With Cotendo Deal, Akamai Takes Out a Competitor & Gains Mobile Acceleration Technology
Akamai (NASDAQ:AKAM) is in an advanced stage of talks to buy out Cotendo, a smaller Israeli rival that may pose a serious threat to Akamai’s value-added services business, for more than $300 million according to a report published in the Calcalist Financial daily Sunday. [1] Founded in 2008 and launched in March of last year, Cotendo has managed to raise over $36 million in funding from its investors Sequoia Capital, Benchmark Capital and Tenaya Capital and also has the backing of strategic partners such as Citrix, Juniper (NYSE:JNPR), Google (NASDAQ:GOOG) and AT&T (NYSE:T). The private company has an impressive list of customers that use its dynamic site acceleration (DSA) and application acceleration services, including some big names such as AT&T, Facebook and Zynga. We believe that Akamai is looking to acquire Cotendo to remove one of its fastest growing competitors which is hurting its profit margins while gaining access to its customer base and mobile acceleration technology.
Our price estimate for Akamai’s stock is $31, about 15% higher than the market price.
See our complete analysis for Akamai stock here
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Cotendo’s AT&T deal threatened Akamai
With the content delivery market no longer an Akamai monopoly after the entry of other Content Delivery Networks (CDN) such as Limelight Networks (NASDAQ:LLNW), InterNAP Network Services (NASDAQ:INAP) and Level 3 (NASDAQ:LVLT), all these companies that offer vanilla CDN services have started facing pricing pressures and are hence looking to diversify their revenue by getting into the very same services that Cotendo specializes in. These value-add services while not as widely known as the traditional CDN offerings such as video delivery are less exposed to the same pricing pressures as they have not yet been commoditized.
Among the CDNs, only Akamai offers some of these services currently but considering that they protect its margins in the face of increasing CDN competition, it is important for Akamai to preserve lead.
The emergence of a strong competitor with Cotendo, especially after its deal with AT&T, threatened Akamai’s unique position. (see AT&T’s Threat to Akamai’s Value Added Services) Access to the huge enterprise customer base of AT&T gave Cotendo a big market to directly compete with Akamai in the value-added service department.
AT&T even said that it could offer its products at a discount of about 50% of what Akamai was charging and still maintain comfortable margins. Continuing to compete with Cotendo would have hurt Akamai’s market share and margins in a department that is growing faster than its relatively stagnant CDN business. By deciding to acquire Cotendo, Akamai is looking to eliminate that threat and retain its pricing flexibility.
Mobile acceleration: the next big thing
One of Cotendo’s value-added offerings that we believe has tremendous potential is its mobile acceleration suite (MAS) launched recently.
As smartphones see mass-adoption and increasingly replace the PC as the primary computing and networking vehicle, it becomes essential for content providers to be able to speed up delivery of their mobile websites and applications. Accelerating mobile content delivery will reduce latency and improve poor page-load performance on mobile handsets due to unreliable mobile data network connectivity, thereby enhancing user experience and bringing in more revenues for content providers.
Akamai recognized this growing need for mobile acceleration when it announced in February a “strategic alliance” with Ericsson to develop some kind of mobile cloud acceleration product; however, no details have been made available about the progress till date. [2]
On the other hand, Cotendo launched their mobile acceleration suite five months ago and have already started seeing adoption for their product. Akamai will be looking to use Cotendo’s MAS to bolster its in-works mobile acceleration product and strengthen its value-added service portfolio.
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Notes:- Akamai in talks to buy Cotendo for $300 mln – report, Reuters, November 27th, 2011 [↩]
- Ericsson and Akamai establish exclusive strategic alliance, Company press release, February 14th, 2011 [↩]