Tag: internet stock coverage
Amazon.com: Torrid Growth Continues
Amazon’s torrid growth in electronics and general merchandise has prompted a major expansion in infrastructure to support its operations. The company now has 69 fulfillment centers around the world, having added 17 this year. Amazon plans to add 17 more in 2012. Amazon.com’s headcount now exceeds 50,000 people, having grown over 60 percent over the prior year, and it has begun to feel the strain of its warehouse and fulfillment operations.
Amazon also continues to invest heavily in cap ex related to its data center expansion, which is required to support the growing number of companies that tap into its web services. Starting with packages that offer five gigabytes of storage for free on a monthly basis, companies ranging from venture-backed start-ups to global corporations and government agencies can purchase computer and storage power on a per use basis, rather than make large capital outlays for computer servers, storage racks, and networking gear. AWS already has several hundred thousand customers across the globe in more than 180 countries. We expect the business to grow in excess of 50 percent compounded annually, though like its other businesses, Amazon does not report on its margin contribution.
Amazon recently launched a frontal assault on Apple in order to lay claim to its unfair share of the emerging computer tablet category. The Kindle Fire, a $199 color Amazon branded tablet, may have sold more than five million units in the most recent quarter, and we think that Amazon.com will confidently lay claim to the number two position in computer tablets within the next few months. The Kindle Fire enables Amazon to sell more of everything digital that it already sells, including video on demand, online game and music services, ebooks, audio books, pictures, and data and backup storage.
Amazon’s video on demand service, for example, allows access to over 100,000 movies and television show episodes s on a pay-per-view basis. Most can be rented for a price which ranges from $1.99 per television episode, to $2.99 per movie. Amazon also offers 13,000 movie and TV shows free for members of Amazon Prime, the company’s $79 per year service which provides unlimited two-day free shipping services. The Kindle Fire also fits well into Amazon’s Cloud Drive strategy, as it already offers 5 gigabytes of free storage for videos, games, music and other data.
It may be hard to believe that electronics and general merchandise now comprises more than 60 percent of Amazon.com’s quarterly sales, up from about 40 percent three years ago. From its humble roots as an online bookstore, Amazon.com now serves over 160 million active customers around the world. Traditionalists will be happy to note that despite rapid growth in electronic books, physical books, that is, hardcover and paperbacks grew by double digits in the most recent quarter.
Akamai’s Cotendo Acquisition in Context
Just three days before Christmas Akamai (NASDAQ: AKAM) put to rest speculation raised in November that it might acquire Cotendo—its only meaningful competitor in the web acceleration services market. We believe the acquisition vanquishes a key competitor, provides Akamai with excellent technical personnel, and keeps AT&T from encroaching on Akamai’s turf.
The acquisition of Cotendo for a net cash payment of $268 million should close in the first half of 2012. With 100 employees, we speculate that Cotendo’s annual sales are between $25-30 million, and growing in excess of 30 percent per year.
Cotendo is the second largest acquisition in Akamai’s history, and is strategic for five reasons: first, it vanquishes a key, emerging competitor, which had evidently been gaining ground at several large customers, including Google and Facebook. Second, Akamai will gain access to vital product and technical personnel with excellent product know-how, half of whom are based in Israel. Third, the acquisition damages AT&T’s presence and credibility in the CDN space, as a result of its much ballyhooed alliance with Cotendo, which will likely come to an end.
Cotendo was founded in 2008 by former executives from Commtouch Software and Limelight Networks. Cotendo had received private funding from Sequoia Capital, Benchmark Capital, and other venture firms, as well as investments from Citrix Systems and Juniper Networks. With cloud-based software valuations soaring to new levels, we speculate that the VCs on the deal were interested in maximizing their investment as soon as possible.
Israeli newspaper Calcalist first speculated in late November that Cotendo, a Silicon-valley, venture-backed Akamai competitor, with offices in Israel, was on the block for sale, and that Akamai, AT&T, and Juniper Networks might have been bidding for the company, at an estimated price of $300 million.
Cotendo is best known for a service which competes with Akamai’s dynamic site acceleration product, which improves the performance of high volume websites. We have seen reports that suggest that several Akamai customers, including Facebook, Microsoft, and Google, were utilizing Cotendo’s services. Facebook’s VP of technical operations, was a member of Cotendo’s advisory board.
AT&T announced in July, 2010 that it would begin to re-market website acceleration services from Cotendo. Four months later, in November 2010, Akamai, along with the Massachusetts Institute of Technology, announced a patent infringement claim against Cotendo. AT&T may have chosen not to bid for Cotendo for fear of inheriting its lawsuit, and the potential to pay Akamai and M.I.T. damages should Akamai have prevailed in the suit.
In addition to entering into a formal distribution agreement with AT&T for its website acceleration services in July of 2010, Cotendo had also announced a partnership with Citrix Systems, which made an early stage investment in Cotendo. The partnership seemed to center around services that accelerate delivery of web-based applications, which sounds very much like Akamai’s application acceleration product. Citrix and Cotendo claimed that their jointly-developed product boosts application performance by 50-80 percent, and reduced bandwidth requirements by 50-95 percent. The agreement was similar to one that Akamai announced with Riverbed Technologies not too long ago.
Akamai’s Dynamic Site Accelerator is utilized by a large number of ecommerce and media sites. A new version planned by the company was already in beta, and we learned at its analyst meeting in December that the product could ship in the first quarter of 2012. At this juncture we are unclear as to whether the product will ship, or whether Cotendo’s functionality will be melded into Akamai’s DSA product.
Akamai will ship at least four new products in 2012, and we expect that Cotendo will be able to contribute to all of them, including: (1) a new version of Akamai’s Dynamic Site Accelerator; (2) new website and ecommerce security software products; (3) a cloud accelerator optimized for mobile platforms, an area where Cotendo has evidently taken an early lead; and (4) a new CDN solution that will be licensed to network operators.
All in all we believe that the Cotendo acquisition makes strategic sense for Akamai, and should enable the company to extend its lead in its key markets.
Mr. Zuckerberg’s Visit to Cambridge
Facebook founder and CEO Mark Zuckerberg recently visited Cambridge MA, where he spent time at MIT and Harvard, speaking with students and recruiting for his company. While in Cambridge, Zuckerberg, who started Facebook in his Harvard dorm room, said that while his company wishes to tap into the local talent pool, Facebook has no near term plans to open an East Coast office.
We would not, however, be surprised to see Facebook make an about face on that decision.
Mr. Zuckerberg may soon come to the same conclusion reached by many other Silicon Valley leaders, namely that the West Coast talent pool is a finite resource from which to draw. Moreover, many of the most talented engineers and entrepreneurs—for a variety of reasons—may not be interested in leaving the East Coast.
Mr. Zuckerberg may well conclude that his best bet for recruiting local talent may be to take a page from Google’s playbook that will give Facebook a ground-level presence in what is widely considered an area rife with talent.
Google began its New England presence with a modest outpost in Cambridge, and after building up a relatively modest staff announced in July of 2010 that it would acquire ITA Software, whose specialized search algorithms for the travel industry have since been subsumed into Google, albeit after a lengthy anti-trust review. In one fell swoop, Google acquired a local company which it will use as a base for future recruitment.
Facebook’s near term expansion plans include opening an office in Seattle, which Mr. Zuckerberg notes is less than a two hour flight from Palo Alto. Our sense is that this may be a short term palliative to what may become a longer term growth issue: how to attract and keep the best talent independent of geography.
Amazon.com: eCommerce Sphinx
One of the most perplexing aspects of Amazon.com’s business model is the ability to sell products and services that compete directly with its many suppliers and resellers. For example, Amazon is the world’s largest reseller of new and used books, both physical and digital, yet it offers CreateSpace, a venue for self-publishing authors, as well as seven publishing imprints. Thus, Amazon competes with major book publishers for new author talent.
Amazon also conducts a large music download business, competing directly against Apple, yet it also sells both new and used iPods on its website. In its most audacious move to date, Amazon will sell the Kindle Fire, a bona fide competitor to Apple’s iPad, and Motorola’s (soon to be Google’s) Xoom. Yet Amazon sells both iPads and Xooms on its website.
Amazon recently boasted that the Kindle Fire will support Netflix’s streaming service, even as it ramps up its own movie and television show streaming service, a portion of which will be free for any Amazon.com Prime customer, of which there are millions.
How and why does Amazon do—or get away— with this?
First, it is important to know that its seeks to be dominant in any category in which it participates. This means that it takes an interest in not just reselling others’ products, but in creating products itself.
Second, unlike other companies that evaluate profit margins by product line, seeking to maximize the sales of their most profitable products, Amazon.com has a completely different strategy: maximizing gross margin dollars. This means that it seeks to gain market share, regardless of the level of profitability generated by the category.
Finally, I suggest that the company is respectful, or perhaps fearful of the potential anti-competitive implications of its success. Amazon.com’s management team is likely mindful of Microsoft’s missteps when it fought against the USgovernment’s anti-trust efforts. It is not difficult to imagine Amzon.com, through the success of the Kindle Fire—or Apple through the success of its iPad—guilty of anti-competitive behavior, should the government decide that bundling proprietary services stifles competition.
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