Shares of Akamai (AKAM) surged higher today, boosted by a strong earnings report and evidence that concerns about price wars in the content delivery market are overblown. Akamai shares rose $2.68 to close at $32.41, a gain of 9 percent on the day.
On Wednesday Akamai reported that its annual revenue grew 48 percent in 2007, with revenues of $636 million for the year. Despite growing competition in the CDN market, customers are spending more money with Akamai, with average revenue per customer up 12 percent from the previous quarter and 22 percent from the year-earlier period. Akamai now has more than 100 customers who spend more than $1 million a year on its services.
Akamai customers are spending more because their businesses are growing. "As more and more entertainment content and games are going online, it drove really tremendous results for us," President and CEO Paul Sagan said during Akamai's earnings call with analysts. "We saw it across many verticals, but the two most important were e-commerce and the media and entertainment, even beyond expectations. I think that we are seeing a steady growth of entertainment content moving to an IP world. I just think you continue to see adoption of the Internet and it creates this virtuous spiral upwards right now."
CFO J. Donald Sherman said Akamai wasn't going to engage in price wars. "There is still plenty of competition," said Sherman. "We still are fundamentally differentiating ourselves and selling based on solutions rather than competing on price - kind of the same landscape that we've been seeing." Sagan elaborated on that point:
I think you see that the market has recognized that our customers want value and they want to see their business accelerated and improved, and that's what we are doing. We're driving revenue in and cost out for them and they are willing to pay us for that.
Separately, Dan Rayburn at the Business of Online Video shared early results of a survey of more than 500 CDN customers. Dan says 62 percent of participants said their pricing was flat year over year. Savvy customers are clearly finding deals - about 15 percent reported pricing at least 20 percent lower than their previous contract - but the broader picture was not one of collapsing margins.
The point is that not every customer is getting rock-bottom pricing and not every customer knows what price they should be asking for. If they did, we'd be seeing lower prices in the market more than we are, but in many cases, customers who already think they are getting a good price aren't trying to get the CDNs to lower pricing even more, unless the customer is willing to commit to more traffic, more revenue, or more services.