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Internap Network Services (INAP)Stock (Internet Industry, Internet Software & Services Industry)
 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 acquired VitalStream in Q1 of FY2007, and integrated its content delivery network (CDN) into its offerings. [1] [edit] Business OverviewInternap divides its services into four buckets:[2]
[edit] Financial OverviewInternap's revenues are dominated by the High Performance IP segment, which made 68%, 61%, and 51% of revenue in 2005, 2006, and 2007 respectively.[6] 
The data center and content delivery have grown in absolute and relative size over the last few years, and are growing faster than the Internet Protocol (IP) business. Less than 10% of Internap's total revenue was earned from foreign sales in 2005, 2006, or 2007.[7] 
Internap has a history of making operating losses as well as negative earnings, largely due to "fixed cost" in network and sales, which is purchased from third parties. This makes growth and margin analysis difficult, and is a source of future operating concern. This is important in light of the fact that operating margin is slim, at 1% in 2006. However, in 2007, there were non-operating one-time impairment and restructuring charges totaling 11.35MM, which if corrected for, would yield a positive operating income and earnings. [8] These costs were incurred for the integration and cost-cutting measures introduced after the acquisition of VitalStream. This does not significantly improve the company's operating margin however, although it is not longer operating at a loss. [edit] Trends/Forces[edit] Increasing complexity in the physical design of the internet will increase demand for Internap's services 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.  [edit] Growing Business-to-Business E-Commerce will make Internap's offerings more attractiveInternap'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. [edit] Slim margins will continue to threaten Internap's operationsInternap 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).[11] 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. [edit] Internap's financial position is threatened by competitionInternap's business is cash-flow negative, and it has typically had to meet cash requirements by selling more stock or borrowing money.[12] 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. This was proven in Q1 2008, where Internap asked to delay filing of the 2007 10-K, due to customer complaints and refunds with VitalStream's CDN services.[13] [edit] Commodization of bandwidth and backbone access is a threat to Internap's relevancePart 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. [edit] Competitors[edit] Internet Connectivity Providers
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. [edit] Data Center ProvidersWhile Internap offers data center hosting, is does not directly compete with data center providers. This is because its data center service is an offering bundled to customers to tie-in with Internap's other (IP and CDN) services. [edit] Content Delivery NetworksContent 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), which has strengthened its position after the dot-com bust, dominating the market with approximately 67% market share in 2007. [14] [edit] Market ShareInternap's share of the traffic routing market is miniscule because it competes with large companies like AT&T (T) and Verizon Communications (VZ), which have international reach and big revenues (although these companies target slightly different customers than INAP). Internap's customers are those who are concerned over reliability to want to be connected to the internet through multiple providers and avoid a single point of failure, but for whom it does not make sense to deal directly with providers. Internap's share of the growing CDN market is more substantial. CDN industry revenues were $990.27m in 2007, 48% higher than the 2006 total of $671.31m.[15] Internap's revenues were two percent of this total. [edit] References
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