Akamai Technologies, the long-reigning king of Content Delivery Networks (CDNs), has been grappling with a declining delivery business, a trend highlighted once again in their recent Q1 2024 earnings call. While analysts have largely focused on the headwinds facing this legacy business, a closer examination of the transcript reveals a potentially explosive development: Akamai may be strategically leveraging their CDN dominance as a springboard for a bold, even stealthy, play for cloud computing dominance.

The narrative spun by CEO Tom Leighton and CFO Ed McGowan is one of a company transitioning its focus from a declining CDN to the burgeoning security and compute markets. While this shift is undeniable, there's a subtle undercurrent of strategic maneuvering that deserves deeper scrutiny.

The most telling clue lies in Akamai's approach to large media companies, a cornerstone of their CDN customer base. Leighton explicitly states they're engaging in discussions to offer discounted, even free, delivery services in exchange for a significant portion of these companies' cloud computing business. This is a classic 'give away the razor to sell the blades' strategy, but with a uniquely Akamai twist.

The hyperscalers, like AWS and Azure, also offer bundled services, but their free delivery is often an add-on to their core compute offering. Akamai, by contrast, is weaponizing their decades-long dominance in delivery to lure customers into their nascent but rapidly growing compute platform. This is particularly intriguing given Leighton's assertion that media companies spend 10 times more on compute than on delivery and security combined.

"This potential strategy is not just a calculated bet on a larger, more lucrative market. It's a shrewd exploitation of Akamai's inherent advantages. They can afford to offer heavily discounted delivery because their existing infrastructure and expertise already provide them with a cost advantage over competitors scrambling for market share in the delivery space."

Furthermore, bundling compute with a deeply discounted CDN creates a powerful incentive for media companies facing pressure to optimize cloud spending. Migrating to Akamai's platform becomes financially attractive, allowing them to trim costs without compromising the quality of their digital experiences. This is particularly relevant in light of Madeline Brooks' observation during the call about the 'optimization inflection' trend in cloud computing. As companies prioritize cost efficiency, Akamai's offering becomes increasingly enticing.

Akamai's Compute Business Growth

The numbers tell a compelling story. Akamai's compute business already boasts an annual run rate exceeding $50 million, fueled by over 200 enterprise customers, a number triple that of the previous year. Notably, six customers are spending over $1 million annually, underscoring the platform's appeal to large enterprises.

While the Gecko initiative, Akamai's bold move to embed full-stack computing capabilities into their massively distributed edge network, garnered much attention, it's the subtle undercurrent of the CDN-as-a-Trojan-Horse strategy that could hold the key to their long-term success. Gecko, while promising, remains largely unproven and is not expected to generate significant revenue this year. The CDN, on the other hand, is a proven powerhouse generating substantial cash flow that can be strategically deployed to fuel compute growth.

Here's the hypothesis: Akamai is aiming to create a self-reinforcing cycle where their CDN dominance subsidizes the aggressive expansion of their compute platform. By offering deeply discounted, even free, delivery to large media companies, they can rapidly onboard these high-spending customers, creating a snowball effect as success stories drive further adoption.

This strategy hinges on two key assumptions: First, Akamai can successfully migrate these high-spending media customers to their compute platform, achieving high net retention rates. Second, they can continue to manage their CDN business for profitability, ensuring it generates sufficient cash flow to support compute expansion.

The potential implications are significant. If Akamai executes this strategy successfully, they could disrupt the cloud computing landscape, challenging the dominance of the hyperscalers by leveraging their CDN as a powerful weapon in the battle for cloud dominance. Analysts may be overlooking this subtle but potentially game-changing development, focusing instead on the predictable narrative of a declining CDN and nascent compute business. Akamai, however, may be playing a much deeper game, one that could redefine the cloud computing landscape in the years to come.

"Fun Fact: Akamai's name is derived from the Hawaiian word "akamai," meaning "clever" or "intelligent." It seems fitting, given their potentially clever play in the cloud computing space."