Paul Sagan of Akamai Technologies

Avid hockey player and Emmy winner Paul Sagan has onetime dot-bomb Akamai Technologies humming again, helping power everything from Apple’s iTunes store to online travel sites.

Paul Sagan has experienced more than his share of misfortune since joining Akamai Technologies as chief operating officer in 1998. Akamai, which helps companies distribute broadband content like video, software and music over the Internet, was a dot-com darling. Then it tragically lost co-founder and technology chief Daniel Lewin, who was a passenger on the hijacked American Airlines flight that struck the north tower of the World Trade Center on September 11, 2001. Meanwhile, scores of Akamai’s customers were going broke as the technology bubble was bursting. The company gushed red ink and its shares cratered, from nearly $350 in late 1999 to less than $1 three years later.

Unlike so many Internet companies, Akamai survived. Sagan and other senior executives, including then-CEO George Conrades, slashed their annual salaries to $20,000 each as part of a cost-cutting blitz. By 2004 big customers were calling as consumers embraced broadband Internet service, fueling an explosion in online commerce. Akamai turned its first-ever profit that year.

Today more than 2,000 companies pay Akamai an average of $200,000 a year to access its network, which was initially designed as a research project at the Massachusetts Institute of Technology and uses software to find the fastest, most reliable routes for Internet traffic. Apple Computer uses Akamai to ensure that its iTunes store runs smoothly; Microsoft relies on it to get Web software to its customers. The Cambridge, Massachusetts, company’s fortunes are booming once again: First-half revenue and profits, at $191 million and $23 million, respectively, far exceeded expectations, helping push the share price up almost 150 percent, to nearly $50.

Sagan, a cousin of the late astronomer Carl Sagan and a former online media executive at Time Warner, became CEO in April 2005 when Conrades stepped aside to become executive chairman. Sagan’s biggest achievement thus far: integrating last year’s $169 million acquisition of rival Speedera Networks, a deal that is helping to drive this year’s surprisingly good earnings.

If Sagan has learned one thing, though, it’s that trouble is never too far around the corner. Akamai faces stiff competition from rivals like Savvis that run a broader suite of technology services for companies over the Internet; and it sometimes loses customers who prefer to handle routing themselves. That’s one reason why the CEO is stepping up R&D spending to improve Akamai’s network and prevent defections.

Still, it’s not all about work for Sagan, a Chicago native who graduated from Northwestern University’s Medill School of Journalism and was an Emmy-award-winning news producer for New York’s WCBS-TV during the 1980s. He came to Akamai after a stint as senior adviser to the Geneva, Switzerland–based World Economic Forum, a post he took after leaving Time Warner. The 47-year-old father of three still finds time twice a week to play ice hockey, which he calls “a religion in Boston.” Sagan recently spoke with Institutional Investor Contributor Robert Hertzberg.


Institutional Investor: No one can argue with what you’ve achieved so far this year, including your first-ever $100 million sales quarter. What has driven your recent success?

Sagan: It’s a number of things. Businesses have gotten very serious about how the Internet affects what they do. Quality of service really matters, so people pay for what we can provide. That’s on one side. On the other, we’ve hit a tipping point in broadband. I don’t know what the magic number is, but there are enough people online now with broadband that providers of broadband content — music, sports — can make it work. That has brought more and more customers to Akamai.

How is online commerce different today than it was during the bubble years?

The biggest difference is that most of our customers’ business models today are fundamentally very sound, whether it’s a pure Internet commerce site or a bricks-to-clicks guy who’s transitioning. There are some hotel chains that now book more online than through any other channel. Even new-car sales are interesting. Almost no one buys a new car online, but just about every new-car sale is determined online before going to the dealer. Of course, that doesn’t mean that everyone on the Internet is profitable. There are some new models out there that are still up in the air, particularly in some of the social-networking spaces.

Your customers enter into yearlong service contracts, a lot like in the cell phone world. What’s your renewal rate?

The vast majority renew. We target a churn rate of 10 percent or lower on an annual basis, roughly 2.5 percent a quarter. We have come above it just a little bit in the past six months, mostly because we were finishing the integration of the Speedera acquisition.

Why did the deal increase customer turnover?

Frankly, we didn’t want some of the customers. These companies were in the areas of adult entertainment or Internet gambling that don’t adhere to our acceptable-use policy. We didn’t “fire” them the day we closed the acquisition. That would be bad business. We gave them plenty of time to move off.

When customers leave voluntarily, who’s luring them away?

Driving to the net

Avid hockey player and Emmy winner Paul Sagan has onetime dot-bomb Akamai Technologies humming again, helping power everything from Apple’s iTunes store to online travel sites.

The primary competitor is the one we call DIY: do it yourself. When we go to a major corporation, usually we’re talking to a CIO who says, “You know, the Web is just another application. I’ve been doing this my whole career. And I guess I’m doing okay because I didn’t get fired. So why do I need to change what I do for this next thing?” That’s really the first level of competitor. The next one is the large managed-services provider whose basic pitch is, “I don’t do any one thing particularly well, but I do everything a little bit.” It’s the one-throat-to-choke model. The idea is, “Outsource to me. When you’re unhappy, grab me by the neck and scream, and I’ll try to fix it.” Where we’ve been successful is in demonstrating that you really have to specialize the way we have to do this well.

Will acquisitions remain an important contributor to your growth?

We’ll always keep looking. Our preference is to do deals where we can bring in customers that we think will benefit by having access to what we provide or acquisitions that have technology that can help us provide better service to all of our customers. I’m not a big believer in transformative acquisitions, where people buy something that’s out of their space because they just think it’s a magic answer.

Why not?

The vast majority of acquisitions fail because they [involve businesses that are unfamiliar] to the company doing the buying. The Speedera acquisition was accretive, tremendously valuable for the business and helped accelerate our growth. I would do one of those a month, if I could. But they’re very hard to find.

So you expect most of your growth to be organic?

Yes. That’s our biggest opportunity. There are just so many things that our technology can do. It’s the reason we moved into application performance services [helping companies offer software on the Web].

About one fifth of your revenue comes from abroad. Isn’t that tiny given that the Internet is a global medium?

More than 20 percent of our traffic is delivered outside of the U.S., so there is demand for content delivery overseas. The market for outsourced Internet services in Europe and Asia is a few years behind that of the U.S. As the same kind of successful models emerge elsewhere for Internet content and Internet commerce, we think the need for performance will matter.

Akamai did a secondary stock offering late last year, and you have personally accelerated your own share sales in recent months. Are these sell signals?

No. The stock that I sold is stock that I bought with my own money as an investment in the business when it was formed. I continue to hold the vast majority of it. This is a management team that has been here since the beginning and didn’t leave when the going got tough and everyone told us we were dead as a company. I think it’s very fair to have diversified my portfolio a little bit this year, particularly when the company was exceeding all the expectations of its performance.

What did you learn from dealing with so much adversity during the first few years after the bubble burst?

All of us in the management team have a pretty healthy perspective. We lived through the bubble bursting, but we also lived through one of our co-founders being killed on 9/11. So I think we really know what bad is and what matters in life. We stayed for reasons we thought were really important: to build a company in the vision that Danny Lewin originally had. We’ve done that, and we’re excited about how much more we can accomplish.