For Akamai, What’s Driving Growth In Average Revenue Per Media Customer?
Media content delivery remains Akamai‘s (NASDAQ:AKAM) biggest value contributor. We expect the company to grow its media customer base, as well as revenue per media customer (which is a mix of content delivery and value-added solutions), significantly over the course of next six to seven years. In this analysis, we’ll look at driving factors behind revenue per customer growth. The figure stood at an estimated $584,000 in 2013 and we expect it to almost double going forward. That implies a doubling of data usage and a further increase in penetration of value-added solutions, both of which are to be partially offset by pricing declines. There can be almost 20% upside to our price estimate if Akamai can increase its revenue per media customer to $1.5 million in the next six to seven years. That scenario may not be unlikely, considering the recent demand for security solutions, site acceleration and the dramatic increase in video data.
Our price estimate for Akamai stands at $61.70, roughly inline with the market price.
See our complete analysis for Akamai here
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Increasing Internet Usage
Consumers are spending a great deal of their time on the Internet and the big media companies are taking steps to move their content offerings online. For instance, Hulu, a company jointly owned by NBC, News Corp and Disney, allows users to see full-length feature clips and TV shows online, giving users the ability to watch what they want when they want. Netflix, an online streaming company, is expected to increase its U.S. streaming subscriber base to roughly 39 million by the end of 2014, accounting for around one-third of the country’s households. Amazon has seen great success with its Prime service which, besides offering free shipping, allows subscribers to stream TV shows and movies. In addition, companies such as DirecTV, Comcast, Dish Network as well as individual premium networks such as HBO have launched their own streaming services. The changing landscape of media consumption will drive significant growth in data usage in the coming years. Such a transition will drive a very high degree of growth for content delivery network providers such as Akamai. Aiding such a transition is the growth in Internet users and broadband penetration. The number of Internet users worldwide has more than doubled from the 2008 levels to about 2.8 billion at the end of 2013. The proliferation of mobile devices has contributed hugely to that growth as about half of these users access Internet from the move.
Growing Broadband Speeds
Akamai’s Q2 2014 ‘State of the Internet’ report states that global average broadband connection speeds grew by 21% sequentially in Q2 2014, and crossed the threshold of 4 Mbps for the first time. [1] Additionally, there are several countries with average broadband speed of over 15 Mbps, which is considered as a minimal threshold for 4K (ultra HD) transmission. User demand for high quality content for these new formats, which require higher bit rates than normal, means that bandwidth requirements are likely to increase significantly in the coming years. With the adoption of 4G LTE rising in developed markets and carriers in emerging markets looking to transition to the standard, mobile data usage is also set to surge.
Pricing Pressure May Act As An Offsetting Factor
Pure-play CDN is rapidly becoming commoditized, with increasing competition from rivals such as Level 3, Limelight Networks, Edgecast, and more recently, Amazon. This has heightened CDN pricing pressure in recent years. However, the fact that Akamai has been bolstering its performance and security value-added solutions through new service launches and acquisitions will help it grab a bigger wallet share of customers as well as mitigate the impact of CDN commoditization. These services, which have higher margins than content delivery, have grown to account for almost 60% of Akamai’s revenues in recent quarters. Among the various value-added solutions that Akamai sells, security products are seeing the fastest growth. Akamai’s margins have also benefited from recent network investments, which have lowered bandwidth and co-location costs as well as increased efficiency in content delivery.
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