The first quarter of 2021 was a period of two totally contrasting tales for CDN providers Akamai and Limelight Networks. One exceeded all performance expectations across revenue, margins and earnings, while the other cut its workforce by 16% in a desperate bid to make $15 million in annualized savings after sustained underperformance. There are no prizes for guessing which is which.
Getting to the bottom of why Akamai has so dramatically outperformed its much smaller rival is not a black and white task. Surges in video traffic do not guarantee more business in the content delivery ecosystem, while the pandemic has exacerbated the downward spiral of CDN prices that was an existing trend a long time prior to any pandemic.
In fact, Limelight saw some reductions in traffic during the first quarter. This was not a direct reflection of any reversal in viewing trends as lockdown restrictions are eased and people leave their screens behind, but as a direct result of Limelight being downgraded to a lower tier status in multi-CDN architectures due to its failure to address rebuffering rates.
Another dilemma for Limelight has been paying for unused network capacity during periods of traffic downtime, which the company hopes to counteract by chasing non-video customers, such as gaming.
This is an unfortunate caveat of Limelight’s largest clients offering OTT video streaming services. These clients with similar traffic demand profiles require peak capacity for short periods of the day, which Limelight notes leads to poor asset utilization. Limelight’s current network utilization is in the high teens and getting that network utilization over 20% is rarely possible even when delivering more and more OTT video traffic, due to the majority of demand coming in the same 5 or 6-hour window over a 24-hour period.
In fact, according to Limelight CEO Bob Lyons who was brought in just three months ago, this scenario is sometimes made worse when Limelight has built for peak capacity, but it just ends up creating more latent capacity that costs a lot of money.
That said, every 100 basis points of utilization improvement can improve gross profit between $5 million and $9 million, according to Limelight, depending on the region and average selling price. So by diversifying this customer base with more off-peak traffic, it hopes to significantly improve gross margin.
The company has also built out a pop monitoring and optimization model to dive into cost by locality, country and region. This level of visibility will allow Limelight to identify anomalies and cost structure in a more disciplined manner and develop action plans to drive down costs.
Both Akamai and Limelight have pivoted to edge platforms, each describing themselves more frequently as “edge solutions providers” these days over traditional CDN peddlers (even though they still are), or words to that effect. However, that strategy doesn’t seem to be paying off for Limelight, after continued revenue slides through the first quarter of 10% year on year to $51.2 million, while Akamai went in the opposite direction, increasing total revenues by 10% to $843 million.
Gross profit tanked by 40% year on year to $12.5 million for Limelight, while registering a net loss of $25.5 million, compared to $5.3 million a year earlier. Despite this, new CEO Bob Lyons is confident in a recovery having simplified its operating mode, improved network performance, reduced operating costs, and demonstrated notable improvements in client SLAs. Lyons has implemented a three-pillared strategy to improve the core, expand the core, and extend the core – which he claims is serving as a playbook to transform Limelight.
Unlike Akamai, Limelight does not break revenue down any further by product or service, making it tricky to pinpoint Limelight’s shortcomings, so we must assume the company’s troubles are across the board. We can see where Limelight is actively aiming to improve performance, highlighting the establishment of an advanced performance engineering team to enable optimal operational performance based on clients’ KPIs.
This new team has reduced rebuffer rates by approximately 30%, and increased network throughput by up to 20% through performance tuning. By market, it seems Limelight is targeting opportunities in Latin America, with reference to a 40% increase in LatAm traffic through capacity optimization.
CDN price compressions have been particularly harsh in the US market, pushing firms like Limelight overseas. Limelight talks about addressing a large, unmet market need for its globally scaled edge platform and operational know-how, although we are struggling to see where that demand will come from in post-pandemic markets.
For Akamai, the growth areas are glaring. Its Security Technology Group saw revenues spike 29% year on year to $310 million, while growth in the Edge Technology Group was almost flat at 2% to $532 million. With security growing at a much faster rate than edge technologies, it raises questions over whether Limelight needs to emphasize security services within its own network delivery offering.
Pitting Limelight against Akamai is a David versus Goliath situation, admittedly, but the stark contrast in performances between the two firms is striking.