Akamai makes money by helping media customers like ESPN, CBS, Viacom and MySpace deliver data intensive media content (e.g. images and videos) faster to internet users which means that some of the content you view when visiting these sites is delivered from a nearby Akamai server rather than the company’s own servers. We estimate that 31% of Akamai’s value comes from Media Content Delivery.
The worldwide demand for internet media is expected to increase significantly due to rising broadband penetration and growing prevalence of high-definition video (e.g. Hulu) which requires more bandwidth to deliver. Unlike Akamai’s Online Shopping Content Delivery business where Akamai offers its customers value added services like transaction security, the Media Content Delivery business has low barriers to entry which competitors like Limelight Networks, AT&T and Internap are taking advantage of.
Competitors that have lower bandwidth costs than Akamai (e.g. AT&T) are the primary threats to Akamai’s media business. We expect that Akamai’s margins will be under pressure from competition as HD demand rises.
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We forecast that Akamai’s Media Gross Margin will decline from 62% in 2009 to 56% over the forecast period. Within Akamai’s content on our platform you can see how Akamai’s stock price would be impacted if rising media competition further reduced Akamai’s Media Gross Margin. The Trefis price estimate for Akamai is $22.06 compared to a market price of $21.13 as of the close on Friday.
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