Upsetting the Apple Cart
03/27/2008 12:00 am EST
Michael Murphy, editor of New World Radar Report, says Apple may switch its iTunes downloads from Akamai Technologies, but he still thinks the stock is attractive.
Akamai Technologies (Nasdaq: AKAM) might have something new threatening its stock price, although it wouldn't affect the company's 30% growth rate much. I think there's a slight chance—say, 20%—that Apple will switch their iTunes downloads business from Akamai to Google. This is just an early thought on my part, but here's what I have pieced together.
Apple, of course, is intensely interested in high-quality content distribution, so Apple must upgrade iTunes right now for high-definition video. Currently, iTunes can download movies in "high-definition" 720p format, but the market has moved on to 1080p. You can download 1080p in reasonable time using BitTorrent, but, of course, Steve Jobs [doesn’t] want to use someone else's open standard.
But developing a new, fast download protocol isn't easy. The one minute and fifty-one second trailer for Indiana Jones and the Kingdom of the Crystal Skull is on Apple's web site in QuickTime high definition. The 480p version, which is about the quality you can download through iTunes today, is a 47-megabyte file. The 720p version is 66% larger at 78 megabytes. The 1080p version is 168% bigger than the 480p version at 126 megabytes. A two-hour movie goes from a three-gigabyte file at 480p to over an eight-gigabyte file at 1080p. Apple has to figure out how to get that to the customer without paying 168% more for the download.
And that brings us to Google, which is putting data centers all over the world and is now even investing in a new undersea fiber-optic cable. As the owners of YouTube, Google knows that video distribution is an enormous opportunity. What better way to enter the market than offering a great deal to Apple for the iTunes contract? With [Dr. Eric Schmidt, chief executive officer of Google,] on Apple's board, it sure wouldn't be surprising.
I'm sure AKAM would take a hit if this 20% probability becomes a fact. B but if the Internet is about to get even more clogged, thanks to high definition video, other companies will have to turn to AKAM to keep their web pages loading at an acceptable speed.
While I don't know the details of the pricing on the iTunes business, I'll bet the profit margin is as low as Akamai gets. I think that they could replace their iTunes business quickly, at better prices, and then reap the benefit of all the current non-customers that would decide they have to do something to provide a decent user experience even when hundreds of thousands of people are downloading Indiana Jones and the Kingdom of the Crystal Skull at the same time.
Buy AKAM up to $36 for my $60 target. (It closed above $32 Wednesday—Editor.)
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