Akamai’s CDN Business Looks Solid, Threat To Value Add Services Far Off
Over the past few weeks, I've been getting a lot of calls from folks asking about Akamai's CDN business and how they are doing in the market along with questions on the stability of CDN pricing. As I wrote in January, due to Akamai getting aggressive with their CDN pricing at the end of last year, in 2010 I have seen Akamai win and retain a lot more business than they did in 2009. Akamai's CDN business appears to be doing pretty well and there is no question that their reduction in pricing is making it harder for their competitors. At the same time, pricing is very stable in the market and I expect it to remain that way for the next few quarters. On average, CDN video pricing should be down about 25% this year for the average customer compared to being down 40% last year.
In general, Akamai's CDN business shows no signs of slowing down. While competitors like Limelight and Level 3 are still serious competitors for products that Akamai gets 45% of their revenue from, no one has yet to truly compete with Akamai on any scale for the value add services they sell. That's not to say that Akamai will be the only game in town for services like dynamic site acceleration (DSA), application acceleration and services for the retail vertical, but they are still the clear leader and will be for some time to come. Other companies will challenge Akamai for these services, but it will be a few years before these competitors are at scale or can compete with Akamai on product functionality.
While many CDNs are just now starting to diversify their revenue away from pure CDN services, moving from a service based company to a software platform company is not easy to do and does not happen overnight. It takes years, literally, to make it happen. Limelight has been working on it for the past 18 months and it will be 2011 before they start to show a real shift in the products that generate revenue for them outside of purely CDN services. From the date Limelight started to make this shift, it will have been over two years in the making.
For a long time, the biggest threat to Akamai's CDN business was that they didn't have any ecosystem offering or messaging around how they helped customers solve their video workflow problems. For years now, customers have been asking how a CDN can help them ingest, transcode, manage, monetize, protect and track their video content. As much as Akamai still talks about the number of servers in the market and the type of network architecture they have, that's not what content owners ask about. Content owners want help managing the complex video ecosystem as well as getting support for getting their content to devices that all seem to have their own special requirements.
In 2006, Akamai acquired Nine Systems in a deal valued at $160M in an effort to have a management platform for video. Akamai was thinking about the video workflow problem well before anyone else, but never capitalized on it. At the time, Nine Systems StreamOS product was thought to be that solution for Akamai but the product never materialized into a mass-market offering. While Akamai did do development work on Stream OS over the years, the company never got the traction for it that they were hoping for. That's part of the reason why over the past year or so, Akamai signed up so many OVP companies like Kyte, KIT Digital and Ooyala amongst others, so that they could simply resell or refer business to vendors that would help solve the video management problem. While no CDN has ever been good at reselling a third party product, Akamai did fill a crucial void in their video business with the deal they announced last week with Brightcove.
Unlike some of the other deals they have signed with other OVPs, Akamai won't resell Brightcove and instead will work with Brightcove to deploy some of their services as a seamless product offering. The two companies are down the road from one another and while both companies have had their differences in the past, they are putting that aside to work together. I'm already hearing about large media customers that both companies have met with, together, to jointly sell their services. Akamai's deal with Brightcove helps fill a really large void they had in the market and should benefit both them and Brigthcove very nicely. With Brightcove in place, Akamai needs to now message the solution properly in the market and better align their video delivery services along with Brightcove's media management offering.
Aside from these deals, I'm also hearing from Akamai partners that they have been really happy with Akamai's R&D group and getting additional functionality deployed into the network has been mush easier and a bit faster. In addition, it's clear that Akamai's network is still much stronger than other CDNs outside of the U.S. and Akamai's footprint in specific regions of the world is still unmatched. While Akamai places way too much value in their "distributed" network architecture for video, the real strength is the reach the network has outside North America.
Right now, Akamai has very little in the way of threats to their
business. Even with other CDNs going after their customers and in some
cases taking some of their business, none of them have yet to really
impact Akamai's revenue on a large scale. Akamai's margins on their
non-CDN products are so healthy that even the percentage of market share
the other CDNs do take from Akamai is offset by those services Akamai
defines as "value add".
But, that won't last forever. Many years ago, Akamai was the only game in town for large-scale video delivery. They owned the market and could charge whatever they wanted and got it. But after a few years, Limelight and Level 3 in particular became serious competitors and forced Akamai to have to reduce their pricing for their CDN services. Their entry into the market changed the pricing dynamics for all vendors. Akamai's competitors didn't take a large chunk of Akamai's share, but did force Akamai to reduce their pricing.
This is the thing to watch with the value add service component of Akamai's business. Even if companies compete with Akamai for only a portion of their value add service business and don't take a lot of market, share, they may drive pricing for these services down over time. A reduction of pricing in the market would have a bigger impact on Akamai as opposed to them losing a percentage of their business. I don't think this will happen anytime soon, not even next year and the good news for all companies offering services defined as value add is that there are lots of differences to the service. When it comes to delivering video, there are not that many components of the service. When it comes to services like dynamic site acceleration (DSA), application acceleration and verticals like commerce and advertising, there are lots of variables and many ways for vendors to up sell their product based on the differences in the offering.
While I don't see major threats to their business, Akamai really needs to improve on their marketing and messaging. Akamai also currently has a lot of senior positions open for jobs pertaining to video including a
Director of HD Strategy, Product
Line Director of video delivery, Senior Product Manager for streaming
and Quality Assurance Engineer for Streaming SQA amongst others. I'm
sure Akamai is hard at work trying to fill these positions and to me, it
is crucial they find an evangelist for video and their CDN product
line. It use to be that Akamai had some folks who were really in the
trenches and hands on with the technology and had the prior experience
in the industry. They knew this stuff and were out in the market sharing
info and when you had a question about video, you knew who at Akamai to
call. Today, they don't have this person, at least they aren't very public facing. They have some folks who fill
this role to a degree, but to me, they are more marketing folks who can
talk high-level, but simply don't have the hands-on experience.
I'm sure they do still have some of the right kinds of folks in-house,
but so far, they aren't positioning them as evangelists and the company
still has a policy against allowing them to comment on blogs or act as a
reference to the market. When was the last time you saw someone from
Akamai quoted in a news article who was not a C level exec or marketing
person? Akamai is the largest CDN and needs to start showing why,
sharing info about video adoption and talking about specifics. It's not
enough for Sagan to simply say each quarter that, "HD video is at a tipping
point", that's just fluff without any details. Share some specifics and all of a sudden it becomes a real message. Many times Akamai will say that they don't need to do much marketing or advertising as everyone already knows who they are, but that does not mean they know what they offer, especially with the value add services. To this day, I still have sales reps at Akamai tell me that my blog post entitled "A Detailed Look At Akamai's Application Delivery Product", explains that product better than any product sheet Akamai has on their own website. There is always more education you can do in the market, no matter how well your name is known.
Overall, I don't see any sign that shows Akamai's CDN business is slowing down. Right now, there are not a lot of major threats to their business and while I get asked all the time if Akamai's overall business can grow 10-15% next year, it's hard to say. I will say that those numbers don't sound unreasonable to me but I don't have as much of an insight into their overall business like I do with their CDN offering. What I would like to see Akamai improve on this year is their messaging to the market. It's not about how many servers you have; it's the problems you solve. It's not about your HD network; it's about all of the other services that go with the delivery of HD video that make that HD video valuable.
If you have specific questions about Akamai's business, put them in the comments section below and I'll be happy to give you my thoughts on it if I can.