Akamai Bolsters Its Value Added Services With Acquisition Of Xerocole

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Content Delivery Network (CDN) giant Akamai (NASDAQ:AKAM) recently acquired Xerocole Inc., a Colorado-based Domain Name System (DNS) technology company. [1] Even though specific terms of the deal were not disclosed, Akamai states that the acquisition was completed in a cash transaction that is not material to Akamai’s financials. This deal is the latest in a long list of acquisitions the company has made over the years in order to improve its value added services. We believe that Akamai’s strategy of focusing on its value added services in addition to its core CDN services will benefit the company in the long run.

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Why Xerocole Is A Good Fit For Akamai

Xerocole was founded in 2010 and is a provider of recursive Domain Name System (DNS) functionality. This acquisition will help Akamai in expanding its own DNS product offerings beyond the existing authoritative DNS products and better fulfil the needs of its customers and network partners. [1] The DNS is an integral component in the functioning of most Internet services because it is the Internet’s primary directory service. [2] It translates domain names, which can be easily memorized by people, into numeric IP addresses and quickly directs the end users to their websites. Akamai has stated that Xerocole’s intelligent recursive DNS technology helps provide carriers with security, speed, and the ability to dynamically and flexibly set DNS policy and user preferences. [1]

Additionally, Xerocole’s technology supports IPv6, the latest version of the Internet Protocol (IP) that provides an identification and location system for computers on networks and routes traffic across the Internet. [3] The company’s DNS recursive resolver also supports Domain Name System Security Extensions (DNSSEC). [4] DNSSEC is used for securing different types of information provided by the DNS as used on IP networks. [5] Internet security is a very sensitive issue for clients since the recent data breaches at Sony Corp, Target Corp and managed health care company Anthem Inc.

The Growing Importance Of Value Added Services To Akamai

Pure-play CDN business is becoming increasingly commoditized. Akamai is facing increased competition from rivals such as Level 3, Limelight, Edgecast, and Amazon which has heightened CDN pricing pressure in recent years. However, Akamai has been bolstering its performance and has been improving its value added services through new launches and acquisitions. In addition to Xerocole, Akamai has acquired companies such as Prolexic, Verivue and Blaze in the past. This will help it mitigate the impact of the Pure-play CDN commoditization and will help it grab a bigger share of the consumers. 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 security solutions, app accelerators, delivery of targeted advertising and cloud-based services for 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. [6] This suggests that despite the commoditization of content delivery business, Akamai can improve, or at least sustain, its margins in the coming years.

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Notes:
  1. Akamai Acquires Xerocole, March 2, 2015, Akamai Press Release [] [] []
  2. Domain Name System, Wikipedia.org []
  3. IPv6, Wikipedia.org []
  4. Xerocole Makes DNSSEC Safer and Cheaper for Carriers to Deploy, Xerocole Press []
  5. Domain Name System Security Extensions, Wikipedia.org []
  6. Akamai’s SEC filings []