As its customers are squeezed, Akamai gets ready for slowdown

Despite the 110 layoffs it announced on Wednesday by Akamai Technologies Inc. of Cambridge, the company insists it hasn't fallen on hard times -- yet. But many of Akamai's customers are being hammered by the recession, and chief executive Paul Sagan wants to cut costs early to prepare for any slowdown in the company's growth rate.

Akamai's global network delivers content across the Internet for major websites that deliver news, entertainment, and online retail services to millions worldwide. Akamai claims that 10 to 20 percent of the world's Internet traffic passes through its network, which serves dozens of major organizations, including Amazon.com Inc., NBC, IBM Corp., Apple Inc., EMC Corp., and a number of US government agencies.

Sagan said there's no waning of demand for Akamai's Internet services, but the financial health of its customers is in serious doubt. "We see distress in really every industry worldwide," said Sagan. "Our customers don't have as much money or capital to expand as they used to."

Sagan singled out companies that use Akamai e-commerce services to run their online retail stores. "A lot of e-commerce sites are suffering and aren't seeing as much selling," he said.

Indeed, a report this week from research firm comScore Inc. found that e-commerce sales in October grew only 1 percent over the same period last year, the slowest since comScore began tracking the market in 2001.

Because Akamai generally sells its services through contracts lasting a year or more, the company isn't immediately affected by a downturn. But as contracts come up for renewal, financially strapped companies will demand lower prices, affecting Akamai's revenues and profits. This led Akamai last month to issue a fourth-quarter revenue forecast that fell short of analysts' expectations.

How bad will things get? "Visibility into the future is murkier than it's ever been in 10 years," said Sagan. He added that by laying off now, the company hopes to keep costs under control and reserve cash for investment in promising lines of business.

"These layoffs are not necessarily indicative of the content delivery network market at large," said John Lovett, a content delivery analyst at Forrester Research Inc. in Cambridge. Lovett said to remain competitive, companies need a strong online presence and websites that offer rich audio and video experiences. They rely on Akamai or rivals such as Tewksbury's Mirror Image Internet Inc. and Limelight Networks Inc. to operate these sites, and that won't change even during a recession.

But Lovett said that cash-strapped companies will seek to pay less for these vital services, eating into Akamai's revenues and profits. "The layoffs are basically a reduction in overhead for them," a pre-emptive effort to cut costs ahead of the expected effects on revenue, he said.

Akamai isn't alone in its effort to reduce its expenses. Mirror Image Internet plans no layoffs, but vice president of sales and marketing James Hart said the company is looking for ways to cut costs as its e-commerce customers suffer lower sales. "To be a success, you need to tighten the belt a bit," said Hart. "That's certainly what Mirror Image is doing."

Despite the layoffs at Akamai, the company still has dozens of help-wanted listings on its website. In fact, Sagan said Akamai plans to keep hiring right through the recession, adding jobs in areas where demand remains strong. "I think we'll end '09 with more employees than we had in '08," he said.

Hiawatha Bray can be reached at bray@globe.com.

Correction: Because of a reporting error, this article misstated Akamai's revenue expectations. Akamai is concerned that it might not be able to sustain the growth rates of years past.