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The content delivery network industry, the folks who work to speed up the Internet by bypassing much of the routine Web traffic, is shaping up into a case of the haves and the have-nots even as the potential market for such services explodes.
Industry leader Akamai Technologies Inc., with about 80 percent of the market, clearly is the have, generating solid sequential revenue growth and narrowing its cash flow losses in the fourth quarter of 2000. The next largest and only other publicly traded player, Digital Island Inc., is struggling.
Content delivery networks essentially have fallen into three categories based on the type of information they're delivering: static data, like text or graphics; dynamic data such as stock quotes, real time e-commerce transactions; and streaming media, such as live broadcast events, video on-demand and audio.
The growth of the Internet is fueling CDN demand. The worldwide CDN product market could grow to an estimated $1.4 billion by 2004 from $122 million last year, according to a forecast by HTRC Group LLC, an IP services market research company.
"There certainly is ample demand for CDN services for performance streaming, as well as static and dynamic content," says HTRC principal Greg Howard. He adds that most of the providers that offer CDN services so far have targeted only the low hanging fruit--the largest companies with large online presences.
In its latest quarterly report, Cambridge, Mass.-based Akamai reports revenue of $37.2 million, up 37 percent from the previous quarter. The company exhibited strong core revenue growth from increasing traffic in its flagship static content distribution business.
"The company posted an impressive quarter across the board in a difficult market environment," says Merrill Lynch analyst Christopher Giordano. He boosted his revenue forecast for 2001 to $225 million from $190 million as he upgraded Akamai's stock to a long-term "buy" rating from "accumulate."
The content distribution sector is becoming a permanent part of the Internet, and more and more applications will be distributed to the edge of the Web, Giordano says.
Akamai, which has introduced at least two new services each quarter, "clearly has the lead in developing those applications. The big question is, will the customers take them? Giordano notes.
For companies hoping to drive business to their Web site, speed and performance are essential, the analysts say. Forrester Research estimates that 58 percent of first-time visitors won't return to a Web site if they cannot reach it initially.
"We believe that content delivery services will grow as websites become more mission critical, IP traffic increases, broadband usage proliferates and content over the Web becomes richer and more interactive," First Union Securities analysts wrote in a recent report on Akamai.
The December quarter's results for San Francisco-based Digital Island were in line with Wall Street expectations, but still showed signs of its struggle. Digital Island, which offers a full range of Internet services including Web site hosting co-location as well as content delivery, lost $142.5 million, or $1.82 a share, and is scaling back capital spending and expansion in order to become profitable more quickly.
The weakness in Digital Island's CDN/networking services revenue and a shift in its revenue mix that puts greater reliance on its Web-hosting business raised red flags for analyst Mark Langner at Epoch Partners, an investment bank focused on high-growth companies. He's recommending investors avoid the stock.
Digital Island is "obviously having some tough times right now" due to the significant build out costs for CDN infrastructure, says HTRC's Howard. Part of the problem is no one's really sure how many servers it takes to deliver performance, which will be critical for streaming media.
"Is it 8,000, in the case of Akamai, or is it slightly less than 1,000 in the case of Speedera Networks Inc.," a Santa Clara, Calif.-based private company that's had fairly good luck with its streaming services in India and the United States, Howard asks. Both have similar performance metrics. Speedera has developed its own technology and is "cranking away at getting customers."
While the bigger CDN players Akamai and Digital Island are targeting large, high-end customers, some companies are opting to target niche markets. Ann Arbor, Mich.-based SolidSpeed Networks Inc., for example, delivers only static content for small- and medium-size business customers.
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