Akamai Still Dead Money: CDN Market Softens, Competition Grows


Citi analyst Mark Mahaney scours the Streaming Media West Conference for a reason to buy Akamai (AKAM)…and comes up empty:

* We attended the SMW conference in San Jose, CA, from Sept. 23-24. We participated in panels on the Worldwide CDN Market, CDN pricing, and online video and mobile video monetization. In addition, we spoke with many CDN service providers, including AT&T, CDNetworks, EdgeCast, Mirror Image, Level 3, Limelight Networks, and Panther Express. We were surprised that Akamai was not present.

    * Competition Intensifies – AT&T is investing $70MM in its CDN service this year and could invest significantly more in the future. Also, Amazon recently launched its own CDN service as well, which offers HTTP object delivery for simple objects and videos (see our Sept. 22nd note, “AMZN’s New CDN Service – No Near-Term Threat To AKAM”). We believe AMZN’s model will offer a cheap alternative to smaller businesses that want a reliable CDN service. Finally, many industry insiders noted that Level 3 has been making strong headway in competing with Akamai and Limelight.

    * Evidence Of CDN Market Softening – Based on our discussions with various CDN service providers, we found that: 1) Q3 online traffic levels among media & entertainment sites are growing but at a slower rate Y/Y; 2) Customers are actively shopping for lower prices and salespeople have been given greater flexibility to negotiate on prices & contract terms; 3) VC’s are putting pressure on smaller CDNs to gain share and/or are looking for a quick exit, which could result in significant industry consolidation over the next 12-18 months; and 4) Many CDNs are entering the Enterprise market, which AKAM is a leader in.

    * Q3 CDN Pricing Trends Are Mixed, And Materially Down At 250TB Level – Dan Rayburn provided Q3 CDN pricing which showed an average Q/Q price decline of 42% at the 250TB level, 0% at the 500TB level, 11% at the 750TB level, and 4% at the 1,000TB level. Fig. 1 shows the Q3 CDN pricing data.

    * What’s The Effect On AKAM? – We believe there are no near-term catalysts for AKAM, especially given greater pricing competition, more price sensitive customers, and lower traffic volume growth. While many at SMW are looking for HD streaming to be the next “big thing”, we believe this won’t materialise for at least another 18-24 months. We reiterate our Hold rating and $21 PT.