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Audio and, increasingly, video content is clearly moving from traditional outlets like radio and television to the Internet. Quite obviously, this trend provides a very favorable business backdrop for content-delivery-network, or CDN, operators.

One example of this is

Akamai Technologies

(AKAM) - Get Report

. It was one of the best-performing stocks in the market last year, returning an impressive 167% vs. the

S&P 500's

14% gain.

As such, one of the more eagerly awaited initial public offerings has been that of

Limelight Networks

, which

recently filed an S-1 with the

Securities and Exchange Commission

. The proposed ticker is LLNW, though no date for the IPO has been set yet.

In a nutshell, this company operates a network designed to deliver data-intensive content, including audio, video and software applications, from its 700-plus customers to their consumers. Demand has grown rapidly for Limelight's CDN services, with revenue surging from $5 million in 2003 to $64 million in 2006 -- stunning growth, to say the least.

An Impressive Customer Base

In addition, Limelight's list of customers indicates that the company is very well positioned from a strategic standpoint. The most important name is


(MSFT) - Get Report

, which is identified as among Limelight's largest software and games customers in 2006. Delivering Microsoft software over the Web is a great business to be in, especially considering the recent launch of its flagship Vista and Office products.

On the games side, Limelight helps power Microsoft's Xbox Live platform, which is no longer just an online gaming service. Since November, it's also a rising video outlet, serving up feature-length films, trailers and television, much of it in high-definition. Microsoft's traffic should dramatically accelerate later this year, too. The November release of "Halo 3" will be a significant catalyst for Xbox 360 sales and Xbox Live use.

These massive files are a nice boost to data traffic over Xbox Live, which had already been delivering game demos and other downloads to users. According to Microsoft, in just four months, Xbox Live became the second-largest online distributor of television and film content, behind


(AAPL) - Get Report



(ADBE) - Get Report

is also counted as a major software customer, a positive in light of the healthy buzz around the Creative Suite 3 software package. Other key Limelight customers include MySpace, MSNBC and


(VIA) - Get Report


Other Notable Factors

The CDN industry has also seen a trend of consolidation. For instance,


(INAP) - Get Report

acquired VitalStream Holdings in February, and

Level 3




( SVVS) CDN business in January. Industry leader Akamai has also made several acquisitions in recent years, including Speedera in 2005, Nine Systems in 2006 and Netli just two weeks ago. It wouldn't at all be surprising to see Limelight get snapped up, particularly by Akamai, which has an expensive stock to use as currency.

The near-term backdrop is very favorable for Limelight, but investors do need to key on some major risks. The first is customer concentration.

Limelight's largest customer in 2006 was reseller

CDN Consulting

, accounting for 21% of revenue; its top 10 customers accounted for 58% of revenue. Going forward, industry growth may rely increasingly on extracting more revenue from each customer rather than signing up new ones. We're already seeing this with Akamai, which is posting eye-popping revenue growth despite relatively modest increases in customer count. There just aren't many Microsofts and Apples to go around, so CDN operators may be forced to cut prices to win new customers.

Plus, the industry can be a litigious environment. Last June, Akamai and the Massachusetts Institute of Technology filed a patent lawsuit against Limelight, and any unfavorable outcome could hurt Limelight's operations and finances. In an unusual move, Akamai actually sued Speedera for patent infringement before acquiring it.

In addition, as bandwidth gets cheaper, it will become more economic for companies to deliver their own in-house content-delivery solutions.

But in the short term, Limelight won't have to work very hard on its sales pitch to Wall Street. The company will be billed as the next Akamai, and the road-show presentations will contain plenty of colorful charts and tables referencing the growth of online media consumption, talk of recent consolidation within the CDN industry and some testimonials from happy Limelight clients.

So, although the risks are substantial, momentum investors should certainly put Limelight on their radar screens, because the stars are aligning for one hot deal. I'll update this story as additional news, particularly regarding deal pricing, comes into play.

In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at In this role he performs stock analysis for Breakout Stocks

, and is also a regular contributor to Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback;

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