Akamai: The Granddaddy Of CDN Is Well-Positioned For Next-Generation Applications (NASDAQ:AKAM)

The CDN business is lumpy and large enterprises often leave for greener pastures. Fastly investors have just discovered this phenomenon with recent events involving TikTok.

Akamai is the granddaddy of CDN with a 20-year history of intelligent edge computing and more POPs than all of its competitors combined.

(Source: Shutterstock)

Akamai Technologies, Inc. (AKAM) is the granddaddy of Content Delivery Network (“CDN”), in business for more than 2 decades and transporting an estimated 25% of all web traffic. Akamai provides more locations, or points of presence (“POPs”), than all of its competitors combined with 300,000 servers in 4,000+ locations.

To be clear, the CDN market is quite mature with little apparent upside apart from increased traffic over time. The market for CDN customers is close to saturation and enterprises tend to disappear once they reach a certain size. They employ their own performance metrics and often decide that they can do better elsewhere, leading them to abandon their existing provider in favor of a competitor. As an example, Netflix (NFLX) was once an Akamai customer but subsequently abandoned Akamai due to apparent performance issues.

Fastly - A Disruptive Competitor?

Another area of concern for Akamai are so-called upstarts such as Fastly, Inc. (FSLY), that claim to be market disruptors. In Fastly’s case, it claims to be disruptive by providing fewer but more powerful POPs with solid-state storage and large cache situated in strategic locations. By employing this strategy, Fastly believes it will improve the cache hit ratio for static applications and event-driven content. The improved cache hit ratio will compensate for the additional transmission time between source and server due to the greater distance away from the source. And the strategy will also lead to reduced costs as less POPs need to be supported. The rationale for Fastly’s approach is as follows:

This argument has a lot of merit, but Akamai of course has a different perspective on this topic as it dominates the “last mile” of internet traffic which is critical for some applications. Here is what Akamai management has to say about edge computing.

Akamai’s position is that it has been in the edge computing business for many years and that the technology isn’t a new revelation or market disruptor by any means. Akamai has a myriad of edge computing solutions as shown below.

(Source: Akamai)

I am more inclined to be on Akamai’s side. By being at the edge instead of in a data center hundreds of miles away, local traffic is processed more efficiently, saving milliseconds that are extremely important for next generation high-speed applications and the current pandemic-driven increase in cyberattacks.

(Source: Akamai/Fastly)

In any case, if Akamai considers Fastly to be a serious threat, then Akamai could easily upgrade 10% of its POPs in two years and compete with Fastly head-on while still maintaining its current CDN network for existing applications. My time-frame assessment of two years is based on Akamai’s current number of locations (4000+) and length of time the company has been in business (20+ years). Akamai could provide 400 upgraded PoPs, equivalent to what Fastly has now, and I suspect that Akamai has been busy trying to do so for some time.

The new reality - the end of the pandemic and return to normal

Akamai has benefited from the pandemic as internet traffic and cyberattacks have grown substantially. The company’s Q2 YoY results reflect this new reality with revenue up by 13% and Cloud Security Solutions YoY revenue growth of 28%. By the way, Akamai’s cloud security business alone has just recently reached a $1 billion run rate, which is substantially more than many of its cybersecurity competitors.

While the current economic conditions are a tremendous shot in the arm for the company, the pandemic will ultimately end and people will resume their previous lives. Internet traffic will decline to so...

The CDN business is lumpy and large enterprises often leave for greener pastures. Fastly investors have just discovered this phenomenon with recent events involving TikTok.

Akamai is the granddaddy of CDN with a 20-year history of intelligent edge computing and more POPs than all of its competitors combined.

(Source: Shutterstock)

Akamai Technologies, Inc. (AKAM) is the granddaddy of Content Delivery Network (“CDN”), in business for more than 2 decades and transporting an estimated 25% of all web traffic. Akamai provides more locations, or points of presence (“POPs”), than all of its competitors combined with 300,000 servers in 4,000+ locations.

To be clear, the CDN market is quite mature with little apparent upside apart from increased traffic over time. The market for CDN customers is close to saturation and enterprises tend to disappear once they reach a certain size. They employ their own performance metrics and often decide that they can do better elsewhere, leading them to abandon their existing provider in favor of a competitor. As an example, Netflix (NFLX) was once an Akamai customer but subsequently abandoned Akamai due to apparent performance issues.

Fastly - A Disruptive Competitor?

Another area of concern for Akamai are so-called upstarts such as Fastly, Inc. (FSLY), that claim to be market disruptors. In Fastly’s case, it claims to be disruptive by providing fewer but more powerful POPs with solid-state storage and large cache situated in strategic locations. By employing this strategy, Fastly believes it will improve the cache hit ratio for static applications and event-driven content. The improved cache hit ratio will compensate for the additional transmission time between source and server due to the greater distance away from the source. And the strategy will also lead to reduced costs as less POPs need to be supported. The rationale for Fastly’s approach is as follows:

This argument has a lot of merit, but Akamai of course has a different perspective on this topic as it dominates the “last mile” of internet traffic which is critical for some applications. Here is what Akamai management has to say about edge computing.

Akamai’s position is that it has been in the edge computing business for many years and that the technology isn’t a new revelation or market disruptor by any means. Akamai has a myriad of edge computing solutions as shown below.

(Source: Akamai)

I am more inclined to be on Akamai’s side. By being at the edge instead of in a data center hundreds of miles away, local traffic is processed more efficiently, saving milliseconds that are extremely important for next generation high-speed applications and the current pandemic-driven increase in cyberattacks.

(Source: Akamai/Fastly)

In any case, if Akamai considers Fastly to be a serious threat, then Akamai could easily upgrade 10% of its POPs in two years and compete with Fastly head-on while still maintaining its current CDN network for existing applications. My time-frame assessment of two years is based on Akamai’s current number of locations (4000+) and length of time the company has been in business (20+ years). Akamai could provide 400 upgraded PoPs, equivalent to what Fastly has now, and I suspect that Akamai has been busy trying to do so for some time.

The new reality - the end of the pandemic and return to normal

Akamai has benefited from the pandemic as internet traffic and cyberattacks have grown substantially. The company’s Q2 YoY results reflect this new reality with revenue up by 13% and Cloud Security Solutions YoY revenue growth of 28%. By the way, Akamai’s cloud security business alone has just recently reached a $1 billion run rate, which is substantially more than many of its cybersecurity competitors.

While the current economic conditions are a tremendous shot in the arm for the company, the pandemic will ultimately end and people will resume their previous lives. Internet traffic will decline to so...