Akamai May Be Forced To Slash Media Prices

Akamai Technologies, Inc. AKAM is desperately trying to retain traffic after six of its media customers shifted a big percent of traffic to their own internal CDNs, leaving Akamai with excess capacity in its network. As a result, the company may be forced to cut rates for media.

In a blog on streamingmedia.com, analyst Dan Rayburn sees Akamai reducing its rates by 15 percent in order to win fresh business so as to retain the current level of traffic. The analyst highlighted that the lower price quoted by the company was $0.002 a GB, and it continues to be the cheapest in any CDN deal. Of note, however, such prices were offered only to big clients.

Related Link: Traders Passing Around Research Note Suggesting Akamai Will Be "Slashing" Media Pricing

However, Rayburn sees Akamai offering a price of $0.003 to Level 3 Communications, Inc. LVLT customers who were charged at $0.005, while Limelight Networks, Inc. LLNW charged $0.0045. The analyst thinks the time has come for customers to have multiple CDNs, and it is a tough situation to win customers even with the lower price. On top of that, even if the company retains a customer, it could come at a lower traffic and at a lower price point. The company already suffered margin erosion of 1.5 percentage points.

The company is also under CAPEX pressure with 200,000 edge servers while Limelight has 10,000 edge servers. While Akamai spent $160 million in the first six-month period of the current year, Limelight's CAPEX is only $5 million. According to the analyst estimates, the company's CAPEX for adding 1Tbps is approximately $5 million, which is considerably higher than the rivals' $1 million per Tbps.

Therefore, Rayburn concluded, "While we don't know Akamai's true cost to deliver content since they don't break out CapEx dollars, I guarantee that Akamai is not making money on a CDN contract priced at $0.002. That's not a deal that is profitable to the company, standing on its own."

Akamai appears ready to sacrifice margins for the sake of traffic.

At Time Of Writing ...

• Akamai was down 0.89 percent at $51.19.
• Level 3 Communications was up 1.16 percent at $48.71.
• Limelight was down 0.32 percent at $1.57.

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