Akamai's Media Slowdown: Company Specific?

Written by Ryan Lawler

Thursday, July 31. 2008 at 05:55 PM EDT Post a comment

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Despite Akamai Technologies Inc. (Nasdaq: AKAM)'s claims that traffic growth in media and entertainment has slowed, industry sources say these factors aren't necessarily an industry trend.

On yesterday's second-quarter earnings call, Akamai CEO Paul Sagan said the company's results were affected by a slower rate of traffic growth in media and entertainment.

"Growth in our media and entertainment vertical has moderated a bit from prior years," Sagan said. "It's not that this market is less promising, The explosion in traffic growth that we saw over the past couple of years has simply moderated."

Sagan pointed to stagnant last-mile bandwidth as a contributing factor in the moderating traffic growth. "What we are seeing is the leveling out of last-mile bandwidth, and that has nothing really to do with the economic situation," Sagan said.

But some analysts and competitors say they're not seeing the same weakness in media and entertainment.

Wedbush Morgan Securities analyst Kerry Rice says, "I've talked to a lot of the CDNs, and not one of them said, 'We're seeing traffic volumes slow.'"

"We don't see any slowdown," says Robert Gribnau, vice president of sales for North America and Europe at CDNetworks Co. Ltd. . "In fact, we're seeing bigger RFPs lately than ever before."

That's causing some to speculate that Akamai is just being coy about competitive pressures that it's facing. In a research report this morning, Raymond James Financial Inc. (NYSE: RJF) analyst Michael Turits wrote, "The company does not believe traffic has been affected by a share shift, but our checks indicate that some large media sites are moving traffic to Level 3 Communications Inc. (Nasdaq: LVLT) and Limelight Networks Inc. (Nasdaq: LLNW)."

Akamai also saw bursting charges "on the low side" for the quarter, according to CFO J.D. Sherman. He attributed lower bursting to a shift in how customers are signing deals. "Particularly in the media space we've seen out customers, rather than make their traditional period commitments in terms of monthly commitments, they are making a long-term commitment."

Longer-term commitments might allow customers to better manage their usage patterns, but Sherman says the result is more sensitivity in Akamai's business. The guideline that Akamai can no longer expect 30 percent of revenues in the media space to come from bursting may no longer apply.

One factor that may affect bursting revenues is the use of multiple CDNs to manage overage charges. "Every customer that can do so moves their overages to other CDNs," says EdgeCast Networks Inc. president James Segil.

While competitors say they aren't feeling the same challenges that Akamai is, that doesn't mean they don't exist. Some believe that Akamai's sheer size makes it more susceptible to feeling the effect of macroeconomic challenges.

"It is natural in any market for a large incumbent to experience more impact from macroeconomic trends than smaller, more nimble players," says Panther Express Inc. CEO Steve Liddell.