4 Key Trends for Akamai
IBM (NYSE:IBM) recently partnered with Akamai (NASDAQ:AKAM) to accelerate the delivery of web/cloud applications for customers by integrating its WebSphere technology with Akamai’s application delivery network. [1] The company will also be involved in authentication management for content providers looking to make content available on multiple devices. [2] As Akamai continues to push ahead, we take a look at the broad trends impacting the company’s stock value. Akamai competes with other players like InterNAP Network Services (NASDAQ:INAP), Limelight Networks (NASDAQ:LLNW) and Level 3 (NASDAQ:LVLT).
Our price estimate for Akamai stands at $37.11, roughly in line with market price.
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Traction of Value Added Services
Akamai’s value proposition has evolved beyond being the fastest content delivery network. As competitors grow increasingly capable of fast content delivery at similar prices, Akamai has positioned itself as a full services provider, touting its ability to offer multiple value-added services, such as the delivery of targeted advertising on behalf of its customers. Value-added services now account for more than 50% of Akamai’s overall revenues and have higher gross margins compared to basic content delivery.
Media Explosion
Media content is rising at a significant pace as more video content moves online and video quality increases (HD video). Key services stimulating this trend include Netflix, Hulu and YouTube. Although growing media demand is an opportunity, it is also a source of gross margin pressure, since one of Akamai’s largest costs is the cost of bandwidth to deliver data. Akamai passes on some of these costs to customers in the form of a bandwidth usage-based pricing structure; however, Akamai’s pricing will be under pressure from volume discounts and competition from other content delivery networks.
Price Competition
Akamai has historically charged premium prices to its customers for fast and secure delivery of their web content. However, the company is becoming increasingly competitive on pricing, particularly on video content, in an effort to attract more customers and traffic to its network. In several deals, it has even outbid its competitors on price. This is likely to win more customers for Akamai but may put pressure on margins.
Mobile Web & Cloud Computing
Mobile internet traffic is likely to grow at a much faster pace compared to traditional wire-line web traffic. Some of the steps taken in this direction by Akamai include its acquisition of Velocitude and partnership with Ericsson. However, it still remains a relatively alien space for Akamai. In addition to this, Akamai will look to take advantage of the trend towards cloud computing among enterprises.
See our complete analysis of Akamai stock here
Notes:- IBM Teams With Akamai to Accelerate Applications Across the Web, and From the Cloud to the Enterprise, IEWY News, Apr 17 2011 [↩]
- Akamai Jumps into “TV Everywhere” with Authentication Services, Beet TV, Apr 15 2011 [↩]