Akamai

Akamai Technologies, provides technology solutions for advanced content and application delivery over the internet.

Firm Information

Akamai Technologies, headquartered in Cambridge, Massachusetts, provides technology solutions for advanced content and application delivery over the internet.  The company was formed in 1998 by MIT graduate Daniel Lewis with the help of Tom Leighton, Jonathan Seelig and Preetish Nijhawan.

The company provides services to businesses, government agencies and other enterprises to help them perform effectively in their online businesses.  Akamai has created an operating environment on the web which allows their client’s web pages to manage demands for rich and dynamic interactive content.  Certain high quality information from their clients, such as music streamed through iTunes, and videos on sites like YouTube.com, run their data streams through Akamai’s serves in order to optimize streaming speed.  Nearly 20% of all internet traffic is facilitated through Akamai’s servers. 

Competitive Strengths & Advantages

Akamai has a strong customer base composed of companies in various industries, including aviation, manufacturing, retail, government, logistics, media, blue chip, and professional sports leagues.  As of December 31, 2007, Akamai’s customers included Audi, BestBuy, FedEx Corporation, Hitachi, L’Oreal, Microsoft, MTV Networks, National Basketball Association, Nintendo, and Google.  These major corporations are in addition to another 2500 customers that Akamai serves.  Akamai is constantly adding more businesses and government agencies such as its fairly recent customer New England Patriots.  As Web 2.0 and the internet become a more integral part of individual’s lives, the request for high quality content will only increase demand for Akamai’s services.

A second competitive advantage for Akamai is its huge Research and Development (R&D) budget.  Akamai spent $44.1 million, $33.1 million, and $18.1 in 2007, 2006 and 2005 respectively, on R&D.  Akamai, as a technology company, must focus heavily on R&D because of the rapid rate at which it can change.   One of the products that Akamai developed in 2007 was TheHDWeb allowing for online HD content to be delivered at qualities 720p, 1080i and 1080p .  In addition, R&D has allowed Akamai to expand its server distribution to over 30,000 servers worldwide, becoming the world’s largest computing platform.  With their own servers interconnected with others companies, Akamai is said to be indirectly connected with nearly 85% of internet users in the world!

By far the greatest strength of Akamai is the EdgePlatform delivery system that it employees for its Content Delivery Network (CDN).  Akamai uses EdgePlatform on every customer to develop mirrors their content.  After this, algorithms determine the fastest and most efficient route to deliver content to users from the 30,000 servers spread across 70 countries.  EdgePlatform allows Akamai to monitor high-traffic and troubled areas on the CDN in real time in order to route traffic around these problems in order to deliver content as fast as possible to the end user.  By eliminating long routes and delivering content from centralized public servers, users are able to avoid loss in packets of information and latency (delay between query from user and server response).  In addition, EdgePlatform enables startup firms to cut the fixed cost of servers, and instead spend capital on the essential parts of their businesses.  These firms pay a variable rate to Akamai dependent on the amount of data that is delivered from their sites.

Future Opportunities

Growth due to acquisitions is something that many companies experience, including Akamai.  In April of 2007, Akamai acquired Red Swoosh, a file sharing company, for $15 million in stock.   is no different for Akamai.  Red Swoosh developed a peer-to-peer file sharing protocol that converts users into consumers and providers, much like BitTorrent.  Essentially, users download files from other users who have previously acquired the content.  By apply this technology standard, users become the delivers of content, causing much less strain to servers.  Besides helping pressures on its servers, this acquisition gives Akamai a foothold within distributed networking, which is gaining increasing popularity day by day; peer-to-peer file sharing is projected to grow around 400% compounded annually in the next five years and Red Swoosh allows Akamai to harness that growth. Another 2007 acquisition was Netli, a privately held company.  Netli’s technology enhances online application performance by increasing deliverable speed.  In addition, Akamai completed its acquisition of Acerno, a privately held company on November 3, 2008.  Acerno enables more relevant data for advertising which will be used by Akamai for to enhance its advertising solutions.

Akamai has also introduced many other service innovations which will provide opportunity for growth in the future.  The most note-worthy is StreamOS; this technology helps clients to distribute their content on the web, gives higher quality live streaming for use with Adobe’s Flash, delivers High Definition Internet Video and also helps deliver content for IP-based applications over the internet.  The numerous acquisitions and new innovations due to superior R&D is the only way Akamai can keep up with competitors. 

Akamai is also beginning to move into the Social Networking market, which has huge potential for growth.  There are close to 373 million social network users worldwide as of 2007 and this figure will be close to 1 billion by 2012.  Established networks like LinkedIn, MySpace and Facebook are still expecting robust growth and to keep up with the users, they will hire firms like Akamai to help deliver on ever increasing consumer web content demands.  Akamai’s social media acceleration technology has helped one of their customers, Tagged.com decrease page load times by 150% in the US and 400% internationally.  With increasing users of social media sites, Akamai is set to literally control the internet. 

Recently, Akamai Technologies sued one of its competitors, Limelight Networks, for patent infringement on a technology which allows content to be delivered from unlimited points.  Akamai won the suit, which caused many of Limelight’s operations to be shutdown.  By pursuing other viable patent infringements, Akamai will have the opportunity to take a larger market share away from its competitors.

Threats & Weaknesses

The biggest threat for Akamai is the intense competition it faces.  Akamai is currently in a severe pricing war with its competitors because their technology is not differentiable from that of its competitors.  Akamai currently charges “burst” charges when customers exceed their allotment.  Other firms, such as Level 3, do not have these charges and if customers decided to switch because of the penalty, Akamai’s revenues would sink by 30%.  In addition to this, Akamai’s pricing structure has come under increasing pressure since the development of other CDN services with no premium pricing and independent companies, such as Amazon, allowing customers to leverage its large network to create a customized CDN.  This fierce competition has caused a 20% decline in pricing for large file downloads and a 15% decline for prices of large volume deals.

Businesses with the required resources have begun to develop their own in-house delivery systems in order to cut out middlemen like Akamai.  Companies such as YouTube, MySpace and Google have perused this self-sufficient movement recently for different divisions of their business.  In addition to this, rapid technology change means that some new competitors could develop a far superior CDN than Akamai’s.  These competitors will be able to provide new and better solutions before Akamai, causing a general decline in both market share and revenues.   

Akamai is highly concentrated on the US market, with 77% of its revenues coming from this market.  The US is growing at a slower rate than the international market, which means Akamai must extend its customer base in order to survive in this market.  The US market grew close to 57% in internet traffic from 2007-2008 but South Asian market grew over 100%.  The concentration increases exposure to local factors and high volatility, and causes Akamai to miss out on higher revenues from Europe and the BRIC (Brazil, Russia, India and China) nations. 

Opinion

No doubt Akamai is a great company.  It uses market power and its resources effectively, which is why it is a behemoth in the industry.  However, competition is intense and every business wants to cut costs by riding themselves of middlemen like Akamai.  So far, Akamai has shown great resistance to the market by adapting and innovating to the changing environment in order to meet the needs of users.  Since innovation is key in technology, and Akamai has an impressive R&D department, it will be very interesting to see how Akamai will handle the new CDN businesses that keep appearing.  From a qualitative perspective, Akamai is the not best long term investment because the industry changes too quickly and if the company does not keep up with this change, it could be very detrimental.  In the short run, Akamai is very attractive qualitatively because of the increased use of rich content on the internet from social media to movies to TV shows.  It has been shown that there is increasing number of teenagers using the computer for entertainment instead of the classic television, mostly due to the fact that higher quality videos load faster due to technology provided by Akamai.