Summary Financials ($MM) | 2005 | 2006 | 2007 |
| Revenues | 283.12 | 428.67 | 636.41 |
| % growth | - | 51.41% | 48.46% |
| Operating Income | 73.38 | 83.11 | 144.93 |
| % growth | - | 13.26% | 74.39% |
| Earnings | 328.00 | 57.40 | 100.97 |
| % growth | - | -82.50% | 75.90% |
Geographically, Akamai's revenues come primarily from domestic sources, with only a slight decrease from 79% of total revenues in 2005 to 77% of revenues in 2007.[7]
Trends/Forces
Proliferation of Broadband Internet Will Grow Akamai's Customer Base
The availability of broadband in people's homes is increasing in double digit percentage points in many developed countries, and has doubled in developing countries as recently as 2005.[9]. With it, media consumption habits have dramatically shifted, as can be seen in the growth of companies such as YouTube , and many traditional TV networks offering their programming online, such as ABC and NBC. More bandwidth presents both an opportunity as well as a challenge to Akamai. The increased expectations of consumers puts a strain on content providers, who then turn to AKAM to bear the content delivery burden. However, it also puts pressure on AKAM's own bandwidth, which is often purchased from internet backbone providers, which operate the massive routers and server farms that send and receive internet traffic across major fiber-optic networks between continents and countries.
- Growth of E-Commerce - In addition to content delivery, AKAM sells other data delivery options to its customers, such as the caching of entire websites for redundancy or better performance, as mentioned above. For example, Akamai was hired by BMW to host and stream movies from BMWFilms, as well as the Car-customization portion of their website. [10]
- Growth of Online Video and Other Media - Flash games, YouTube videos and other "rich content" are demanded by consumers, yet place tremendous load on provider's servers. As a point of reference, observers estimate that YouTube streamed 200 terabytes (1000 gigabytes per terabyte) of data per day in 2006.[11] IDC estimates that video generated $230 million in revenue in 2005 but will jump to $1.7 billion by 2010.[12] The consumption of media online as opposed to over the air will only increase in the next decade, and AKAM is in a position to profit from this shift.
Increased distribution of Software as a Service Creates further Opportunities for Revenue Expansion
SaaS is a new e-commerce business model. SaaS changes the mode of distribution of software from a one time purchase of CD-roms and discs, to a service sold on a per-period basis, typically over the Internet. This model places larger server demands on the provider, although it also gives them more stable revenue streams and increased control over the application. AKAM's server network and monitoring tools lets its clients forgo the "in-house" model to build out SaaS capability, helping them deliver their software over the cheaper and more controllable internet, rather than discs. The strength of this model is demonstrated by Akamai's own performance, as their data-monitoring and caching services employ this same "Software as a Service" model.
Decreasing costs of storage media and bandwidth means more competition for Akamai
Akamai houses information in its servers, and ships out the content over the internet. Respectively the costs to each of these components of its business are broadly determined by storage prices (or hard drive prices) and bandwidth prices. The price per gigabyte for magnetic hard drives has fallen to less than $1 in 2006, from over $10 at the start of the decade.[13] The wholesale prices of bandwidth are difficult to chart, but are decreasing similarly over time. As these prices fall, it is easier for new players to step into the space, and for operations to return to in-house groups. This is a risk to Akamai's business as its success has rested on the fact that smaller companies cannot afford the infrastructure investments that content delivery networks demand, and Akamai charges higher prices than its competition due to its wide reach and technological supremacy. MOre competition may threaten Akamai's ability to charge this premium for its services, eroding both its profits and its market share.
Competition
Direct Competitors
- Limelight Networks (LLNW) - Limelight served data for YouTube prior to the acquisition by Google . The company currently serves data for networks such as News Corporation (which now owns MySpace) and Microsoft.[14] There is likely some overlap between Limelight's and Akamai's client lists.
- Internap Network Services (INAP) - Internap is a competitor diffentiated by cost, and has picked up several large clients, such as J P Morgan Chase (JPM), Charles Schwab (SCHW), Atari (ATAR) and Delta Air Lines Inc. (DAL). [15]
- Level 3 Communications (LVLT) - Level 3 also competes against Akamai, largely on price, moving video and VOIP, as well as other more complex services.
- RealNetworks (RNWK) - RealNetworks operated in the Online Video segment beginning in the 1990's, and has a number of technologies that make it a viable content delivery service alternative. For example, Rhapsody, a jointly-operated venture between Real and Viacom was signed on to replace Yahoo's "in-house" Yahoo! Music Unlimited service.[16]
Telecoms
- AT&T (T) - AT&T's scale and wealth of bandwidth makes them a clear competitor in this industry. The company's control of $100BN in internet backbone servers makes it less reliant on third parties for bandwidth than Akamai.[17]
Other
Internet monoliths like Google (GOOG) and Yahoo! (YHOO) have invested time and effort into managing content delivery already. While not typically serving outside clients, their reach is extensive, much like Akamai's.
Market Share Information
Observable metrics are amount of data delivered (GB) and revenues generated ($). In terms of revenue, analysts estimate that in 2007 the Content Delivery Network industry revenue reached $990.27m, which represents 48% growth over the 2006 total of $671.31m.[18]
With this in mind, approximate estimates for market share based on revenue can be generated from Akamai's revenues[19], and Limelight's revenues[20].
References
- ↑ Akamai Technologies, "Visualizing Akamai"
- ↑ Datamonitor Company Report, "Akamai Technologies" 17 Jul 2007
- ↑ Akamai Technologies, AKAM 10-K(FY 2007) "Consolidated Statements of Operations" pg. 45
- ↑ Limelight Networks, LLNW 10-K(FY 2007) "Consolidated Statements of Operations" pg. 53
- ↑ Akamai Technologies, AKAM 10-K(FY 2007) "Consolidated Statements of Operations" pg. 45
- ↑ Akamai Technologies, "Q4 Earnings Call Transcript." February 6, 2008
- ↑ Akamai Technologies, AKAM 10-K(FY 2007) "Note 19"
- ↑ Akamai Technologies, AKAM 10-K(FY 2007) "Note 19"
- ↑ The Economist. "Broadband Penetration" June 30 2005
- ↑ Akamai Technologies "BMW of North America Relies On Akamai To Stream The Next Chapter of “The Hire” Internet Films" 2004
- ↑ TechCrunch Blog "Did YouTube Just Raise another $25 million?" April 30 2006
- ↑ Forbes. "Your Tube, Whose Dime?" April 28, 2006
- ↑ About.com, Melissa J. Perenson, PC World "The Hard Drive turns 50." Sepember 13, 2006
- ↑ Forbes. "Your Tube, Whose Dime?" April 28, 2006
- ↑ Internap. "Internap Clients"
- ↑ Real Networks Press Release. "RHAPSODY AND YAHOO! ANNOUNCE STRATEGIC PARTNERSHIP IN DIGITAL MUSIC". February 4, 2008
- ↑ IDG News Service. "AT&T to start content delivery services" July 10, 2000
- ↑ Tier1 Research. "Content Delivery Network Services Sector Gains Momentum as New Players Enter." Jan 4, 2008
- ↑ Akamai Technologies, AKAM 10-K(FY 2007) "Consolidated Statements of Operations" pg. 45
- ↑ Limelight Networks, LLNW 10-K(FY 2007) "Consolidated Statements of Operations" pg. 53
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