Akamai: Blueprint for Building a Platform Business
Akamai operates a classic two-sided business model and has moved well beyond its roots as a pure content delivery network (CDN).
The recent product development and acquisitions activity provide a great lesson to all how to leverage a platform and build barriers to entry. Even before the credit crunch, the plethora of new entrants into the CDN space would find competing with Akamai difficult.
Below we explain the roots of Akamai's success and how it stays one or more steps ahead of the competition.
Akamai's 2-sided business model
Akamai has a compelling proposition for downstream players: allow servers to be hosted within your network and we not only reduce your transit costs and pay a co-location fee, but improve your end-users online experience. This is classic subsidisation of one side.
For sure, downstream players can refuse to co-locate Akamai servers deep inside their network, but there is no incentive to do this as Akamai can reach their customers anyway - albeit slower, but for free.
Akamai also has a compelling proposition for upstream players: for a fee, Akamai will deliver your content or applications faster, reduce your requirement for investment in servers and bandwidth, and most importantly take away the worry and complexity of building a highly available service.
Upstream players have a lot of choice - the CDN market is highly competitive and yet Akamai is the market leader, has low churn, and manages to charge a premium price.
Excellence in Distributed Computing Theory & Practice
The best way to think of the Akamai platform is as a super-computer with over 20,000 nodes in over 70 countries processing over 300bn transactions daily. The first key skill of Akamai is managing this super-computer without a huge army of engineers scattered across the globe - this is not a trivial task and something often overlooked by new entrants.
The next key skill of Akamai is the ability to rewrite some of the inefficient internet protocols and deploy within their own super-computer. BGP routing doesn't do the job? No problem, Akamai will invent our own and call it "SureRoute". TCP is slow and messy for certain applications? No problems, Akamai will invent its own "IP Acceleration" technology. Database queries taking too long? Akamai will invent its own pre-fetching technology.
Performance management is another key skill and allows Akamai to build up a body of data to prove that Akamai performs the best and deserves a premium price. Akamai quarterly "State of The Internet" is fascinating reading, but could also be seen as a list of reasons to use Akamai services.
These Computing & Communications skills are not easy to acquire, but Akamai seem to have them in abundance.
Targeting the high spenders with vertical offerings
Akamai has around 2,800 customers with average spend of US$300k/pa and they have more than 100 customers spending over US$1m/pa. They deliberately target the top-end of the market. The bursting of the tech bubble in 2001/2 taught them a very painful lesson - customers can disappear in a downturn.
The Akamai sales force organise themselves around specific verticals. This is an important message to all platform players - sales teams need to understand industry challenges and must be able to package & bundle standard platform capabilities to solve specific Industry issues.
Obviously they are very strong in Media & Entertainment, where content delivery is a basic online requirement. In the first 9 months of 2008, Media & Entertainment represented 48% of revenues or US$275m - a year-on-year growth of 30%. This is highly competitive sector, future growth will come from the adoption of High-Def and thereby higher volumes of data.
High Tech companies are also a strong sector where application delivery is important. In the first 9 months of 2008, High Tech represented 22% of revenues or US$125m - a year-on-year growth of 16%. Akamai expects growth here coming the adoption of SaaS or cloud services.
Application Acceleration is vital in the B2C and B2B commerce where customers are only one-click away from not making the purchase - Akamai sees the important commerce verticals as retail, travel, pharma, finance & manufacturing. n the first 9 months of 2008, Commerce represents 26% of revenues or US$153m - a year-on-year growth of 43%. This is very little competition in this sector - future growth will come from the macro-economic shift to ecommerce and B2B legacy apps moving into the cloud.
Intriguingly, Akamai also targets the Public Sector which although small in overall size (first 9 months 2008, US$25m) presents an excellent opportunity for funded R&D. One can only guess which US agencies, Akamai deals with.
Continually launching new services on the platform
Akamai continually updates the platform's capabilities either via internal development or acquisition.
A good example of this is the acquisition of Red Swoosh in 2007 for US$15m, which gave Akamai p2p distribution capabilities. Akamai doesn't sell a P2P-based content distribution services, viewing p2p as an ingredient delivering more nodes on the super-computer.
The Nine Systems acquisition for US$190m delivers a capability of media management. Renamed as "StreamOS" and integrated with the Akamai platform, this gives Akamai the capability of selling more value-added-services - capturing more revenue per customer and reducing the probability of churn. A great example of StreamOS in use is the Association of Surf Professionals, which also serves as a great success story for other customers.
The recent acquisition of Acerno for US$95m shows that Akamai is moving into Advertising Services. Acerno has a very interesting twist on advertising with a co-op model, sharing purchase data. It seems blindingly obvious that actual purchase data is far more valuable than the context of someone browsing the web. It also seems equally blindingly obvious that Akamai's Media & Entertainment will gladly look at any capability which offers the opportunity of increasing revenue with online video.
Akamai doesn't do everything by acquisition alone. An example of internal product product development is the Move Networks clone named "Akamai Adaptive Edge Streaming for Silverlight". Akamai also is moving into providing security services. Akamai doesn't stand still - it has the base platform and can leverage it to continually add new services of value to its customer base.
Akamai has created a market leading platform over the last ten years - it has a world leading team making sure the platform operates reliably and efficiently, and it continually adds new capabilities to the platform making it more attractive to both existing and new customers.
Anybody thinking of launching a platform business can learnt a lot by studying them.