Internap Network Services (NASDAQ: INAP) specializes in internet traffic routing technology. The company purchases excess bandwith from backbone telecommunications companies such as Level 3 Communications (LVLT), AT&T (T), and Sprint Nextel (S), which it then uses to route traffic from its clients' websites to ensure its speedy delivery through the internet. The company earned $256 million in revenue but incurred a net loss of $69 million in 2009.
In addition to making sure this excess bandwith is available for its clients, Internap uses proprietary software to route its clients' traffic in the most efficient way possible. Data may travel several hops through intermediate servers on its way to its final destination, and Internap makes sure its clients' data takes the fastest path with the fewest delays.
Internap divides its services into four segments:
As mentioned in the introduction, internet traffic must pass through several steps to arrive on the desktop of the end user. As can be seen to the right, the hub-and-spoke model of the internet can be likened to air traffic, as is further demonstrated in the image below. If traffic needs to get from one side to the other, it likely needs to go through the ultra-congested middle. This pattern increase with more users, and the hub-traffic becomes denser and denser.
Internap's primary IP services business does not face or affect the end user. Instead it transfers data between business servers. Given that these transfers are critical to potential clients as a "necessary step" before transmission to the end-user, they are also a potential bottleneck that clients would like to avoid. This opportunity, along with the above opportunity of increasing complexity, will be key drivers of Internap's future growth.
Internap has not historically been able to earn profits from its operations. This is primarily due to large variable costs that eat into margin, since it purchases access from network backbone providers like AT&T (T). This weak margin brings into question whether the business is sustainable, and margin issues will be magnified in situations where the below two forces - competition and commoditization - come into play.
Internap's business is cash-flow negative, and it has typically had to meet cash requirements by selling more stock or borrowing money. Since INAP does not have incoming cash flow, it cannot reinvest in its own business to stave off competitors or develop its technology. Internap's growing content delivery business is dominated by Akamai Technologies (AKAM), and Internap's reliance on the telecom third-parties for access makes them vulnerable, as competitors can either offer competing products or co-brand services that offer a similar integrated product as Internap. This is amplified by INAP's own missteps in the content delivery arena, as integration of VitalStream has been dicey.
Part of Internap's value proposition is that it is connected to many redundant internet suppliers via AT&T (T) and other telecommunications companies. These services are expensive for individual customers who only need stable internet access, unlike business clients who need multiple dedicated connections. If the price of access decreases, however, it will be easier for Internap's clients to cut out the middle-man by providing direct internet backbone to the end user.
Internap offers connectivity to its clients that has been bundled from the above providers and resold. However these owners of the internet backbones transfer data all over the wired world, and thus have tremendous power in the industry. Although their model does not offer the same guarantees that INAP does, they provide the underlying service that makes INAP's existence possible. While Internap promises to deliver a better service, improvements in the competitor's own network to improve reliability and up-time, or a decreased need for insurance/performance on the client's end, will erode INAP's economic niche.
Personal lesson lernat: I will now save all my Oyster history (before it expires every 3 months), check-ins, and latitude. I want to be ready for questioning. Ah, ok! I was starting to worry that you could end the post without any REAL paranoia symptom :-D
Content delivery is the final leg of Internap's value proposition to clients, and is growing rapidly. However, this industry has long been dominated by Akamai Technologies (AKAM).