Akamai’s Aura Launch Shows Carrier Dominance

by Trefis Team
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Akamai (NASDAQ:AKAM) recently launched “Aura Network Solutions,” a line of managed and licensed CDN offerings aimed at fixed-line and wireless operators. For now, Akamai is only offering managed CDN but plans to release the licensed version for trials next month. This is a departure from Akamai’s traditional services-based approach and will let carriers develop their own CDN offerings using Akamai’s software. While not an industry first – competitors Edgecast and Limelight Networks (NASDAQ:LLNW) already have operator-based products in their armory – the entry of the largest CDN player in the space shows huge influence that carriers can have on any market that uses their network.

See our complete analysis for Akamai stock here

Operators Flex Their Muscles

Historically, Akamai and network operators have been great pals. Akamai’s edge servers are installed within a ISP’s network that helps operators reduce their bandwidth costs as content can be cached at the edge and closest to the user, thereby reducing the need to re-transmit data every time the user sends a request. Not only did this help enhance user experience but also avoided clogging networks and saved valuable bandwidth for the carriers. Akamai, on the other hand, would get access to millions of subscribers and free network bandwidth.

However, over time, carriers realized that since they own the network, they could develop CDNs of their own and monetize every bit of the huge video traffic that ply through their pipes. As industry watcher, Dan Rayburn, noted back in June 2011, a group of carriers and telcos plan on coming together to form a federated CDN group that will set the standards required for them to connect their CDN networks. [1] A number of carriers around the world have already started building out their own CDNs, including Verizon and AT&T. [2] [3]

Akamai has resisted entering the market for long because this makes it easier for telecom carriers to compete with Akamai for content providers. However, with ISPs increasingly getting serious about their CDN ambitions, Akamai found its value within the carrier networks diminishing. Moreover, smaller competitors such as Limelight and Edgecast have been providing similar carrier-based products for resale. So it wouldn’t have been long before Akamai found itself competing with the big telcos for market share with hardly any leverage on the carriers.

Akamai Addressing Changing Market Dynamics

It can be said that it will be tough for any carrier to build out a full-scale CDN that will address all its needs to the extent that Akamai becomes redundant. But all indications show that the market may be headed in that direction in the long term. Carriers are increasingly looking to control the content that plies through their pipes and building out a CDN is a means to an end.

Verizon recently announced that it will launch its own streaming service in partnership with Redbox, and we expect other telecom providers to follow suit. With their own CDN, carriers such as Verizon will have a greater say in the content deals they need to sign for their streaming services. That could spell doom for other streaming providers such as Netflix which pays a high premium for its content obligations.

Moreover, carriers may also choose to throttle bandwidth in their own favor, disregarding all the net neutrality rules. If you think this is absurd, you need to look at the recent AT&T proposal to charge app developers for their customers’ data use which may also see it regulating its data speeds in favor of its premium customers. [4]

As for Akamai, its core CDN business is already under a huge threat of commoditization from many rivals that have sprung up. It may as well let the carriers join the fray while still maintaining some kind of leverage in the space. Meanwhile, it should look to strengthen its high-margin value added business through more acquisitions such as the recent Cotendo and Blaze deals. (see Akamai’s Cotendo Deal Would Add Margin Upside & Growth to Current $33 Value)

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Notes:
  1. Telcos And Carriers Forming New Federated CDN Group Called OCX, Streamingmedia.com, June 27th, 2011 []
  2. AT&T Intros New Cloud Based CDN Services, Telecompetitor, June 23rd, 2011 []
  3. Verizon Launches Digital Distribution Utility, Telecompetitor, April 11th, 2011 []
  4. AT&T’s Terrible Plan to Bill App Makers for Your Data Use, February 28th, 2012 []
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