Akamai (AKAM) was an exception in my portfolio. I typically avoid high P/E high market cap companies, but Akamai had a unique and dominant position in the marketplace that I felt people overlooked. But I’ve synthetically hedged out Akamai holdings since September 22.
I’m writing this post today because I haven’t written anything substantial for a week and a half and readers deserve better. Brightcove, a company I have written about, released their video content distribution platform today (WSJ Link, free article here). It seemed necessary to footnote what I have written before and summarize why I’ve closed the door on Akamai.
First and foremost: Everyone is talking about Akamai and how great they are (This is a great example, and is what catalyzed me to action). I rarely read articles or speak with anyone who has anything bad to say about Akamai. This indicates the market has built in perfect expectations to the price.
Of greater concern is whether Akamai is a high margin service provider, or a low margin hosting service.
Today, Akamai exists to outsource hosting for companies using their large, distributed datacenter. Whether it is Salesforce.com, NBC, Apple iTunes, etc. – Akamai sells a distributed hosting infrastructure that ultimately is application agnostic.
Building and operating large data centers is a depreciating barrier to entry. Google (GOOG) has them. Yahoo (YHOO) has them. Microsoft (MSFT) is building them. This blog is hosted on one. They are not the unique resource they used to be. Therefore, Akamai’s hardware infrastructure is no longer a unique advantage.
They do have a compelling advantage on the sales side, with a large direct Salesforce and great connections into the big media companies. This advantage is eroding as well. The issue is Akamai offers nothing but hosting. Companies like Microsoft, Google, and Yahoo can add value beyond hosting. These companies all have the infrastructure to not just host content, but also pair it with the appropriate advertising to extract revenue.
Our assumption appears to be breaking down, as Google deftly repositions itself a more of a mediator of video content rather than an author/owner. The WSJ article captures the leading edge of this trend very well. Google appears to be convincing major networks like CBS to allow them to host and monetize high value content. This is very negative for Akamai.
This was before Google bought YouTube. Google bought YouTube because they wanted to monetize the video content. Akamai provides an agnostic solution that requires the content owners to monetize the content. Extracting value from content is inherently a higher margin business than hosting it on a server.
I believe that Google, Yahoo, Microsoft can better pair content and advertising for each individual viewer. NBC, CBS, ABC, etc. evolved in a world where 50mm people all view the same content and advertising (broadcast TV). It is hard to imagine they will evolve better advertising systems than the ones already evolving within the search behemoths.
The cost of hosting quality content that can generate revenue will be zero. Google, Yahoo, Microsoft, and others will line up for the chance to cache content for free in order to pair advertising with it (extracting a success based fee). Akamai has no means and has shown no interest beyond operating a very sophisticated hosting company (see Brightcove vs. Akamai from Feb ’06). This business model does not deserve a triple digit P/E.
Hosting is a commodity. Akamai’s service is no different. The market will eventually price this in; next week, next month, or next year. I don’t want to be a stockholder when it does.
I can calculate the movement of the stars, but not the madness of men. – Isaac Newton