Shares of Akamai Technologies (AKAM) are lower today after an analyst issued a "sell" recommendation on the stock, saying competitors were likely to erode a key revenue niche for the content delivery network (CDN) market leader. Shares of Akamai closed at $30.37, down $1.89 for a drop of 5.9 percent on the day.
Kaufman Brothers analyst Sameet Sinha said that the competitive dynamics in the CDN market are ready to change. "There is an influx of new entrants into the space, especially in the media and entertainment" segment, which makes up 40% of Akami's sales, Sinha wrote in a research note. Factors include the recent entry of newcomers EdgeCast and Panther Express, the IPO of Limelight Networks (LLNW) and the launch of a CDN offering from Level 3 (LVLT).
This has led to concern about a price war in the CDN market as competitors seek to gain market share by luring customers awayu from Akamai. There are reports that Level 3 may position its CDN offering as a lower-priced alternative to Akamai.
Sinha expressed particular concern about Akamai's potential loss of "bursting" fees for exceeding traffic allotments. Sinha said new competitors may eliminate bursting fees, which would pressure Akamai to follow suit and offer customers the option of splitting their traffic.
"As customers reach their maximum monthly commits, they could switch to the second provider for the rest of the month, rather than pay Akamai more," Sinha said. "While Akamai has indicated that bursting is 30% of its revenues, we believe it is much higher as a percentage of revenues from media and entertainment." One customer that may consider this is Apple, a long-time Akamai customer that Sinha says has opened its CDN business to a competitive bid, inviting both large and small CDNs for evaluation. Sinha says Apple will likely continue with Akamai, but may rely on several providers.