How about competition?
Competition is getting fiercer. It’s not only startups the ones interested in joining the CDN market, either. Big telecoms and even Amazon.com, Inc. (NASDAQ:AMZN) are interested in this party. Amazon will be particularly hard to beat: the Amazon CloudFront is Amazon’s CDN product and is easily integrated with other Amazon Web Services like cloud computing services and storage solutions. Akamai, on the other hand, only offers CDN services. Web developers may get so accustomed to Amazon Web Services (because it’s free for one year) that they make Amazon CloudFront their preferred CDN choice as well.
Akamai Technologies, Inc. (NASDAQ:AKAM) is more expensive compared to Amazon CloudFront. As competition gets fiercer, it will be more challenging to keep prices high.
The upside is that small companies like Limelight or InterNAP Network Services (NASDAQ:INAP) are having a hard time competing with big-scale CDNs like Akamai and Amazon. Limelight seems to be having some trouble with customer support. It’s easy to find poor reviews about the service, especially regarding poor performance of Limelight’s network for video and poor customer support services. It seems that the best outcome for Limelight at this moment is being the target acquisition of a big telecom.
InterNAP Network Services (NASDAQ:INAP) is also having a hard time. In the past three months, the company’s stock price decreased by 13% as some hedge fund managers like Archon Capital Management and Silver Capital Management dumped significant stakes. InterNAP is also not consistently profitable; according to Morningstar, the company reported negative net income of $4 million in 2012.
The Bottom line
Akamai Technologies, Inc. (NASDAQ:AKAM) has been growing revenue for the past 10 years and there are no reasons to suspect that demand for its products will fade any time soon. The company’s history clearly shows that it is ready to compete against any startup or middle-size company without modifying its price premium. Amazon.com, Inc. (NASDAQ:AMZN) and big telecoms are the real competitors, however, and their presence should not be underestimated.
Akamai could be forced to continue reducing its prices in upcoming quarters, though this could also bring additional revenue from price-sensitive clients. Considering that the demand for video and music streaming is rising, this scenario shows an asymmetric risk/reward profile that favors being long on Akamai.
The article Would You Invest in a Company that Delivers 20% of All Web Traffic? originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Adrian is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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