Akamai Takes Strategic Steps With Focus On Security Solutions Business

Content Delivery Network (CDN) giant Akamai (NASDAQ:AKAM) recently announced a new strategic alliance with industry-leading managed security services firm Trustwave. ^[1] The company also announced the opening of a new Security Operations Center (SOC) in Bangalore, India. ^[2] Security solutions is an integral part of Akamai’s value added services and the company is clearly focusing on improving its capabilities on this front. We currently have a price estimate of $70 for Akamai, which implies a discount of around 4% to the market price.

See our complete analysis for Akamai here

Akamai Bolsters Its Security Solutions Capabilities

Akamai is a leading Content Delivery Network (CDN) provider and delivers between 15-30% of all Web traffic. ^[3] The company has also positioned itself as a full services provider by offering multiple value added services such as the delivery of targeted advertising, cloud-based services and security solutions to its customers. Akamai has made two big strategic moves in the last few days with a focus on security solutions. The company has decided to collaborate with Trustwave, a Chicago-based information security company. Trustwave comes to the table with its own set of cloud and managed security services, integrated technologies and a team of security experts, ethical hackers and researchers. According to Akamai, the two companies’ collaborative efforts will be designed to help their customers fight more effectively against a wide range of malicious online activities through vulnerability assessment, denial of service prevention and incident response. The combination created leverages technology solutions and security services from each company’s portfolio and they will provide a broader set of cyber security protections to the customers, meeting a wide range of demands in a dynamic cyber security threat landscape. Security scanning and testing, Distributed Denial-of-Service (DDoS) attack protection, Incident response and readiness, and Web application security are just some of the services and products included in the first phase of the collaboration. The collaboration gives Akamai an opportunity to publicize its product portfolio to Trustwave’s 3 million strong customer base, which is spread across 96 countries. ^[4] A recent report by Forrester Research predicts that at least 60 percent of enterprises will encounter a breach of sensitive data in 2015. ^{[5] [1]} Akamai senses an opportunity and is enhancing its capabilities in order to better serve existing and potential clients.

Akamai also announced the opening of a new Security Operations Center (SOC) in Bangalore, India. The SOC adds significant bandwidth capacity and 24/7 expertise to Akamai’s extensive global cyber defense network. ^[2] The Bangalore site is expected to become a major SOC for the company outside of the United States and will be at full capacity by year end. Looking at the current trends in DDoS attacks, the location of the SOC has strategic value. Akamai’s Q1 2015 “State of the Internet Security Report” states that China was the top source country for DDoS attack traffic during the quarter, with more than 22 percent of recorded DDoS attack source traffic originating from the country. A DDoS (Distributed Denial-of-Service) attack is an attempt to make a machine or network resource unavailable to its intended users. ^[6] DDoS attacks have become very common, with users encountering 28 such attacks each hour as of 2014. ^[7]

The Growing Importance Of Value Added Services To Akamai

The 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 by improving its value added services through collaborations, new launches and acquisitions. Akamai has acquired companies such as Xerocole, 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 acceleration, 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. ^[8] 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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1. Akamai and Trustwave Form Strategic Alliance to Protect Businesses from Online Threats, June 2, 2015, Akamai Press Release [↩] [↩]
2. Akamai Continues Network Expansion in Asia with New Security Operations Center in Bangalore, India, May 20, 2015, Akamai Press Release [↩] [↩]
3. Facts & Figures, Akamai [↩]
4. Our Story, Trustwave [↩]
5. Planning For Failure, February 11, 2015, Forrester [↩]
6. Denial-of-service attack, Wikipedia [↩]
7. DDoS Attack Volume Escalates as New Methods Emerge, eWeek [↩]
8. Akamai’s SEC filings [↩]