Akamai 2Q15 Earnings Call Notes

Over the top TV viewing could mean an explosion of data across the internet

” the world’s major broadcasters and Internet companies are working to create over-the-top, or OTT, services and packages for popular video content. This has the potential to create an enormous amount of traffic on the Internet. Typical subscribers watching OTT video delivered across the Akamai platform could consume 10 megabits per second or more of traffic while they’re watching. This means that an audience size of only 5 million users, which is the equivalent of about four Nielsen points, could generate 50 terabits per second of demand, far more than we deliver today for all of our customers combined. And if OTT becomes commonplace, the demand could increase by an order of magnitude or more. This is why we are investing in growing the capacity of our platform and why we are working on new technologies to decrease the cost of delivering large volumes of video.”

It’s not easy to get the data over the networks

“making OTT successful involves a lot more than just capacity and scale. The quality of the viewing experience is also critically important. Delivering broadcast quality video over the Internet at scale is a lot harder than most people realize, especially considering the diversity of video formats, devices, operating systems, browsers, video players, DRM and ad insertion technologies, encoders, and carrier equipment in the ecosystem. And that’s just for the landline Internet.

The problem is even harder when you try to deliver high-quality video over cellular networks. That’s because cellular networks were originally built for voice, and voice uses about 1,000 times less capacity then video.”

Growing momentum for OTT

“It’s really hard to predict the rate of adoption and when new OTT services will become available. But we are in conversations with the country’s leading broadcasters, in fact, several global broadcasters and major Internet companies, and there’s a lot of buzz out there and a lot of interest in bringing major video content online over-the-top.”

Increasing our CapEx to prepare for OTT

“There is the possibility that it could have a significant impact on our financials next year. We are taking risk in doing this because there’s always a chance that the offerings will be delayed or there won’t be as much uptake among the users and subscribers as people are hoping for, but we’re willing to take that risk. The downside there is that if we just deploy the CapEx a little early we’ll be using it within a year anyway, but we really want to be ready if OTT takes off as a lot of people think it might.”

Most major media brands already use Akamai so potential is substantially more traffic from existing customers

“most of the major media brands already use Akamai. So I think less of new customers, more of new service and substantially increased traffic from our existing customer base”

Capex impacting gross margins via increased depreciation

“so year-over-year GAAP gross margins were down two points. Cash gross margins were down I think about a point. Certainly a point of that is depreciation. And as we mentioned, we’ve been doing some pretty substantive build-out of the network, so you can account for half of that. And as you can imagine, we’ve been doing very large build-out in the first half.”

A lot of big media companies will try to do this in house, but many have realized it’s better to just partner with Akamai

” We’ve got a lot of competitors. The very biggest media companies will have a do-it-yourself effort in-house. Pricing is always important, very competitive there. The only I’d say major change has been over the last few years we’ve developed much closer and better relationships with many of the world’s leading carriers, some of whom had large competitive or do-it-yourself efforts in the past and now have abandoned those efforts and decided to partner with Akamai.”

Want to do $5B in revenue by 2020

“I would say that we have certainly talked about a long-term model for the company is that we believe that we have an ambition to hit $5 billion by 2020. And if you do the math on that, it means you need to grow the company around 17% on a compound annual growth rate. “