Akamai Technologies (NASDAQ: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 company earned $860 million in revenue and $145.9 in net income in 2009.
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. 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.
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 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 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.
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 in the mid 2000s.. 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.
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.
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 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.
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.
Amazon, through its Amazon Web Services unit, offers a CDN solution called CloudFront that dovetails with the rest of the AWS stack -- though nominally a separate offering, the primary use case for CloudFront is content delivery for AWS customers. If AWS continues to capture market share in the hosting and cloud-computing businesses, CloudFront will emerge as competition to Akamai.