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Funnel Akamai Technology into your portfolio for short-term profits and stay clear of Internet traffic jams
by Siu-Yee Ng
Lies, damn lies, and the pledges of politicians. Especially those made by presidential candidates who claim to have spawned major technological breakthroughs.
Anyone who's ever used the net for anything more than typing your name into the Altavista search engine knows that the Internet recently celebrated its 30th birthday.
International Data Corporation estimates that there were approximately 142 million users of the Internet at the end of 1998 and that the number of users will grow to 502 million by the end of 2002.
The growth in the number of users, together with the wealth of content and information available, have led to sharp increases in the daily traffic volume. Media Metrix estimated that the number of unique visitors to the top 25 Web sites increased from 224 million in June 1998 to 330 million in June 1999.
The ability of a Web site to attract traffic is in part based on its richness of content. Increasingly, Web sites add graphics as well as newer technologies, such as video and audio streaming, animation and software downloads. While richer content attracts more visitors, it also places increasing demands on the site to deliver the content quickly and reliably. As a result, Web site owners frequently elect to constrain the amount of rich content on their Web sites, thus sacrificing the quality of the user experience to maintain minimally acceptable performance levels.
Charlotte's web
The Internet was not originally designed to provide a rich multimedia environment for individual browsers. Since its origins at the United States Department of Defense research project, the Internet has evolved into an aggregation of many networks, each developed and managed by different telecommunications service providers.
Not surprisingly, the Internet lacks the ability to manage traffic between disparate networks to find the optimal route to deliver content.
Congestion or transmission blockages significantly delay the information reaching the user. The storage of Web site information in central locations further complicates Internet content delivery. As the volume of information requested on a Web site increases, large quantities of repetitive data traverse the Internet from that central location.
Performance problems are exacerbated during peak demand times, such as a breaking news event, the release of an on-line movie trailer, the first day of ticket sales for a hit film, an on-line special event or sudden demand for a new software release.
Because it is typically not cost-effective for a Web site to design its infrastructure to handle relatively infrequent periods of "flash" or sudden demand, periods of peak network traffic and surges in traffic volumes often overwhelm the capacity of the site, causing long delays or complete site outages. Jupiter Communications found that in June 1999, if response times at a particular Web site did not meet Internet users' expectations, 37% of those users visited a substitute Web site to meet their needs. For 24% of users, the decision to use an alternative Web site was permanent.
Coming up short
While various products and services have been developed to address performance problems, they generally do not address the fundamental architectural limitations of the Internet. For example, caching is a hardware and/or software solution sold to Internet service providers to help them improve network performance by placing electronic copies of selected Internet content on geographically distributed servers on their own network. Caching is not, however, designed to address the needs of Web site owners, and to deliver their content with high performance and reliability across the multiple networks that comprise the Internet.
Outsourcing Web server management to hosting companies enables Web sites to add server capacity as needed and increase server reliability. But hosting does not address the transmission disruption problems that can arise as data leaves the hosting company's servers and traverses the public network to the user. Broadband services are being deployed to increase the speed of a user's connection to the Internet, addressing the problems that occur in what is commonly known as the "last mile."
Faster and quicker
Akamai Technologies, Inc. (AKAM-NASDAQ) provides a global Internet content delivery service that improves Web site speed and reliability and protects against crashes due to demand overloads. Their FreeFlow service, which they sell to Global 2000 and Internet-centric businesses, delivers Web content through a worldwide server network by locating the content geographically closest to their users. Their proprietary algorithms monitor Internet traffic patterns and deliver their customers' content by the most efficient route.
The demand for speed is a priority for online businesses and services. Due to long download time, some companies chose to make their web pages simple. Goto.com, an Internet search engine, promotes its simple and quick-to- download web page.
Akamai's service is easy to implement and does not require customers or their Web site visitors to make any hardware or software modifications. Using their FreeFlow service, customers have been able to more than double the speed at which they deliver content to their users. In some instances, speeds have improved by ten times or more. Customers identify and tag portions of their Web site content that require significant amounts of bandwidth, such as advertising banners, icons, graphics and software downloads. These tagged items are delivered over Akamai's server network. When users request this content, which they call "Akamaized" content, their FreeFlow service routes the request to the server that is best able to deliver the content most quickly based on the geographic proximity, performance and congestion of all available servers on their network.
Akamai's customers identify which of their Web objects are to be delivered over Akamai's network. The customer then runs a software utility provided by Akamai, called FreeFlow Launcher, which searches for the URLs of the selected objects and tags them with a special code.
This modification transforms each URL for Akamaized content into an "ARL," or Akamai Resource Locator. When a user's browser downloads an HTML file containing ARLs of Web objects for that page, the browser is automatically pointed to Akamai's network to retrieve those objects.
This process does not require any modification to the browser or other personal computer configuration changes. While Akamai can serve the HTML as well as the objects embedded in it, their customers typically choose to serve the HTML themselves to maintain direct contact with the user. Thus, even while users are receiving Akamaized content from their servers, their customers can continue to count Web site visitors, track user demographics and dynamically assemble Web page content, including the insertion of targeted advertising and other personalized content.
MIT Geeks
Sounds complicated? What do you expect when a group of MIT graduate students and professors develop a solution to control web traffic? Akamai's beginnings trace to a challenge that Tim Berners-Lee, the inventor of the World Wide Web, posed to his colleagues at MIT in early 1995 to invent a fundamentally new and better way to deliver Internet content to users. F. Thomson Leighton, an MIT professor of applied mathematics and founder of Akamai, recognized that a solution to Web congestion could be found in applied mathematics and algorithms.
Dr. Leighton believed that algorithms could be used to create a network of distributed servers that could communicate as a system and could deliver content without depending on a centralized controlling core. Dr. Leighton, together with Daniel Lewin, one of his graduate students at MIT, and several other researchers with expertise in computer science and data networking, undertook the development of the mathematical algorithms necessary to handle the dynamic routing of content.
Their FreeFlow service was introduced in April 1999. As of July 31, 1999, they had 900 Akamai servers deployed in 15 countries across 25 telecommunications networks, providing their customers with a guaranteed global Internet content delivery service. Their customers include Apple Computer, CNN Interactive, Discovery Channel Online, Infoseek, J.Crew.com, The Motley Fool and Yahoo!.
FreeFlow constantly monitors the performance of connections between various locations around the Internet and Akamai's regions. The result is a "map" of the optimal Akamai region for each location at that point in time. Akamai rebuilds this map periodically to reflect changing conditions.
Strategic allies
Akamai's services are sold primarily through a direct sales force targeting primarily domestic companies, focusing on the 300 Web sites that have the greatest number of visitors, Fortune 100 companies, and Global 2000 companies with large operations in the United States.
On June 1998 and August 1999 the company entered into a strategic alliance with Apple Computer and Cisco Systems to enhance and jointly develop new content routing, switching and caching technologies to improve the performance of Web content delivery.
The company has incurred significant losses since inception and expects to continue to incur losses in the future. We're not looking at profits here but at the future potential. To date, substantially all of their revenue has been derived from customers based in the United States. For the six-month period ended June 30, 1999, one customer accounted for 75% of their revenue and one customer accounted for 14% of their revenue.
Sales of their service to Apple Computer represented approximately 75% of their revenue for the six-month period ended June 30, 1999. The company expects that sales to Apple Computer will represent a significant portion of their revenue for the year ending December 31, 1999.
Akamai recorded no revenue for the period from inception (August 20, 1998) to December 31, 1998. Revenue was US$403,900 for the six months ended June 30, 1999. The increase in revenue was due to sales of their FreeFlow service, which was commercially introduced in April 1999.
Facing the board
Management plans to use the net proceeds for anticipated working capital. They may use a portion of the net proceeds to acquire businesses, products or technologies that are complementary to their business; they have no specific acquisitions planned.
The company's board of advisors is impressive. Akamai has the 3Com Founders chair at the Laboratory for Computer Science at MIT. He directs the World Wide Web Consortium, an open forum of companies and organizations with the mission to lead the Web to its full potential.
The company has a director of the Digital Entertainment Network, who served as president of A&M Records and co-founded Classic Sports Network, a cable network sold to ESPN in 1997.
Akamai's reeled in the chief systems engineer for CNN Internet Technologies. He has been the architect of CNN's Internet systems since the launch of CNN.com in 1995.
They also have the head of enterprise technology of Charles Schwab & Co.'s electronic brokerage unit, who led the start-up of the technology organization supporting the institutional business at Charles Schwab; a president and CEO of Sycamore Networks, Inc.; and a chief information officer of The Washington Post company, who founded and in 1996 became CEO of Digital Ink Co., the electronic publishing subsidiary of The Washington Post company.
Born leaders
If the board of advisors did not turn investors' head, then surely the management team will. The chairman and CEO served at Akamai since April 1999 and as a director since December 1998. He has also been a venture partner of Polaris Venture Partners, Inc., an early stage investment company, since August 1998. From August 1997 to July 1998, he served as executive vice president of GTE and president of GTE Internetworking, an integrated telecommunication services firm. He is currently a director of CBS and Infinity Broadcasting, a media company. He is also an interim member of the board of ICANN, the Internet Corporation for the Assignment of Names and Numbers.
The co-founder has served as chief scientist and a director since August 1998. Dr. Leighton has been a professor of mathematics at MIT since 1982 and has served as the head of the Algorithms Group in MIT's Laboratory for Computer Science since its inception in 1996.
Directors include the former president, chief operating officer and a member of the board of directors of New World Communications Group Incorporated, an entity engaged in television broadcasting and production; a general partner of Battery Ventures, a venture capital firm and the former principal and senior technology analyst at Montgomery Securities, now known as Banc of America Securities LLC, an investment bank and brokerage firm; a founder and a general partner of Polaris Venture Partners, Inc.; and a founder and general partner of the Baker Communications Fund, a communications private equity fund.
It worries me a bit to see so many venture capitalists in management. That usually indicates an unhealthy interest in making a quick buck at the shareholders' expense. We'll have to pay close attention to any market movement after the IPO. But looking at Akamai's competition, the company is positioned to be a leader in the industry. F5 Networks (FFIV-NASDAQ) went public in June 1999 and is currently 640% above its IPO price. BMC Software (BMCS-NASDAQ) is currently trading at US$67.19.
Underwriters include Morgan Stanley Dean Witter, Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Smith Barney, and Thomas Weisel Partners LLC. Akamai Technology has not announced a price or date for its IPO yet, so log on to the Taipan Website for any updates.
For more information on Akamai Technologies after its quiet period, contact Akamai Technology, 201 Broadway, Cambridge, MA 02139, phone: 617-250-3000, fax: 617-250-3001, toll free: 877-425-2624, Web: http://www.akamai.com/home.shtml.
Siu Yee Ng now writes a weekly IPO column on this site. Check it out for previews of upcoming IPOs, weekly picks, and a Friday afternoon wrap-up.
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