Akamai's Pricing Conundrum

December 3rd, 2008 by · 2 Comments

Dan Rayburn has a long article on Akamai’s pricing travails in the video streaming market, I recommend a read.  Put simply, Akamai (AKAM) has long sold at a premium to the market.  But the market is segmenting, and the basic delivery of streamed bits is largely commoditized.  Dan says that Akamai is still quoting the higher prices for this product, but cutting it in half or more in negotiations.  This is not the whole CDN market, just raw streaming video delivery, but it is a challenge to Akamai’s leadership nonetheless.

Followers, or should I say survivors, of the IP transit wars over the last decade will recognize the pattern.  It is what happens when a company with a substantial existing revenue base meets commoditization and price compression.  A fair amount of customers are somewhat price insensitive or just have too much inertia, you really want to just renew those contracts.  If you cut prices publicly across the board, you lose that edge and your revenue falls rapidly.  If you don’t cut prices, your competitors eat your lunch on new sales. So, you try to have it both ways:  keep high list prices but cut them aggressively in private, which is what Akamai is doing.

But as Dan eloquently describes, this makes the market fuzzy.  It makes pricing hard to figure out and loses customers in other ways.  It makes the trainwreck long, slow, and excruciating, because sooner or later pricing does come down on all that revenue and in the meantime the competition drives a truck through the open door.  In IP transit, we saw Cogent (CCOI) take advantage of fuzzy pricing by nearly all other carriers and managed to turn a ragtag pile of garage sale assets into a top 10 backbone.  They did so by offering a clear, unambiguously low price in a fuzzy industry that was trying to hang on to existing revenue.  Well, that plus an aggressive sales style that just drove the industry berserk sometimes, but the point is that Cogent had nothing to lose and its competitors did.

Now the CDN market is not IP transit and Akamai is in a far better starting position than those carriers were, they are profitable and while there are many CDNs there are still less than a half dozen real competitors.  But I’m going to agree with Dan here.  If Akamai’s pricing gets too fuzzy on the parts of their business that are commoditized, they may protect some revenue for a while but they will do it at a price.  They will cede the initiative to the competition.  With online video looking to become the real deal in the next few years, that may be worse.

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2 Comments So Far

  • iSiS says:

    Keep up the good work Rob. You’re now my 1st blog to read every morning!

    A couple of points:

    1) Regarding Akamai’s quotes and cutting pricing in half, this is not an entirely foreign concept in telecom/software/hardware/etc. Nobody pays list prices and you expect this going in. I think its over-simplifying things to think that THIS is the problem with AKAM losing deals. Their list prices are a subset of the greater problem, but not the core problem.

    The core issue is the pervading arrogance inside the company that has come from their success and dominance over the years. Not that this is a problem unique to Akamai, but its hurting them now regardless.

    People who know the market, know that Akamai is more than willing to drop their pants for the right client. Clients’ issues would primarily be, “do I really want to deal with Akamai?” They are effectively the “ma bell” of CDN’s: more complicated contracts, slower implementation, etc. Do you get a slight improvement in performance over most other CDN’s? Sure. Does a 10, 15, 20ms improvement when downloading an object represent paying that premium and going through the hassle? Not in this economy, and not at the unprecedented levels of bandwidth that folks are pushing.

    2) The premise that “this is not the whole CDN market, just raw streaming video delivery,” is completely false. Akamai is starting to get very aggressive for any type of traffic: small object, prog dLoad, streaming, etc.

    I agree that AKAM is a much better position than the carriers, and their diversified product is offering is very good. But they can no longer afford to walk away from business because “they are Akamai.” They are now starting to do this, but they can also kiss their 70% gross margin goodbye.

  • Rob Powell says:

    Thanks for the words of encouragement, iSiS!

    You’re right, I should clarify. It’s not that I know (or think) Akamai is pricing less aggressively in the other CDN categories, just that the information in this case was specific to streaming. That you see them equally aggressive in other categories is interesting.

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