Level 3 Communications (LVLT) as a threat to Akamai Technologies (AKAM)?

I mentioned a few days ago the must read blog if you are a content delivery network investor; well today Dan Rayburn has a pretty bearish article if you are a Limelight (LLNW) or Akamai (AKAM) investor.

Some high (low) lights:

• If you thought the pricing wars between the CDNs was fierce today, just wait till the next quarter when Level 3 enters the market with it's new content delivery service for video.
• Based on everything I have seen, Level 3 has finished it's CDN initial build-out for the caching and progressive download of content and is nearly complete with being able to support the delivery of video via streaming.
• And if my prediction is right, I expect Level 3 will come to the market with an aggressive marketing campaign talking to competitive functionality and performance at a much lower price. And I don't mean slightly lower, I mean less expensive by a wide margin.
• While that would not be a new tactic by a CDN, (remember iBEAM?) it is unique to Level 3 since they own the network and should be able to have lower costs than anyone else.
• Now I know that some CDNs will say that it does not affect them as they sell "value added services" and customers will pay more for those, which is true, but only at times. Not all customers need more than a CDN product and if that's all they are looking to buy, then additional services won't allow CDNs to keep their pricing higher for that specific customer.
• Also, Level 3 is an interesting one to watch in that it also offers co-lo and other services, so some of the CDNs who offer those additional services are getting a competitor on multiple levels when it comes to the product portfolio.
• Does cheaper pricing mean Level 3 is guaranteed to succeed? No. They have to prove they have a reliable network, have the geographic reach customers want and have all the other services that go along with a CDN offering like reporting, SLA, customer service etc. in order to be taken seriously. But when they have all of that in place, which I expect will be before the end of the year, Level 3 will have a service that the other CDNs will have to compete with.
• Level 3 is not looking at this in the short-term and clearly wants to win not only the business that is out there today for short-form content, but really win down the road when it comes to long-tail content.

Now, I have to say this is a different animal than previous competitors to Akamai; as Level 3 owns its network, has billions in revenue already and can be aggressive on pricing to enter a market. I view it a parallel to when Microsoft (MSFT) entered the video game market with Xbox; video games were just a gnat on the elephant's (Microsoft's) behind in terms of revenue at the front end so they could afford to lose money and be aggressive on pricing. Now one could say, well how has it worked out for Microsoft in the long run? That is the wrong question - the question is, how did it work out for the other video game hardware/console makers. Yes, Nintendo is doing well but its due to a revolutionary product (Wii), but before that both Nintendo and Sony Playstation had to adjust and experienced some struggles. So even though the overall market (video games) is growing, as is the CDN market, an aggressive new player who can actually afford severe price cuts (unlike LLNW) could really hurt revenue/margins for existing players.

I am going to cut back my AKAM position 80% on this news and see how things shake out. If this was 1 isolated event, that would be one thing but there seems to be a lot of issues in regards to pricing as highlighted in this blog for the past few weeks, and each price reduction is lost revenue.

One could argue, why take such a strong action in the stock on a future event and one that is not even a guaranteed outcome? My answer is, with so many solid plays out there, with far fewer questions than the CDN space, why bother with large positions in a sector with storm clouds above? Competition is great the consumer of said products - not so great for the investor though. So I will retrench in this sector for now and see how it plays out in next few quarters.

Long AKAM in fund; no personal position.