According to a Bloomberg article, Cyrus Mewawalla, Managing Director of CM Research, explained that Alibaba might be interested in acquiring Akamai to expand its cloud infrastructure. Alibaba will receive $8B in cash from going public, plus another $50B in loans if need be, to help it make strategic acquisitions. Some companies Alibaba might be interested in acquiring are Yahoo, Lions Gate, Snapchat and Akamai. Lets break down the news article, and do a quick analysis. With $58B in cash, Alibaba can acquire Akamai at any premium price point, so money is not the issue. What about the impact to the CDN Ecosystem?
Impact of Acquisition
If Alibaba acquired Akamai, there would be a two-fold impact to the CDN industry. First, it would literally rain money on all US based CDNs not named Akamai. It’s a guarantee that Akamai would lose a big chunk of customers, operating as a division of Alibaba. How much would the customer churn be? I would say between 30% to 50%. CDN customers are an extremely picky bunch, and whenever there is any sort of distraction occurring to a CDN, the CDN competition pounces on that account. If Alibaba acquires Akamai, you can bet hundreds of sales reps working for the 17+ US based CDN will be calling on Akamai’s bread and butter accounts day and night.
Secondly, if Alibaba acquires Akamai, hundreds of Akamai’s best engineers will leave causing a major brain drain. In turn, that will impact innovation and product development. Akamai engineers are a loyal bunch, and have tremendous pride working for Akamai. Any activity that disrupts the loyalty mindset, would add an unknown dynamic to the equation, and in my estimation, it will be enough to force employees to leave to greener pastures. Many will join the competition, and the braves ones will go out to start dozens of new CDNs, exploding the CDN Ecosystem to new heights, in the areas of product innovations, and new business models.
Akamai is not a good fit for Alibaba. It is too risky of an investment. If the acquisition occurs, Akamai’s bread and butter customers will leave, and also their best employees. If Alibaba has its mind set on buying a CDN, Limelight Networks is the best choice. Their market valuation is low, and their global CDN is extensive. If Alibaba happens to fail in the CDN business, the losses won’t be as great.