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60% Market Share And Piercing Vision Make Akamai Technologies A Tech Stock Survivor With Massive Potential, According To Industry Expert

February 3, 2010 - The Wall Street Transcript has just published Internet Services Report offering a timely review of the IT Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.

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Kerry Rice is a Los Angeles-based Analyst with Wedbush Securities, Inc., where he covers the Internet infrastructure industry. Mr. Rice's previous Wall Street experience includes positions at JPMorgan and Pacific Growth. He also worked in accounting at Pricewaterhouse Cooper and Alcatel. Mr. Rice earned his undergraduate degree and MBA at Southern Methodist University.

TWST: In which of these subsectors do you see the greatest opportunity for growth in 2010 and why? Which of the companies you follow are best positioned to take advantage of those opportunities?

Mr. Rice: I'll highlight GSI Commerce first. It is a hosted e-commerce platform provider focused primarily on retailers. Today only about 3.5% of consumer spending is online, which makes it a great long-term opportunity to benefit. And as comfort levels rise with online shopping, I think GSI has a great opportunity in 2010. I think Rovi Corp., again, does this interactive program guide, and they have a great opportunity to benefit in 2010. From a host of trends related to digital media or the transition from analog to digital media, Rovi pretty much owns the North American markets. Their main customers are cable operators that provide digital cable. They're moving internationally, and they have had some good success in Europe penetrating that market. Although really penetration is only 26% today, I think there's a great opportunity to drive that to the 90% range, which is the level in North America. Then longer term, Asia-Pacific and Latin America will be the focus. So I think there's a long-term growth opportunity there. And Rovi has the opportunity to layer on some new revenue streams like advertising.

Certainly, there are some banner ads today, but we're talking about interactive guides and interactive advertising which may be specifically targeting the things that you watch on television. For example, if you watch the golf channel, maybe there will be some golf clubs or a golf lesson advertised. So that's about a 2 billion addressable market. They would split that with the cable operators or the service provider operators. So really about a billion-dollar opportunity there, but they should earn 20 million to 25 million in revenue this year from advertising. It's a great long-term opportunity. And then one of the things that they also do through their acquisition of Gemstar and a couple other acquisitions, such as All Media Guide, Rovi has created this database of information about television shows, movies, music, gaming and books, and it's really probably one of the largest databases of information on that type of entertainment.

TWST: There are quite a few companies in Internet services. How might a company differentiate itself in this crowded marketplace, and who does a good job of that?

Mr. Rice: Let's start out with the content delivery networks, which are Akamai Technologies and Limelight Networks. Akamai has 60%-plus of the market share, and they have been the designated leader. And I think it's because they've managed to last - they were founded during the tech bubble and lasted through the tech bubble bursting. The company's success is because the founders had the foresight to realize that sometimes the Internet's best-effort routing system doesn't always work, and how do they optimize the delivery of content around the world? So I think that vision and being first to market has given them that opportunity to be head and shoulders above everyone else. Again, it's interesting - if you look back from 1998 to now, their strategic vision of enabling or optimizing the delivery of content still rings true now that we are watching more video on the Internet. So their products and services are really critical to improving the user experience. There's been an ebb and flow of competition over the course of the last 10 years, but they have always been on top this whole time. I would say competition right now is as strong as it's ever been. Limelight has emerged as a clear number two and does similar things to Akamai, but Akamai has a broader suite of products and services. So they're able to maintain their margins at a high level. And I think most people in the industry view them as the gold standard, but people are becoming more educated about the content delivery network (CDN) providers and versed on how they work. So companies like Limelight, who may not have the full suite of products and services that Akamai has, but have been able to price at a lower level than Akamai and gain market share - although I would say their market share for Limelight is between 10% to 15% - they have had raised their visibility.

And the view of the market is they are the clear number two. And generally speaking, most customers want a couple of options, and so they've been able to at a minimum be, if not the primary option, the secondary option to Akamai, and that serves them well. Going forward, Limelight has to take that next step, and provide a broader suite of products and services to compete or to gain more market share and still keep their prices competitive. Both of the content delivery networks, Akamai and Limelight, are getting more into online advertising and more into e-commerce, and so you will see that trend throughout the companies I cover. For Digital River and GSI Commerce, which are e-commerce platform companies and that's their primary focus - Digital River focuses more on software and software downloads, primarily you think of security like Trend Micro.

The remainder of this 50 page Internet Services Report can be immediately viewed by purchasing online.


The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 50 page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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