It’s Official: Akamai To Acquire Cotendo, Good For Akamai, Bad For Customers

[Updated: Part two of this post is now online: More Thoughts On The Akamai/Cotendo Deal and Its Impact On AT&T“]

As expected, this morning, Akamai announced that they have agreed to acquire privately held Cotendo for $268M, in a deal that is expected to close in the first half of 2012. While Akamai always portrayed to the market that Cotendo was never really any threat to their business, Cotendo was starting to put pressure on some of Akamai’s higher margin revenue and winning some big deals in the market. The fact Akamai paid about 6x revenue for Cotendo (updated: just to clarify, the deal is valued on expected 2012 revenue, not 2011 trailing revenue. Cotendo did about $30M in revenue this year) is a testament to the value of what Cotendo built and the impact they were starting to have on Akamai’s business. This is a good acquisition for Akamai and will help to shore-up their value add services and clearly the street likes it as Akamai is up over $4 a share as I write this post.

Cotendo launched on March 11th, 2009, and in less than three years, built out a very robust platform for application acceleration, dynamic site acceleration and mobile content acceleration with Facebook, HTC, Conde Nast, Answers.com, Vistaprint, Digg, Mashable and Bayer as customers. While I have seen others say that Cotendo’s core focus is mobile, most of their revenue is not from the mobile sector. Cotendo released their mobile acceleration product only six months ago, (here’s details on how it works), so most of their revenue it not from mobile delivery today. That said, Akamai knows where mobile is headed so Cotendo’s mobile product is a great fit into Akamai’s product portfolio not to mention, Cotendo’s DSA product was out-performing Akamai’s DSA product by up to 20% based on feedback from many of Cotendo’s customers.

Because AT&T licensed re-sells Cotendo’s technology to run on the AT&T network, AT&T did have right of first refusal to purchase Cotendo. But from what I hear, AT&T never made a serious offer for the company and Akamai wasn’t bidding against anyone else. To me, it’s a bad sign for AT&T that they didn’t step in to acquire Cotendo as it would have shown they are serious about the overall CDN space. What happens to AT&T’s products and services that rely on Cotendo’s technology is not known, but clearly there won’t be any more software updates from Cotendo and AT&T will have to build out any additional functionality to the platform on their own. it is expected that AT&T will stop re-selling Cotendo once Akamai acquires them and that AT&T will now default to EdgeCast for some of these same services since EdgeCast’s software is running diectly on AT&T’s network.

While this acquisition is great for Akamai and their business, it’s bad for the industry and for customers as a whole. Competition is a good thing because it makes companies innovate faster, helps foster quicker adoption of technology, drives pricing down in the industry and with more companies selling the same service, it creates better awareness in the market. With Akamai taking out Cotendo, they have locked up the market for app acceleration and mobile acceleration and are the clear leader, in terms of revenue, for DSA offerings. That’s not to say that others won’t compete over time (Amazon will, EdgeCast also), but Cotendo was really the only company that was getting some good traction in the market for these services, had some real revenue and customers to show for it and was putting pressure on Akamai.

With one vendor now controlling the vast majority share of the market, Akamai has no pressure to reduce pricing. Pricing for these services will go up, not down, the same way CDN pricing did when Akamai acquired Speedera. I’m sure Akamai will say otherwise, but with Cotendo customers saying that Cotendo was on average 30% cheaper than Akamai, that pricing difference will disappear once the acquisition is done and contracts have to be renewed. While some vendors like Limelight Networks, CDNetworks, AT&T, Level 3 and EdgeCast are trying to focus their products and services on more of what Cotendo was doing, none of them have gotten the kind of traction Cotendo has and it will still be awhile before any of them compete with Akamai at scale.

While this is a good acquisition for Akamai, there is one danger to it. Akamai needs to understand that many of Cotendo’s customers don’t want to work with Akamai or have left Akamai for Cotendo. Akamai has a history of acquiring competing companies, shutting their services down and essentially migrating all of those customers over to Akamai’s already exisiting products. In this case, that won’t work. Akamai has to keep Cotendo’s products alive and integrate them with the Akamai network in order for this to work.

After hearing the news, I reached out to some of Cotendo’s customers who naturally, weren’t happy to hear that Akamai would acquire Cotendo. One of them said, “the whole reason we are with Cotendo is that we didn’t want to be on the Akamai network anymore“. That’s the argument that many of Cotendo’s customers are going to have, so Akamai has their work cut out for them to make sure Cotendo’s customers feel like they can still use Cotendo’s platform, on the Akamai network.

One thing I hope for from this deal is that Cotendo’s culture may be able to rub off on Akamai. Cotendo is quick and nimble, they follow up with customers quickly, develop and roll out new products fast and are thought of as easy to work with. Akamai may be the leader in the market, but they are still very slow with new product introductions, are anything but nimble and customers still tell me all the time that it takes Akamai weeks to do things that their competitors do in days. Akamai’s management knows that the culture of the company needs to change, that their marketing message needs to be overhauled and that the value proposition of products and services, like their HD Network, aren’t being highlighted correctly. Hopefully Cotendo’s culture can help assist Akamai with that.

Note: I have a lot of emails from people asking me to call them to get my comments on the deal and I will get to all of them as I can. I am doing a lot of media calls as well, so if you have a question, you can reach me on my cell at 917-523-4562. I will return all calls.

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