Wall Street Questioning Akamai’s CDN Business After Company’s Q1 Earnings Call

When Akamai announced during their Q1 earnings call last week that the rate of traffic growth on their network from media and entertainment customers had “moderated” for the second quarter in a row, many on Wall Street were left scratching their head about what’s causing the decline. Since then, I’ve gotten a lot of calls and questions about this and while only Akamai knows for sure what’s causing the decline in traffic growth, here is what I am hearing about traffic patterns from speaking to content owners and other CDN providers.

Some analysts I spoke to were quick to say that Akamai isn’t losing wallet share to competitors, which would be one of the obvious ways for any CDN to quickly see a decline of traffic growth on their network. While this may or not be the case (we don’t truly know since Akamai does not disclose how many CDN customers it has from one quarter to the next), Akamai did say that when it comes to renewals, “it’s a very competitive space out there, especially in the volume-driven solutions” and that, “competition has something to do with it,” with regards to pricing for renewals.

But whether or not Akamai is actually losing wallet share with CDN customers I can’t tell. Each quarter I see Akamai lose some contracts to competitors but then I also see them take business from the same competitors, in the same quarter. Without knowing how many CDN customers Akamai has, especially for video, and what percentage of revenue those customers make up, putting percentages on wallet share is a guessing game. But if Akamai is not losing wallet share, why is traffic on their network not growing as fast as previous quarters? Even if pricing is lower, that would not impact the rate of traffic growth, it would only impact revenue.

If other CDNs were seeing the same decline in traffic growth, then this would all make sense. But so far, all of the CDNs I have spoken with aren’t seeing the rate of traffic growth on their network decline, they are seeing the opposite. And content owners keep telling me their traffic is growing at a faster rate than last year. In fact, six days before Akamai’s earnings call, one of Akamai’s larger CDN customers, MLB, put out a press release detailing just how fast their traffic grew this year when compared to last. Even Akamai gave out traffic numbers for the March Madness tournament saying there was a, “63% increase in total visits over 2010“. So with Akamai having a lot of large M&E customers like MLB.com, whos rate of traffic growth is accelerating, why isn’t Akamai seeing that on their network? It’s puzzling.

When it comes to revenue, Akamai did say that revenue from their media and entertainment customers, “declined 4% sequentially in the first quarter, driven by contract renewals at lower price points from some of our largest media customers.” That all makes sense and why this has spooked some on Wall Street I don’t know as it’s not uncommon that Akamai would have to cut pricing for contract renewals with some of their largest customers. That’s simply the nature of the business, but pricing declines does not explain traffic growth declines. If anything, a cheaper price means that a customer should push more volume, not less, since this is a volume based business. And in order to even get the lower pricing, customers have to show they are growing traffic at a faster rate to qualify for a discount.

Akamai did say that they, “remain confident in the long-term growth potential” for their “volume business” and while that is good, it still does not explain why they have reported what they have over the past two quarters. So what exactly is going on, I don’t know, but here’s what you want to keep an eye on. Level 3 reports earnings today and Limelight reports earnings on Thursday and if neither one of them talks about the rate of traffic growth slowing on their network, then Wall Street is going to question Akamai even more on what they reported.

If Akamai is in fact losing some wallet share, expect them to lower their pricing again to get that market share back. We saw this in 2009 when they cut pricing and then their M&E revenue grew nicely for a few quarters after and we just might see them have to do it again. Akamai set the tone last quarter when they talked about a reset in pricing, but most thought that the volume commits or the expected volume associated with those renewed contracts would drive acceleration in traffic growth faster than it is.

Content owners have been pretty open discussing with me their rate of traffic growth and tell me that on average, they expect traffic to grow about 60% this year, which would be higher than the 45-50% rate of growth they saw last year. If that numbers sticks, and it’s too early in the year to know for sure, Akamai “should” make out ok in the second half of this year. But if Limelight and Level 3 don’t discuss any kind of traffic growth slowdown on their earnings calls, then Akamai is really going to have a hard time convincing Wall Street that they can grow their volume based business in the second half of this year.

Updated 3:31pm ET: During Level 3’s earnings call, the company said they are not seeing any rate of decline in the growth of traffic on their network. If Limelight says the same thing during their earnings call on Thursday, then it’s clear that Akamai is in fact losing wallet share.