Akamai Mid Year Review: Media Division Is Bothering The Company

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Akamai’s stock has been relatively flat year to date as the company has reported steady financial results backed by modest increases in revenue. However, a decline in media division revenues is a cause of concern for Akamai. This reduced growth has occurred as major customers including  Apple have been  diverting an increasing amount of their traffic from Akamai to their own Content Delivery Networks (CDNs). There is a possibility that these big clients could divert all of their traffic to their internal delivery networks on an accelerated schedule. Companies such as Netflix and Google were able to develop sustainable networks at a fast clip, and this does not bode well with Akamai. Revenue from Akamai’s six biggest technology company’s accounted for just 11% of its net sales in Q2 2016, down from 18% in the year ago period. The shift appears to be a permanent one and the media division is the biggest segment for the company, accounting for over 50% of the revenues. This is why the company needs to augment this division quickly and effectively.

Akamai may be able to increase the number of its media customers going forward, but what matters is the magnitude of the business they’ll provide. The company would rather want to hold onto one significant clients rather than focusing on adding smaller online businesses to its customer base. Historically, there has always been the danger that Akamai’s largest clients could gain sufficient scale to favor their own CDNs.  And Akamai has always leveraged value-added services to induce them to stay. Clearly, these incentives to stay have lost their power, at least to a degree.  The company is sure to be looking for alternatives.

AKAM mid year review

 

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Akamai
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