Akamai Getting More Aggressive On CDN Pricing, But More Steps Are Needed

Over the last 60 days, I have seen Akamai getting more aggressive with video delivery pricing and in some cases, appears to be doing a better job of trying to keep existing customers at the time of contract renewal. While that should come as no surprise considering current market conditions and Akamai's recent slowdown in the growth of their business, I think it's being done too late and on too small of a scale.

While Akamai's pitch to customers has always been that you should pay more if you want multiple services like content delivery, app acceleration and ecommerce services, for customers who need just video delivery, that sales pitch simply does not work. Yes, if you need content management or other services outside of pushing video bits, I think Akamai has a legitimate sales proposition. But for customers who need just video delivery, streaming or download and no additional services, Akamai has no justification as to why a customer should pay 3x the going rate. No one can debate with any reasoning that pushing video bits across a network is not already completely commoditized in today's market.

If Akamai was the only CDN who had the scale or performance to push even commoditized bits across the Internet, then the argument could be made that even if the service is commoditized, Akamai is the only major player in town so it costs more. But that is not the case. The fact that Limelight, Level 3 and CDNetworks combined will do more than $200 million dollars this year in CDN revenue proves that point.

While Akamai has been more aggressive on pricing for video delivery, many times, their pricing is not matching their sales proposition to customers. I am seeing many proposals where Akamai is pitching the customer on the value of their network for commoditized video delivery at 3x the going rate, yet when the customer balks at the pricing, Akamai proceeds to drop their pricing in half. That's a confusing message. If Akamai knows the customer needs basic delivery services, why try to pitch them on a higher level of service only to drop the pricing right away? In some cases, customers aren't even giving Akamai a second chance to bid on the business as Akamai's initial pricing is too high and does not make the initial cut. In cases where the customer does go back to Akamai saying the pricing is too high, I am also seeing Akamai cutting pricing by more than half, but only after three or four rounds of negotiations with the customer. Again, if this is commoditized business, why jerk the customer around? It should not take four rounds of negotiations to get a price that the customer is actually willing to consider. Give them a fair price for the service being offered and do your best to win or keep their business.

I know many Akamai investors are going to want to knock my reasoning by saying look how much cash Akamai has or look how big their revenue is. But no investor can argue that Akamai's business, while still growing, is showing some serious signs of slowdown and increased pressure from competitors. That being the reality, there are a few things Akamai should do to help increase their market share and increase the growth of their video CDN business.

For starters, Akamai should stop trying to charge more for streaming delivery than progressive download. I know some are going to say streaming costs more, but Akamai has long said that the value of their network is that it is so distributed and flexible that all their servers can delivery any type of content and do it at a cheaper cost. If that is the case, then there is no need to charge more for one type of protocol than another. And even if it is more expensive to Akamai, no other major CDN charges more for streaming. So like it or not, the market has dictated how customers are buying these services. Akamai can continue to think they can charge more or they can listen to the market and realize they are losing business to competitors due to their pricing strategy. If Akamai were to charge one price, they would win more business and get the opportunity to bid on more business. I can't even begin to count the number of times a customer has told me they are not going with Akamai due to Akamai's increased cost to stream content.

Second, Akamai should start offering two levels of content delivery pricing. If they are going to end up discounting their initial pricing by half, then just admit that some video delivery business is commoditized and come in with an aggressive price the first time. Do what you can to win this business outright. I know some will want to argue with me that Akamai does not want this business to begin with but then I ask, why is Akamai dropping their pricing in half? If they don't want the business, then stick to the high pricing they are giving out let the customer leave if you don't want them. You can't say you don't want the business to begin with, but then you drop your pricing in half to try and win the business. That's a conflicting message.

Akamai has been around for ten years now and no question has been the leader in the content delivery market. But times are different now and all companies need to deal with reality of what is going on in the market. Companies must evolve with the times and that includes how you price, package and productize your services. Akamai seems to be doing a really good job with their other services outside of CDN and lining themselves up as a company for when things like app acceleration truly begins to grow. But in my eyes, they are doing all of this at the expense of the CDN product, which is the service that really helped them grow for many years.

Some will say my argument makes no sense because if Akamai takes on this business, at a reduced cost, it will only have a negative impact on their margins. My response to that is that this business is all about volume and the economics of scale. While overall margins for CDN would go down initially, they would go up over time, as the added impact of so much additional traffic on Akamai's network would reduce their overall cost. Again, this is what Akamai has pitched the industry on for years, their ability to scale their delivery services like no other company. If that were the case, then signing up enough customers for commoditized video delivery services would have a positive impact on margins over time. I'm not saying for Akamai to give the stuff away or to match some of the lowest pricing in the market. I'm saying Akamai should price it to win, within reason, based on what the customers needs are and the type of traffic it is.

If Akamai re-tooled their pricing, their sales pitch and their strategy for how to deal with customers who only need very high volume of commoditized video delivery, they would win a lot more business. It would also enable them to hopefully be able to up sell the customer on additional services down the road when the customer grows their business and needs some actual services that come with a premium. If Akamai does not want to be in the business of offering commoditized video delivery, fair enough. But then stop giving out quotes for that business and pass on responding to the RFP. They can't have it both ways.

Akamai is not dumb, in fact, I've always thought of them as being very smart folks. And I don't think this is a case of Akamai not knowing what is going on in the market. I think Akamai has been in a comfortable position for the past few years, with little in the way of pressure and competition and is still sticking to their old mentality of how they sell their services. It's time for Akamai to evolve their CDN business and re-tool it for the current market. But to do that, they have to throw out the legacy idea that they are the only game in town and the attitude that comes with that. Akamai has all the resources needed to make this transformation in the market and now is the time they need t
o do it.

If Akamai is going to make this change, deliver a new message and adapt their CDN business to the changing times, I'm even willing to go on record and say I will give them any outlet they want, be it at one of our shows, my blog or StreamingMedia.com for them to deliver that message to the industry. Akamai has always been seen as the market leader in the CDN space, and as a result, is expected to educate and lead the entire market with their vision. That needs to happen soon as before too long, it's not going to be such a clear-cut decision as to who the market leader for CDN services is anymore.

Reminder: I have never bought, sold or traded stocks in any public company ever, including Akamai.