CDNs, They Are Hot

By Allan Leinwand
The mid-1990s content delivery networking technology deployed by Akamai, Digital Island (now part of Savvis) and Speedera (acquired by Akamai) to distribute content close to the consumer edge of the Internet should be yesterday’s news given the bandwidth boosts, and the ever increasing speeds, both on the edge and the core. And yet, the business is in full bloom, and attracting the attention of private equity crowd.
Why? Because the current digital media boom means bigger, fatter files and more content online. CDNs don’t just deliver small banner ads anymore, but rather YouTube videos, movies from companies like Apple and Amazon and megapixel pictures via MySpace. It costs content providers money to distribute this content and CDNs can save money on Internet peering fees and server load.
Wall Street saw this trend early on, and you can see that in scorching stock performance of Akamai Technologies: Akamai stock price is up 400% in past 12 months, and market capitalization has topped $7 billion. Its’ profit/earnings ratio of about 25, a very nice multiple and a comparable for others in the market to dream about.

Vitalstream, a video streaming CDN, went public on NASDAQ in June and today has a current market capitalization of $188M. Savvis has a $1.4 billion dollar market capitalization, nearly doubling from a year ago.
Private equity guys are paying attention. CacheLogic, a company focused on peer-to-peer CDNs, just got $20M in funding. Limelight Networks, a CDN focused on video and multimedia content just raised $130 million from Goldman Sachs.
What the market sees is that Akamai is vulnerable on two fronts: innovation and expense. On the innovation side, Akamai does not appear to be building the CDN of the future that supports large file distribution, web services at the edge and peer-to-peer technologies. As an example, just look at how Limelight Networks built a cost-effective architecture that exploits their weakness in large file distribution capabilities.
On expenses, they have a large network deployment that requires significant expense to keep operational (and most say unnecessary with today’s Internet). It’s a classic innovators dilemma that the smaller players should be able to exploit if they focus on execution and customer acquisition.
Akamai is paying attention and is using their patent portfolio and threats of litigation to slow the smaller players down. We’ll see if they can use their current market capitalization to keep the smaller players down while they innovate future CDN services the market will require.
Allan Leinwand is a venture partner with Panorama Capital and founder of Vyatta. He was also the CTO of Digital Island.