Limelight Networks: shedding light on the CDN business

I have long been a fan of internet infrastructure plays such as AKAM, and today I wanted to briefly look at NASDAQ's newest member, Limelight Networks, trading under symbol of LLNW. It is opening with a lot of positive press, raising the pricing range throughout the roadshow, and upsizing the deal by close to 2 million shares. Given the success of the roadshow, I can't help but wonder, have investors forgotten that there already is a much larger, more profitable company, that does the same thing, and trades on the NASDAQ? Many people saw the LLNW IPO as a potential threat to AKAM. Others view it as hopefully shedding more light into a relatively unknown business segment of the internet. Whatever the case may be, I believe it will be a positive for AKAM shares.

LLNW is nowhere near the size of AKAM, nor does it even rival AKAM’s strong market position. In fact, this IPO is intended to help the company grow, given that the use of proceeds is to fund capital expenditures. According to the S-1 filing, the company expects to make capital expenditures of approximately US$35 million to US$45 million in each of 2007 and 2008. The remainder of the proceeds will be intended to make complementary acquisitions. By comparison AKAM spent close to US$70 million in 2006 capex alone.

What else is of significance in LLNW’s filing? Under the risks section and throughout most of the document, Limelight mentions “the possibility that [they] could be permanently enjoined from offering CDN services as a result of the patent infringement lawsuit filed against [them] by Akamai and the Massachusetts Institute of Technology, which is similar to other lawsuits in which the same plaintiffs have been at least partially successful in the past.” Apparently, in June of last year, AKAM and MIT filed a lawsuit in the U.S. District Court for the District of Massachusetts alleging that LLNW is infringing two patents assigned to MIT and exclusively licensed by MIT to Akamai. In September 2006, Akamai and MIT expanded their claims to assert infringement of a third, recently issued patent. In addition to monetary relief, the consolidated complaint seeks an order permanently enjoining Limelight from conducting business in a manner that infringes the relevant patents. Needless to say, it’s a significant concern that is both costly and time consuming for LLNW’s management. The case is expected to go to trial in 2008.

Glancing at both companies, AKAM is clearly the blue chip in the sector; it has the infrastructure, the sales network, the customers, the relationships, the financial position, and it seems it even has the patents. Even if LLNW has a nice run in the near term, I believe that the smart money is and will continue to be with Akamai.

For your review, this is how both companies stack up against each other: