Mobile Traffic Explosion Creates Both Opportunity and Risk for Akamai

Akamai (NASDAQ:AKAM) is a content delivery company that delivers web content for its customers and also offers other value-added services like advertising solutions and site acceleration. It competes with other players like InterNAP Network Services (NASDAQ:INAP), Limelight Networks (NASDAQ:LLNW) and Level 3 (NASDAQ:LVLT) in this business and delivers close to 20% of global web traffic. Our price estimate for Akamai stands at $37.11, which is roughly 10% below market price.

Akamai stands to gain from current data trends. As internet usage accelerates, Akamai’s fundamental business drivers continue to improve. Notably, mobile data usage is growing at a faster pace than overall data usage, creating a few unique opportunities (and risks) for Akamai.

Mobile Data Growth

According to a recent study by Cisco, mobile data traffic grew by about 159% in 2010. Mobile data traffic could further grow at an average annual rate of 92% from 2010 to 2015, amounting to 6.3 exabytes per month by 2015. ^[1] A separate Cisco study indicated that global IP traffic could increase at an average annual rate of 34% between 2009 and 2014. ^[2]

Given the aggressive pace of mobile traffic growth, mobile networks are likely to face significant congestion and will thus require technological advancements from content delivery networks.

Opportunity… and Risk

So where is the opportunity for Akamai? Growth in mobile traffic is not simply a result of a shift in internet traffic from wired to mobile networks. What is happening here is that mobile networks have stimulated higher internet usage, beyond what might be possible with traditional wireline networks.

This is where the opportunity lies for Akamai. The company recently announced that it is partnering with Ericsson to speed up the mobile web service. ^[3] This deal is aimed at speeding up e-commerce, banking and enterprise applications. ^[4]

See our full analysis and $37.11 price estimate for Akamai

Drag the trend line in the modifiable chart above to see how changes in revenue per e-commerce (online shopping) customer can affect Akamai’s stock value.

Akamai also acquired Velocitude last year to strengthen its position in the mobile internet arena. With quite a few promising initiative on the horizon, what’s the risk for Akamai?

While mobile traffic has accelerated substantially, it still remains a relatively alien space for Akamai. Mobile traffic growth is both a result of stimulation of higher internet usage as well as the shift of some traffic from wireline to wireless networks. This shift of data usage could pose a risk for Akamai’s wireline CDN business if it does not quickly capitalize on mobile web growth.

So the risk of lower profits in some business segments looms. Traditionally, companies involved in internet traffic management have often helped each other out in the wireless internet space. As The Wall Street Journal notes:

“Companies that handle Internet traffic have long struck “peering” arrangements, in which they agree to carry each other’s traffic, typically at no cost.” ^[5]

The FCC’s net neutrality rules are partial in the sense that they allow wireless networks to implement methods to control wireless traffic. As a result, networks could charge additional fees for faster content delivery, thereby leaving those with small pockets at a disadvantage.

So how might this play out for Akamai? Will a given company choose to pay wireless service providers like AT&T (NYSE:T)  and Verizon (NYSE:VZ) an extra fee for additional bandwidth, or will they use Akamai’s CDN services to leverage its caching method for faster content delivery? More flexibility in managing data traffic could also prompt wireless service providers to incorporate their own CDN-like technologies, thereby providing new competition for Akamai.

Nevertheless, if Akamai can capitalize on the opportunities sparked by mobile web traffic growth, the company stands to see upside to its revenue per customer metrics.

1. Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2010–2015, Cisco Study, Feb 1 2011 [↩]
2. Cisco Visual Networking Index: Forecast and Methodology, 2009-2014, Cisco Study, June 2 2010 [↩]
3. Ericsson enlists Akamai to speed up the mobile Web, InfoWorld, Feb 14 2011 [↩]
4. Surprise! Akamai’s Mobile Play Isn’t About Video, GigaOm, Feb 15 2011 [↩]
5. Web-Traffic Spat Over Netflix Highlights New Tensions, The Wall Street Journal, Nov 30 2010 [↩]