Apple Inc. (AAPL): What Exactly Is Its CDN Strategy?

Apple Inc. (AAPL): What Exactly Is Its CDN Strategy?
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Apple Inc. (NASDAQ:AAPL) is a major customer for numerous companies, and losing its business could be disastrous for some. Take, for example, Akamai Technologies Inc. (NASDAQ:AKAM), which declined more than 3% on Monday after reports that Apple may one day stop being a customer. The company is scheduled to release its next earnings report on Wednesday.

How Apple affects Akamai

Akamai Technologies Inc. (NASDAQ:AKAM) provides Apple Inc. (NASDAQ:AAPL)’s content delivery network (CDN), helping boost Apple’s bandwidth for things like iTunes and software downloads. In other words, if Apple builds its own CDN, it might not have use for Akamai’s network any longer. After all, Netflix, Inc. (NASDAQ:NFLX) once relied on Akamai for its content delivery needs, but the company no is now able to deliver approximately 70% of its content in the U.S., according to network researchers from DeepField. The result was lower costs in content delivery—a goal Apple could be aiming for as well.

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However, Barron’s reports that analyst Gray Powell of Wells Fargo came to Akamai Technologies Inc. (NASDAQ:AKAM)’s defense, saying that we simply don’t know enough about Apple Inc. (NASDAQ:AAPL)’s CDN strategy. He called the risk to Akamai “fairly minimal” and says that if it does have an impact, it won’t be any time soon. Atlantic ACM VP Aaron Blazar also noted that this process of shifting away from Akami could take “several years.

Powell notes that recently the two companies negotiated a three-year contract, and Akamai Technologies Inc. (NASDAQ:AKAM) does see a reduction in revenue from Apple in the near term. However, he said even if Apple Inc. (NASDAQ:AAPL) does move all of its CDN traffic away from Akamai, the full impact of this wouldn’t happen until 2015, and even then, he said the impact would be relatively small.”

Apple works behind the scenes to build a CDN

The decline in shares of Akamai Technologies Inc. (NASDAQ:AKAM) came after The Wall Street Journal reported on Monday that Apple Inc. (NASDAQ:AAPL) has been quietly building its own Internet infrastructure, or CDN. The report indicates that Apple may want more control over how its online offerings are distributed and the quality of those offerings while also preparing for even more traffic. And if Apple is planning to see even more traffic, then it could be preparing for a move even further into television, just as analysts have been saying for years. In fact, experts say that the company’s recent moves mimic those of Netflix, which abandoned Akamai.

Apple Inc. (NASDAQ:AAPL) has found itself in need of more and more online delivery over the last several years as its iCloud and iTunes see more and more usage. The App Store also adds to the company’s needs in this area, but if it is indeed planning to launch an iTV, as so many analysts expect, then its needs will increase even further.

How Apple is building its CDN

According to The Wall Street Journal, Apple Inc. (NASDAQ:AAPL) has been signing deals to increase its bandwidth while hiring even more experts in networking. So far the company has reportedly hired former Comcast Corporation (NASDAQ:CMCSA) executive Lauren Provo and former CableLabs VP Jean-Francois Mule’. The publication notes that other major technology companies, including Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG), have already taken these steps.

International Internet Exchange Chief Strategy Officer Bill Norton estimates that Apple Inc. (NASDAQ:AAPL) has so far purchased enough bandwidth for hundreds of gigabytes of data to be downloaded every second. Norton calls that “the starting point for a very, very big network,” according to The WSJ.

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