Akamai, the worldwide leader in CDN services, has just announced its acquisition of StackPath’s CDN business. We find ourselves slightly surprised, as we had predicted Akamai’s acquisition of StackPath just three days ago. The rapid occurrence of an event of such magnitude was beyond our expectations.
Akamai has taken over 100 enterprise customers from StackPath, representing a billing of $20 million in ARR. What’s even more positive is that StackPath will retain its staff and technology. While the announcement doesn’t provide extensive details, there’s much to unpack here. To begin with, this development proves to be beneficial for Akamai, StackPath, and the industry as a whole.
There are six Tier 1 CDNs, which include Akamai, Cloudflare, Fastly, Edgio, StackPath, and Lumen. However, Lumen’s CDN business has declined, particularly following the loss of the Disney contract. Nonetheless, this setback isn’t significant for them, given their status as a telecommunications company generating billions in ARR. With StackPath’s acquisition by Akamai, only four Tier 1 CDNs remain unaffected. The market cannot viably accommodate more than four global CDNs based in the US, as the revenue pie is limited. However, there is room for numerous small CDN niche players to thrive.
Underneath the Transaction
StackPath emerged as a significant winner, as they managed to avoid a fire sale to Akamai, similar to Instart Logic’s situation. On further reflection, it becomes apparent that the StackPath team made a strategic decision, granting them a fresh lease on life. This move eliminates the need for them to devalue their company by 50% to 80% through a down round, a situation that can be detrimental to founders and employees due to potential equity loss. With this acquisition, they can utilize the funds to navigate the ongoing storm in venture funding, projected to persist for another year and a half.
Another advantage is that StackPath is relieved of the burden of managing numerous Points of Presence (PoPs). Establishing and upkeeping PoPs is a costly endeavor, encompassing the procurement of racks, servers, switches, routers, and notably, bandwidth. Sustaining an extensive network poses challenges for a CDN that hasn’t amassed hundreds of millions of dollars in ARR.
The most startling revelation is that the StackPath CDN business generated a mere $20 million in ARR. Our expectations were considerably higher. The business they will retain revolves around edge computing and security, encompassing VMs, containers, and WAF. However, this branch of their operations is likely to yield less revenue than the CDN business this year.
The big question is how much did Akamai pay for StackPath’s CDN business. Was it 3x, 4x, 5x the $20 million ARR?
If it landed in the range of $50 million to $70 million, then StackPath’s performance is commendable (rumor is Akamai acquired them for $30M, updated 8/25/23). These proceeds could be invested in enhancing their existing technology stack.
StackPath holds a promising future, although it necessitates structural adjustments. The edge computing market landscape is highly competitive and several startups ahead of StackPath in terms of product offerings. Their first priority should mirror the strategies of Fly.io and Render.com. These two startups epitomize innovation in the CDN industry, akin to the status Netlify and Vercel held a few years ago.
Additionally, they must recruit a visionary CTO like Ajay Kapur to drive transformation. Injecting fresh talent with novel ideas is essential for revitalizing the StackPath product lineup, which presently is underwhelming. With the removal of the CDN business from their concerns, they are better positioned to elevate their offerings to match the competition.
A Glimpse at Edgio
Edgio’s performance is lackluster. Its stock price languishes, particularly following earnings restatement. While acquisition by Akamai or Cloudflare is conceivable, it could trigger antitrust concerns. Though IBM could potentially acquire them, such a scenario remains unlikely at present.
The silver lining for Edgio lies in their $400 million in revenue, offering opportunities to streamline their infrastructure cost. They purportedly operate 300 PoPs and have 250 Tbps of capacity. Trimming their PoP count by 50% to 70% is feasible without compromising performance or revenue. Maintaining 100 PoPs should amply cater to global CDN customer demands.
In conclusion, a consolidation is evident at the Tier 1 level. Nonetheless, the startup ecosystem continues to expand, with CDNs serving as an essential service for companies delivering traffic, applications, and APIs.