When it comes to delivering vast amounts of data over the Internet, Akamai Technologies Inc. of Cambridge is number one. But the company won't stay on top without a fight, and the list of challengers keeps growing.
Akamai dominates the "content delivery network" business. Leading Internet companies pay to use Akamai's thousands of server computers. These servers collect and store billions of Web pages, along with audio and movie clips, and then deliver this material quickly to end users around the world.
It's a critical Internet business, and Akamai controls about two-thirds of it, according to the consulting firm Frost & Sullivan.
But many other companies want a piece of the action. Last week, telecom giant AT&T Inc. made its move, saying it would build advanced content delivery services inside its existing Internet backbone, which extends into over 180 countries.
"We actually think this is a natural extension of the services we sell already," said Stephen Sobolevitch, AT&T's vice president of content distribution services.
No big deal, said Robert Blumofe, Akamai's vice president of networks and operations. Blumofe noted that AT&T has had a small content delivery business for some time. "Historically they haven't been a major factor," he said. "We don't lose sales to AT&T."
But Tim Watts, investment analyst for Cowen & Co. in New York, took a less sanguine view. He followed up the AT&T announcement last Wednesday with a downgrade of Akamai stock to neutral. "The market seems to have agreed with us," said Watts; shares of Akamai dropped nearly 6 percent after the downgrade.
Indeed, the market has had a jaundiced view of Akamai for much of the year. Akamai's shares traded above $59 in February, but have slumped to around $35. Investors haven't taken much comfort in the company's solid financial performance. Third-quarter revenue grew 45 percent over the previous year, while income was up 49 percent, to 34 cents a share, a penny better than analysts' estimates.
Still, investors have focused on the certainty of thinner profit margins as Akamai fends off a growing host of rivals.
"Everybody's been piling into this space," said Melanie Posey, an industry analyst at IDC Corp. in New York. "A lot of the new companies, and also some of the network providers, are stepping up their efforts."
Last December, Level 3 Communications Inc., a major Internet service provider, made its move into the space by purchasing the content delivery business of Savvis Inc. Limelight Networks Inc., a major Akamai rival with about 10 percent of the market, went public in June, and in August disclosed a major deal to deliver Internet music, video software, and games for Microsoft Corp.
There are plenty of other smaller competitors, including Mirror Image Internet Inc. of Tewksbury, a privately held firm that entered the content delivery service in 1997, at about the same time as Akamai. Mirror Image handles streaming video for The New York Times Co., the Home Shopping Network, and a variety of local television stations in the United States.
But Watts believes that AT&T's entry into the market is particularly worrisome, because the company can piggyback on its vast network infrastructure. That could enable AT&T to build a technically superior network, capable of outperforming Akamai's system. "It may take awhile," Watts said, "but if they pour money into something and set their sights on it, I think they're likely to get there."
But Blumofe said Akamai has a technology lead that AT&T can't match. "Our performance and reliability is way, way beyond what AT&T offers," he said. "From a functionality point of view, they really enter the market looking more like Akamai circa 1999."
Even so, the presence of AT&T, along with Level 3, Limelight, Mirror Image, and many other firms, is sure to depress profit margins at all content delivery companies in coming years. Gross margins at Akamai have slipped from a high of 86 percent in 2005 to around 83 percent this year. Akamai officials have predicted that these margins will continue to fall.
"This is a technology business so prices do decline," said Blumofe, "but so do our costs."
Meanwhile, Akamai expects revenues to keep rising, to around $1 billion a year by 2009. And while Watts is a skeptic about Akamai's investment potential, he's confident about the company's future. "There's no question that they're still a great company, and they're going to dominate this market for some time," Watts said.
Hiawatha Bray can be reached at bray@globe.com.
