Akamai & the CDN Price Wars

Akamai Technologies (AKAM) investors are the stock market’s walking wounded. Over the last month, the stock has plummeted to about $33 a share, wiping out over $3 billion in market capitalization. The slide began soon after the company announced its second quarter earnings, indicating that it would have to spend more, and its gross margins were going to decline. The reason: price wars.
For a very long time, Akamai, thanks to its arsenal of patents and early technological leads, had a near dominant market share in the content delivery network sector. It was able to charge a lot of money for delivering bits more reliably. Their dominant position meant that investors plowed a lot of money into their stock, pushing it to nosebleed levels. Akamai got priced for perfection, where even a slight burp could send the stock tumbling.
That burp has come with the increase in the number of competitors, each one trying to cash in on the boom in online video and other digital content. Limelight Networks (LLNW), Level 3 (LVLT), Internap (INAP), CDNetworks, along with new entrants Panther Express and EdgeCast Networks are some of the CDN players currently involved in a catfight with Akamai. (Their stocks are slumping as well.)
We have heard from various sources that there is a price war going on, with some players being more aggressive in luring business away from Akamai. Why? because as HipMojo correctly points out the basic CDN business is getting commoditized.
The action now revolves around adding new services on the basic commoditized CDN service, especially when it comes to online video. The good news is that Akamai’s management knows that, and bought Nine Systems and Red Swoosh to address those opportunities. The bad news is that some of its basic CDN customers, for example, Move Networks also offer similar value added services. This conflict management will be Akamai’s dilemma in the near future. Not that it helps their investors much.
Related Stories
1. Level 3 buys Savvis CDN Business.
2. Limelight Raises $130 million.
3. Our previous Akamai Coverage
Also read, 24/7 WallStreet about why Internet infrastructure companies are not doing well despite an online video boom.

The first is the the service providers are in such fierce competition for business in a market that Wall St. views as hot that margins are being compressd by price cuts. The other possibility is that, after two years of extremely rapid expansion, video streaming and consumption is flattening. Neither set of circumstances is good for these business, and neither is likely to go away.