Cisco and AOL vs. Akamai

by David Gross

Exactly ten years ago in August 2000, industry leaders were concerned about Akamai's (AKAM) domination of the CDN business, and formed two separate coalitions to do something about it. Cisco (CSCO) created the "Content Alliance", which included most of the major business ISPs of the time, such as Cable & Wireless, Genuity and PSINet. AOL and Inktomi created the "Content Bridge". Akamai's chief competitor at the time, Digital Island, joined both groups.

The conventional wisdom among analysts and Wall Streeters was that Akamai wouldn't be able to stand the competitive threats, and with the world turning against the company, it would struggle to hold its market share, let alone survive. Moreover, Cisco wanted to take matters to the IETF, to neutralize the market value of Akamai's patents.

Akamai's biggest problem back then wasn't these content groups trying to destroy its business, but its own over-expansion. It didn't need any help from AOL or Cisco when it came to wrecking its balance sheet and income statement. And successive generations of competitors haven't stopped it from improving its financials. In 2000, the company spent 47% of its revenue on bandwidth and colo fees, in 2010, it spends 16%. In 2000, it produced 62 cents of revenue for every dollar of property, plant, and equipment on its books. In 2010, it produces five dollars of revenue for every dollar of PP&E.

The conventional wisdom chorus that fretted about Cisco and AOL ten years ago, is now worrying about Limelight (LLNW) and Level 3 (LVLT). Level 3's CDN business is the old Digital Island service, three owners later. While Akamai was in the process of growing fourfold between 2003 and 2009, the Digital Island CDN was being passed through the hands of Cable & Wireless, Savvis, and Level 3, which cut the growth of what would otherwise have been a much stronger competitor. Limelight did grow faster than Akamai last quarter, and is now 1/6th the size of its larger competitor. However, Limelight's network is far more centralized with 76 POPs compared to 1,200 for Akamai. While there are operational benefits to both approaches, Akamai's is far more cost effective, with its bandwidth and colo fees amounting to just 16% of revenue, compared to 33% for Limelight.

After ten years of worrying about Akamai's competition, investors would be better off finding the next company that will grow on the back of a major cost advantage, because no one who's competed directly against Akamai the last decade has developed one.