Akamai’s Troubles: Much Ado About Nothing

The search for the "Wall Street darling" happens every time an initial public offering is floated. Limelight, seen by many as Akamai’s nemesis in the CDN space, was able to raise around $205 million in its IPO last month. Priced at $15 per share, Limelight sold 14,900,000 shares of its common stock, which includes the sale of an additional 2,400,000 shares of common stock to the underwriters upon exercise of their overallotment option (in other words, Goldman Sachs did a good job of getting the IPO subscribed). The stock continues to trade heavily, but within a limited range.

In a recent article, Barron’s added extra fuel to the fire of the search for the next rapid-growth darling in the CDN space. The article pointed out that Internap, (which in late 2006 acquired VitalStream, which itself had previously acquired EonStreams and its advertising insertion technology) has predicted 30% earnings growth for 2007, higher profits, and gross margins of about 50% for all of its businesses, and even higher margins for its CDN division.

[Editor's note: Since this article went live, Internap announced its 2Q 2007 earnings, which showed a GAAP net loss of $1.7 million or $0.03 per share, compared to net income of $.07 million or $0.02 per share for 2Q 2006, according to this RTTNews article.]

Adding to Akamai’s troubles are the recent preliminary findings in a suit it brought against Limelight where it argued that Limelight is infringing on a patent that Akamai and the Massachusetts Institute of Technology claim restricts Limelight from delivering content the way the new CDN is currently delivering it. The judge in the case ruled that Akamai was overstepping its bounds by attempting to block a competitor from a process.

U.S. District Court judge Rya Zobel issued a preliminary ruling in the case in early July that was, according to WR Hambrecht & Company analyst Robert Stimson, a rejection of the notion that Akamai could patent the way files were delivered over the internet.

"What happened was Akamai was trying to patent the process, as opposed to its technology," Stimson said. "And the judge said, 'That's not a process you can patent.' "

Fil Zucchi, an investment advisor who writes for the financial website Minyanville, sums up the situation well from an investment standpoint. He argues that Limelight’s strong IPO—which seems to break the perception that Akamai has a monopoly on the CDN space—isn’t going to have as much impact as some analysts believe.

"I am not oblivious to the fact that the simultaneous appearance of ‘margin problems’, and of Limelight Networks (LLNW) as a publicly traded competitor, are probably more than a coincidence," says Zucchi. "For the first time in a long time AKAM is likely seeing some pricing pressure. But so what? If a seal-tight monopoly has now become a pre-requisite for successful growth, the list of investable companies has just gone through the incredible shrinking machine. Top and bottom-line growth continues to hum along—and content distribution remains one of a handful of true growth opportunities."