Akamai (NASDAQ:AKAM) seems to be getting pretty aggressive with acquisitions. In what will be its fourth acquisition in less than a year, the dominant content delivery network (CDN) player announced recently that it has entered into a cash transaction to acquire Verivue, a much smaller firm that specializes in licensing CDN software to network operators. The acquisition will help Akamai bolster and accelerate the time to market of its recently launched Aura Network Solutions product line, a licensed CDN software service that enables service providers to build their own CDN capabilities using off-the-shelf hardware. With telecom carriers increasingly looking to build their own CDNs, this acquisition will help Akamai add value and maintain its relevance within carrier networks while competing effectively with rivals such as Edgecast and Limelight Networks (NASDAQ:LLNW).
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Historically, Akamai and network operators have been great pals. Akamai’s edge servers, that were installed within a ISP’s network, helped operators reduce their bandwidth costs as content could be cached at the edge and closest to the user, reducing the need to re-transmit data every time a user sent a request. Not only did this help enhance user experience but also avoided clogging of networks and saved valuable bandwidth for the carriers. Akamai, for its part, would get access to millions of subscribers and free network bandwidth.
However, over time, carriers have 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. Network operators have started working on setting CDN federation standards that will allow them to collaborate and connect their CDN networks. A number of carriers around the world have already started building out their own CDNs, including Verizon and AT&T.  
Akamai has long resisted entering the licensed CDN (LCDN) market because this makes it easier for telecom carriers to compete effectively with itself for content providers. However, with ISPs increasingly getting serious about their CDN ambitions, Akamai found its value within the carrier networks in danger. 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 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 any time soon. 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 flies 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. (see Verizon’s Christmas Launch Of Redbox Instant Will Drive Data Usage) With their own CDNs, 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 Akamai, which relies on business deals with content providers to cache their content close to the users.
The Verivue acquisition as well as the Aura product launch may therefore seem like a defensive move, but Akamai’s core CDN businesses are already under 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 businesses, which have served as a much-needed diversification so far, 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)Notes: