Content Distribution Analysis
I have no idea if any of you are interested in this. It's a weird play, for sure. In fact, it might have already been hashed out and I'm just bugging you. I'm posting the analysis that everyone wants to hear first. A much longer look at the market is available at my new Xoom site. I set this up so I can keep track of this space, and others, without bugging the hell out of yall. It is
members.xoom.com
Three companies made my cut: Akamai, Digital Island, and Xcelera (the Gildered one <g>). I'm happy, nay, hoping to take questions on this space, and follow up and all that. I mainly wanted to get this in front of the big brains before the weekend was out, as I leave on business eaaaaarrrrllly Tuesday AM.
Gorilla DNA Analysis
This is a rapidly growing market space that seems to change on a daily basis. The stock valuations given all three of these companies are comparable to the Godzillas. The products they offer are more akin to Gorillas on one hand. On the other hand, their business model, a service, possibly relegates them to the King and Prince category.
Of the bunch, I believe that Akamai has the best chance for gorilla-hood in the future. The reasons I believe that are answered in the Big Six Questions for AKAM:
A. Is there a discontinuous innovation, or a proprietary open architecture?
Pushing web content to the edge of the network, closer to the user, is not discontinuous in and of itself. It has long been known that geographic proximity is preferable when serving web content to end users. The methodology employed by Akamai is discontinuous. It works in conjunction with a content providers' policies and within their framework. It allows those customers to determine what should be close and what shouldn't. It gets data closer to the end user than any other of the methodologies, and at a lower cost to the companies who serve that end user.
Additionally, Akamai is trying to achieve am open architecture with the introductions of the ICAP protocol, which will be presented as an Internet standard in conjunction with Cisco, Network Appliances, and others. This will not be proprietary, however. Akamai will be a major contributor to that standard, and will have a lot of influence on setting the direction of that standard, thanks to their alliance with Cisco. Their competitors are not a part of the development body, so Akamai can have a big head-start implementing and deploying ICAP, once it becomes a standard. Cisco did this early on in their technology adoption life cycle, and it has served them well.
B. Does it have the potential to grow into a mass market phenomenon, become a standard?
"Akamaized" web pages are becoming a standard. Virtually all of the large web sites are using Akamai to speed content delivery. Others are using Akamai's competitors services.
C. Are there high barriers to entry and high switching costs?
The barriers to entry are middling to high. The algorithms developed at MIT came from some very focused, very advanced math people. But, they are ultimately math. If a better algorithm comes along, it could compete against Akamai.
Switching costs are high. Once a company has Akamaized, it would be difficult to implement a new set of policies and procedures to replace them. Due to the nature of Akamai's product, it is the kind of software that gets "built in" to a company's practices.
D. Have value chains developed?
Akamai has a very long, and very deep value chain. First are the investments by Apple, Cisco and Microsoft. These three companies together own 10% of Akamai. All are working with Akamai to develop new technologies for content delivery, including an Internet standard. All stand to gain significantly from future products, such as their media streaming capabilities and their EdgeAdvantage software that utilizes coming ICAP technology.
Akamai has established partnership programs continue to grow their presence in ISPs. The qualification requirements are stringent, but appropriate. The fact that the ISPs get the servers for free, and their customers receive better performance at their web browser, makes their ISP program a strong link in the value chain.
Akamai has also starting forging partnerships with web developers to "spread the word." There are a lot of comanies that are working with Akamai to implement their technologies and to design websites with Akamai in mind. The best example of this is CMGI.
Their customer list is 200 names long, and is very impressive. To name just a few: CNN, Go Network (ESPN, Disney, ABC), Yahoo, Lycos. This list should grow rapidly as they roll out their media streaming products that come online with the InterVU merger.
E. Have they crossed the chasm?
Akamai has crossed the chasm, and is out of the bowling alley. There are no longer any niche markets for their products. Their customer list bears this out. I believe that they will discover new bowling alleys for their acquisitions, InterVU and Networks24. Even those bowling alleys will be shortlived, as the demand for broadband streaming media grows.
F. Existance of hypergrowth?
Hypergrowth is occurring for Akamai. They have QoQ revenue growth of 200% and 350%, but they've only two quarters to look at. Akamai is 100% focused on content delivery. The biggest impediment to Akamai is loss of focus on FreeFlow. That focus could shift to EdgeAdvantage as they try to compete in the e-business services field. One analyst said, however, that it is easier for Akamai to become a service provider than it is for Digital Island to become a content delivery service on par with Akamai. Their competitors have other parts of their business to focus on and deliver on. This can easily dilute their potential.
Summary
This is a fascinating field, as I've said more than once. As near as I can tell, Akamai's biggest competition comes from two areas: a huge glut of bandwidth, and Gilder. Let me address Gilder first. George has given his blessing to Xcelera. I haven't read his report, so I don't know why. Of the three technologies presented here, MII is the "worst," as near as I can tell. There are problems with it that a technologist can poke large holes in. But the Gilder Effect could make all the difference in the world.
Even unlimited free bandwidth would not change the physics of serving web content. Given that Akamai has done the most work of getting content closer to the user, I think they will prosper even when broadband is available to everyone at their cell phone. A server in Dallas for me will always be faster than a central server for ESPN in Bristol, CT. I think broadband availability will make Akamai's services more desirable, rather than less, as customers become used to always-on, instantaneous response times.
The question now is where they should be classified. In light of the fact that they only have two quarter of financials to deal with, they should be put on a Watch List somewhere. They are definitely a Shiny Pebble. Their DNA will be decided by the following defining moments:
- acceptance of ICAP as a standard by the Internet governing bodies, AND implementation by Cisco, Microsoft, Oracle etc.
In this case, Akamai should be an Application Gorilla, by virtue of their development of the standard, and early-mover status
- no standard is adopted, but Akamai continues to develop their value chain.
Akamai should probably be a Godzilla, with Gorilla potential as they become the de-facto standard for Internet delivery
- Akamai fails to execute on their acquisitions and quits delivering their promise to their customers
Akamai gets consigned to the internutz dustbin and we start over
I hope to get the answer to this question from all of yall.
Other than that, I'm done. It's been a fascinating study, no doubt. I wish Gilder had kept his mouth shut for another quarter. I don't like having Cayman-owned companies that report no financial information in my basket. George has been wrong before, and I think he'll be wrong on this one. Akamai is closer to his dumb-network/smart-edges philosophy. Of course, I expect the Gilder gods to punish me now, boy.
buck
PS I have no money invested in any of these companies. I hope to hear critiques of a) my logic on AKAM, ISLD, and XLA, and b) my GG skills and content. |
