Akamai Technologies, Inc. (AKAM)

Akamai is now facing the biggest competitors it has ever faced in its 10 years of existence. The MIT buzz that they their math is somehow better just isn't true any longer. 10 years has passed since they started and others have had plenty of time to write code and catch up. The CDN math is complicated but it is not Einstein level. Content delivery is now a commodity business using commodity products. They are now going head to head with competitors that manage far bigger, more complex global networks that have greater visibility into the Internet traffic flows for static http objects and streaming and hosted internet video. Both Level 3 and ATT have recently deployed new working content management networks that are in place and will be getting customer wins happily with prices that are half of what Akamai charges. The difference is that they are both running global networks alongside the CDNs which Akamai does not. Moreover, they have deeper pockets to invest in the new faster, emerging hardware.





A little history is in order: Akamai emerged as the early content player in the late 1990s during the time when the majority of users were on dial up. Their distributed server architecture made sense at that time because there were acknowledged problems and congestion at most ISP peering sites. Since then these backbone ISPs and peering sites have now purchased routers with gigabit and 10 gigabit network interfaces that have 1000 times more performance of the Cisco 7500 routers of that era (which were 10 and 100-megabit (.1 gigabit) interfaces. The 7500 were pre-gigabit and pre-10gigabit network interfaces at that time. Many backbone providers have purchased Cisco GSRs and CRS-1 routers, which will scale to 90 terabits or 90,000 gigabits in a multi-rack chassis. The network interfaces used on core routers will be running at 100gigabits by late this year (See announcements on www.nxtcommshow.com). As an example, the new edge Cisco ASR 1000 Quantum flow router that replaces the older 7200 series has the performance equivalent of 160 7200s. The core routers are thousands of times this.


SEE (http://www.networkcomputing.com/immersion/virtualization/showArticle.jhtml?articleID=206901409)


"Leveraging the 40-core Quantum flow processor (announced by Cisco in February and which can process 160 simultaneous threads at a whopping 49 billion transactions per second), the ASR supports the common services found on Cisco's routers, including stateful firewalling, QoS, VPN, and multicast."


SEE( http://telephonyonline.com/access/news/cisco-edge-router-0304/ )


"In terms of performance, said Suraj Shetty, Cisco’s senior director of worldwide service provider marketing, the new router is equivalent to 160 of Cisco’s popular 7200s"





Akamai gets bandwidth and colocation space from other providers but does not own the fiber or networks it runs over. Most of their IP address blocks are from their colocation providers. They play around with DNS CNAME functions and have a large network of caching servers that are colocated around the Internet. These servers are getting cheaper all the time and using VMware, it is now possible to replicate their server architectures for a quarter (1/4) of what the cost is on their balance sheet all with faster quad processors which are much faster than some of the older legacy Akamai servers. Nowhere does Akamai breakout in detail the generation of the servers they have by number or type. It is possible for an edge customer to be stuck behind an aging, slower Akamai server, and have problems getting the page objects and sites they serve up.





Akamai has an amazing NOC that makes for a great dog and pony show. However, the fragility of their CDN architecture, which rests on the unsecure DNS protocol, makes them very vulnerable to attacks. There have been attacks (search on Akamai problems) which have affected major customers. DNSSEC would help on a private backbone but really the core argument is that the CDN world is changing and changing very fast. CDNs play nicely with the Doubleclicks of the world for web advertising but one cannot expect that to last much longer since Google now owns it and could announce a CDN at any time on their deployment of global servers and suddenly there are three majors CDNs out there.





They advertise the fact that the US government uses them for content delivery does not validate a new customer’s purchase decision. Both Level 3 and ATT won the multibillion NETWORX US government telecommunications bids. (http://www.gsa.gov/Portal/gsa/ep/contentView.do?pageTypeId=8199&channelId=-13259&P=&contentId=22827&contentType=GSA_BASIC)


AND


( http://www.gsa.gov/Portal/gsa/ep/contentView.do?pageTypeId=8199&channelId=-13259&P=&contentId=23096&contentType=GSA_BASIC)





You can bet sure that some of the government business that is going to Akamai may go away. And why does this “bright” management give their customer list away on their website to AT&T and Level 3? These competitors now have the real customer lists to target for their new CDNs and just have to offer a lower price until Akamai misses their numbers and the stock price drops like a rock. Employees will exit because the options drop when that happens.





Lastly do not forget the off-the-shelf distributed server load balancers are getting much faster and better for enterprise and ISP customers that can use them as cheaper replacements to any companies CDN. See the recent announcements by A10 networks ( http://www.a10networks.com/) for its new product line of distributed content devices that are selling like hotcakes.





To summarize, I do not own Akamai stock. But even if you don't believe a word of what I've said so far, I believe the multiple they are commanding is too high given that they own thousands of commodity PCs that should be written down (write off 4 or 5 billion of assets) and no network. Remember the Internet will still keep going and run properly if they go out of business and will probably be faster because the slower caching servers will no longer be in the way. Be wary of this stock.