Akamai Needs to Cut Prices to Drive Growth

paul sagan On yesterday's earnings call, Akamai (AKAM) once again said they were seeing more pricing pressure in the market and stated that they are being more aggressive on their CDN pricing. While this may sound like Akamai is finally waking up to the reality of what's taking place in the market, I don't think that's the case and they still aren't taking the necessary steps needed to grow their CDN business.

Back in December I wrote a post entitled "Akamai Getting More Aggressive On CDN Pricing, But More Steps Are Needed", and I detailed how I was seeing Akamai compete on some deals with lower pricing, but not on enough of them. Seven months later, Akamai's saying they are going to be more aggressive, but noticed they always followed that statement on the call with phrases like "with key customers" or "with key strategic customers". If Akamai has any intention of growing their CDN business again, they can't be more aggressive on pricing only with "key customers". If they have finally come to the realization that their CDN pricing is too high, then it's too high. That's the bottom line. It's not that it's only too high for "key customers", it's too high for everyone. And what every investor should be asking is, what percentage of revenue do those "key customers" make up? If those "key customers" are only responsible for lets say 20% of Akamai's CDN revenue, then lowering pricing for them really won't have much impact.

On the day of Akamai's earnings, I saw two deals where Akamai was charging a customer $10 per Mbps and that customer left Akamai for a competitor who was charging $6.50 per Mbps. This was a customer that was billing about $800K a year and Akamai wouldn't lower their pricing, but did offer to defer their payment until next year. I also heard from another major M&E customer who said Akamai charges them $0.15 per GB delivered, with no monthly commit, yet other competitors are at $0.10 per GB on the same deal. Akamai can't afford to be aggressive with pricing for only select customers.

Over the past ten years, Akamai has run their business successfully using two difference strategies. One was simply the ability to grow their business based on significant traffic volume on their network due to it being a good time in the market and the economy. The second strategy for growing their business was that Akamai could charge more for their services, since for many years, they had no competitors in the market. The problem with both of these strategies today is that due to the market we are in, significant traffic growth is not there and not a guarantee, and today, Akamai does have competitors in the market.

With Akamai's M&E revenue down 4% year over year and 8% sequentially, they need to take immediate steps to get their CDN business back on track, including the ridiculous practice of trying to charge more to deliver content via streaming protocols, without explaining to anyone, including customers, what the additional charge is for. When I told Akamai a few weeks ago just how many deals I see them losing in the market because of their streaming pricing surcharge, they were very adamant with me that it was not affecting the flow of deals they are winning. Really? After yesterday's earnings, how can they possibly try and convince anyone of that? Lets stop pretending people don't see what's really going on in the market and deal with the reality of what's taking place so Akamai can take the necessary steps to fix it.

While Akamai did say things on the call about lowering their pricing to drive volume, that doesn't make any sense to me. Lowering pricing does not drive more consumption since it's consumers that drive volume, not content owners. Yes, if Akamai lowered pricing and kept more CDN business and won more new contracts in the market, that would drive more traffic on their network, but it does not drive volume for the content owner. I also found it odd that Akamai talked about how some of their customers are already at a point where they can make money from their content. If that's the case and content owners are making money, then why would Akamai have to lower their pricing? If your customers are already able to generate a profit over the model that is in place today, why would you need to reduce pricing? I simply don't believe that most of Akamai's customers are making any money from video specifically and Akamai didn't say that they were, since they used the generic term "content", which does not necessarily mean video.

Even with all of these problems, Akamai's not going anywhere. They have plenty of cash in the bank, still lead the market in terms of CDN revenue and are in a position to make acquisitions that could potentially help their business, something many other CDNs can't do. While I am not an investor in any public company, and never have been, it does not matter to me what their stock price is. But for investors, I keep hearing that the story from Akamai needs to be about growth, which is not happening. Why Akamai doesn't attack the market and their competitors with aggressive, fair and reasonable CDN pricing so that they would increase their revenue and put their competitors out of business is beyond me. They could do it overnight if they wanted to, but still aren't doing it.

The only way you grow business at a CDN is by taking advantage of the economics of scale, something Akamai knows very well, yet is not applying when it comes to their CDN business.

Dan Rayburn is executive vice president at StreamingMedia.com and principal analyst at Frost & Sullivan. This post originally appeared at his blog and was republished with permission.

Akamai Needs To Cut Prices To Drive Growth

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