Networks

Empire-Building at Akamai


(Corrects description of new Akamai service in 6th paragraph and Netflix distribution agreement with in 8th paragraph.)

Akamai Technologies (AKAM) has been a rumored takeover target 21 times since 2005, more than any other company, according to Bloomberg data. Chief Executive Officer Paul Sagan insists nobody there is paying attention. "I get more questions from employees about whether we can get more showers in the office," he says. Told that Akamai had been crowned king of the rumor mill, he laughs: "Well, I guess that makes you guys wrong more often than anyone."

The takeover chatter has included Apple (AAPL), AT&T (T), Cisco Systems (CSCO), and Google (GOOG). Although shares of the Cambridge (Mass.) company with the funny name (it means "intelligent" in Hawaiian) tumbled nearly 12 percent on Feb. 9 after a weaker-than-expected forecast for the current quarter, Akamai still trades at roughly 50 times earnings. Apple, by comparison, trades at about 20 times profits. It's a sign that Wall Street expects Akamai's sales to keep zooming upward—revenue increased 19 percent in the fourth quarter of 2010, to $285 million.

The company is known for its dominance in the $2.5 billion market for content delivery network, or CDN, services. Content providers such as video sites and media companies pay a monthly fee to cache their content on Akamai's 77,000 servers in 71 countries. The company's network—which amounts to a more reliable, faster Internet—handles roughly 15 percent of all Web traffic, more than any other CDN and more even than Google, says Sagan.

Media companies use CDNs to distribute their articles, movies, and music. When a sports fan in Wisconsin presses "play" on a Super Bowl clip, the video comes from the nearest Akamai server rather than NFL.com's data center in El Segundo, Calif. "They're like a giant shock absorber," says Hans Schroeder, NFL.com's senior vice-president of media strategy and development. "When millions of people hit the site on Sunday, Akamai's ability to handle the load through their dispersed network is tremendous."

Rival CDN providers such as Limelight Networks and Level 3 Communications (LVLT) have pushed down the price Akamai can charge for basic CDN services. Sagan says the company's sales volume will make up for falling prices: Growing demand for Internet video delivered to everything from iPads to big-screen TVs will drive Akamai's CDN business from $400 million today to $2 billion within 10 years, he says.

Sagan, a cousin of 1980s scientist Carl Sagan, is also expanding Akamai's offerings. The company now takes in roughly $200 million a year from e-commerce sites, helping to cut seconds off the time it takes to deliver product recommendations to shoppers. It recently started a service that lets e-tailers receive credit card payments, without actually having to store the credit cards themselves. Merchants can forgo the expensive security audits demanded by payment processors, potentially saving them millions of dollars. Plus, e-tailers eliminate the risk of having thousands of credit card numbers stolen.

Akamai has begun to sell to big corporations, too, letting them pay a monthly service fee rather than take on the cost and complexity of building sophisticated IT shops of their own. It offers security services to protect against denial-of-service attacks like the ones WikiLeaks supporters launched against sites run by Visa (V) and MasterCard (MA) in December. Akamai's servers are programmed to spot and block suspicious traffic. Tom Leighton, a former Massachusetts Institute of Technology professor and one of Akamai's co-founders, says this strength-in-numbers approach is the only way to defeat massive cyber assaults. Most sites "just can't afford to fight off some of these attacks" on their own, he says.

As Akamai expands into new markets, competitors are edging in on its core business. Level 3 won some of the high-profile Netflix (NFLX) account away from Akamai in late 2010. Telecom companies such as AT&T are adding content distribution capabilities to their phone networks. Barrett Lyon, who co-founded rival Bit Gravity (which was recently sold to Tata Communications (TCL)), is about to launch a new video distribution company. "They've been the Cadillac of CDNs with Ferrari prices," he says of Akamai. "But someone is going to come along and solve customers' problems more economically."

With that in mind, wouldn't Akamai be better off under the protective umbrella of a large acquirer? Sagan says it's not an option. He thinks the company is better off on its own, free to market to and partner with anyone rather than be handcuffed by a parent company's strategic goals. "We don't get intimidated," he says. "And we don't take no for an answer."

The bottom line: Akamai, the "shock absorber" of the Internet, is diversifying into e-commerce, network security, and other businesses.

Burrows is a senior writer for Bloomberg Businessweek, based in San Francisco.

American Apparel's Future
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus