Akamai’s Other M&A Choice

Last night, Dan Rayburn posted a lengthy and very detailed screed about the pressure growing on Akamai (NASDAQ:AKAM, news, filings).  Dan suggests acquisitions, for example EdgeCast, to jump start its carrier-licensing efforts. That certainly might help a bit in the short term, but I think that perhaps the EdgeCast model doesn’t take advantage of Akamai’s sheer scale.  There is another option out there though if they’ve got the stones for it. 

I agree with Dan that Akamai is getting squeezed strategically right now. Years ago, the CDN industry was a small pond with a big shark in it eating anything that got big enough to be a threat. But nowadays that pond is a lake with a direct channel to the ocean.  There are other top predators to worry about – some more aggressive than that shark, and some just larger. But the battle on the value added services side of things is one that shall always have a low barrier to entry. Whatever the shark decides to do, there will be new pirahna trying to do it faster.

So what could they do? Akamai could turn around and buy a fiber operator, and thus take the Level 3 challenge head on. Seriously. Commoditization is only scary when you don’t own the underlying assets.  Akamai could easily go out and buy XO or Reliance Globalcom.  Actually, perhaps Cogent actually makes the most sense.  Instead of moving up into the cloud, they could anchor their growth into the cloud by putting down a few roots in the underlying fiber assets – thus giving them fixed cost advantages over those pirahna, and therefore staying power.

What would it accomplish? CDN services are now so critical to the internet, so intertwined with the bits that people care about, that it is no longer an overlay service that can be thought of separately. Scaling it properly for the long term means tightly integrating it directly with the underlying fiber assets. Unlike any other CDN Akamai has the scale and firepower to match Level 3’s effort from the other side and to benefit from it.

The Level 3 thesis can work in reverse. Heck, it might even work better that way, although it would obviously require a major shift in the Akamai’s DNA. Yet it seems like a clearer path than betting on continually staying one step ahead of each successive generation of innovators backed by a few tens of millions of dollars of speculative capital.

Over the years, I’ve been skeptical of the idea that Akamai might do this.  I still am – they just don’t seem to be on that path.  But strategically it’s making more sense to me that it’s what they *ought* to do.

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