Posts tagged ‘Akamai’
The Wall Street Journal had an article out yesterday that has created a real firestorm of controversy. It’s about how some of the large Internet players (such as GOOG, MSFT, and AMZN) are backpedaling on their previous Net Neutrality stances.
Moreover, they’re variously negotiating with telecablecos to gain “favored nation” or preferred treatment status on their networks.
Holy Turnaround, Batman!
Some writers quickly noted–here, and here–that Google at least is simply caching content closer to customers, just like Akamai (NASDAQ: AKAM) and other CDNs do. And that much of the Journal article reflects the kind of sensationalism many feared would appear once Rupert Murdoch (NYSE: NWS) bought the paper.
[As an aside, when I was doing research a year or two ago on Akamai, top management there vehemently denied my suggestions that they would ever be in competition with Google. Heh.]
If any of this is true, it’s a sad development, but hardly unexpected. As competition heats up for everything from ad serving to video downloads to cloud computing, everybody wants an edge. And they’re willing to pay for it.
Those that can afford to will get better services, better access, better distribution. Which means the little guys get shafted again. If you want to buy from Amazon, you get speedy page refreshes (not to mention faster access to things like S3). Google apps will work faster than, say, Zoho.
The rich do, indeed, get richer.
This plays right into telecableco hands. It’s what they’ve been lobbying for, after all. (I can almost see the big, fat, spider sitting there in the middle of its web inviting them all in. ) The result will be a vertical model, with only a few players controlling the entire value chain, up and down.
If this was just about commerce, I’d be less concerned. But it’s also about access to information. And about control of content. Ultimately, it’s about exclusion and higher costs for everyone. As well as a loss of the kind of innovation that has made this country successful.
Imagine if TV stations were free to broadcast good signals from those advertisers (or news programs) that spent more. Everyone else, they deliver fuzzy pictures with the sound continually dropping out. Pay to play. Eventually, everyone gets their news and entertainment from a few large companies. Welcome to the 50’s. There’s progress for you.
Critics argue: “But as businesses they should be allowed to offer different levels of service”. If there was true competition at the last mile level, I’d be inclined to agree. However, most of the large telecablecos built their networks–and their competitive advantage–on the revenue streams from exclusive franchises and government mandated monopolies.
You and I paid for their broadband networks through our monthly TV and telephone bills, mostly at a time where we had no choices. Or they used the proceeds from bonds whose attractive terms were based on the existence of those same “guaranteed” payment streams, which is basically the same.
Now that the moats around them have been fortified, we shouldn’t think that they’re entitled to operate as normal businesses. Monopolies (or even duopolies) don’t get the same rights as firms in a free marketplace. It’s not that I believe Network Neutrality should be regulated. (I agree about the principle but not the solution.) It’s last mile competition where the natural monopoly lies, and that’s what should be regulated. Until it’s no longer a monopoly, or until the telecablecos no longer have insurmountable market power.
Or until there’s structural separation.
Many thinkers (at least the ones whose salaries don’t depend on the success of telecablecos), have long recognized the most efficient market structure is to go horizontal–one company does the infrastructure, one does the content. Each competes within its own level, but not up and down the stack.
The PC industry helped this country thrive with the same model. Some companies built chips, some sold computers, some provided software. This drove innovation and helped keep costs low and falling. (Even the emergence of intra-level monopolies like Microsoft couldn’t halt the effect–some argue the standardization even helped.)
But now the big players are changing the game, in order to become even bigger. The Internet guys want to differentiate on performance, because they’re finally getting into each others businesses, and have to compete–some for the first time. The pipes guys want a piece of the content pie, because as network usage grows their costs go up, and they face resistance in trying to charge consumers more money for Internet access, especially as they’ve been billing flat rates for so long. But we will pay, one way or another.
Not everywhere, thankfully. Much of the rest of the world actually has competition in the last mile. They’ve created a more horizontal model, with providers competing “across” levels. If we fail to adopt this kind of structural separation in the U.S., we can watch our innovative spark and competitive advantages slowly drain away.
And just as many around the world laughed at us for voting to re-elect George Bush, they’ll laugh at us again, for voting to go “up and down”.
Disclosure: I hold no position in any of the stocks mentioned here.
Dan Rayburn has another nice article out this morning, this one detailing his recent visit to Akamai Technologies (NASDAQ: AKAM). It’s generally very positive about the company, and given Dan’s readership, I wouldn’t be surprised to see a nice bump in the stock today, all other things being equal.
In past discussions with Akamai, management has hinted to me that most of the analysts covering the stock don’t completely “get” its business model and in particular, its sustainable advantages. To do so requires a fair amount of technical acumen, and so I’m not surprised.
I do not see Akamai being disrupted in the short-term. Dan does a nice job in his piece of dispelling the myth of a CDN price war that has kept a lid on its stock price over the past couple of quarters. Certainly others such as Limelight Networks (NASDAQ: LLNW) and Level3 (NASDAQ: LVLT) can deliver content more cheaply, but not at the service levels many clients require. Really, it’s in the [delivery x service] product where Akamai shines.
One day, transit bandwidth may be an order of magnitude cheaper, and everyone will have 100 Mb/s or more of sustained bandwidth entering their homes (I wish). But that time is far off in the future. As long as Shannon’s Law holds, and people continue to ramp their media consumption via the internet, there will be a need for the kind of optimizing technology Akamai provides.
In the intermediate term there’s nothing I see that would indicate severe headwinds for Akamai. They recently won an intellectual property suit against Limelight, and in general have a solid IP portfolio. They are the market leader, have very high profit margins, and continue to dominate the high end for CDN and application acceleration services, both of which are expected to enjoy double digit growth rates in the coming years.
My view is that they’re currently undervalued (though not drastically) and should enjoy steady appreciation for some time.
Dan Rayburn has a note out this morning about the lack of traction that P2P vendors such as Pando Networks and BitTorrent are experiencing with Content Delivery Networks. Dan’s the most knowledgeable guy I’ve read about CDNs, and I agree with him here. P2P certainly has its commercial uses, but as Dan points out:
From what I can tell in the market, P2P is not as big of a story as it was at the end of last year. The topic has cooled off a bit except when its being discussed as it pertains to carriers blocking or filtering of P2P based traffic on their networks. Aside from that, customers are not asking me about P2P and 55.2% of those we surveyed about their content delivery needs said they did not plan to even look at P2P as a delivery solution for 2008.
Cost is usually touted as the primary reason to use P2P for content delivery, and as I’ve argued before, this won’t scale–ISPs will eventually demand their pound of flesh, one way or another. Plus, as Dan says over and over, cost isn’t even the most important factor for most content providers. My view is that P2P will eventually take its place as a valuable niche method for video delivery, and several of the larger players will gain traction (and/or be acquired). But it’s likely to remain a total delivery solution only for file traders and small content owners.
Silicon Alley Insider has a short interview with BitTorrent CEO Doug Walker about plans to entice the media Big Boys to use BT’s peer-to-peer delivery service. Walker claims he can undercut the likes of Akamai and Limelight Networks.
P2P does a great job of file transfer. Streaming? Not so much.
Streaming via P2P doesn’t use any less bandwidth that streaming directly. It just uses somebody else’s bandwidth. So yes, it can be “cheaper”, but this is virtual savings, not real savings. Once P2P streaming delivery gets big enough–if it ever does–the ISPs will step in and demand their share. This is what the whole net neutrality thing is about. In fact it’s already happening, with Comcast selectively blocking some P2P clients. Even if there’s no direct royalty to the telcablecos, sooner or later their bandwidth gets chewed up, and then they raise prices to consumers.
This thing won’t scale. It runs up against the fundamental problems of the Internet in the U.S.: lack of edge capacity and asymmetric bandwidth.
Most internet connections are designed to be timeshared. Your advertised 2 Mb/s (or 10 Mb/s) link only gets that kind of speed if no one else in your neighborhood is using theirs. Cable systems often have a 500:1 share ratio. Even DSL is shared in a way, limited by capacity at the DSLAM in the central office (and it’s typically slower to start with). Which all works fine for web pages where it’s a quick download between idle times. But video streaming of any kind runs into real problems with enough simultaneous users, because there’s a minimum sustained rate that must be achieved to avoid jitter and/or buffering.
What makes the problem worse for P2P is that almost all internet connections are asymmetric; the upstream bandwidth is an order of magnitude slower than downstream. This is because the phone and cable companies–with their heads firmly in the sand–never envisioned the internet as anything other than a way to shove increasingly expensive media down consumer throats. That is, after all, the model they were founded on. But P2P and User Generated Content are turning that notion on its head.
So we have too little bandwidth, and it’s increasingly pointed in the wrong direction anyway.
Streaming via P2P works fine on a small scale (Joost’s beta wasn’t half bad; but notice how the more users it gets the less you hear about it?) And P2P is great for file transfer since there are no latency/buffer issues. Just don’t expect it to be the answer to video delivery for consumers. Conversations with executives at the likes of Akamai (who has their own P2P technology) have confirmed peer streaming will likely be limited to private networks where there’s greater control over the protocols and the bandwidth.
Don’t get me started on streaming vs. download, and why the latter is better because storage is cheaper than bandwidth. That’s a subject for another post.