Dear Reader,
This week in Product | Strategy | Innovation we highlight the opportunities and challenges of building a better internet. A widespread global website outage occurred on June 8, 2021 affecting many websites like the NY Times, CNN, Twitch and Reddit for just under an hour before normal service could be restored. But this outage was not the result of a cyber-attack. A valid customer configuration change on the Fastly edge network triggered a software bug introduced into that network as part of a system upgrade a month earlier by Fastly itself.
The original concept of the internet was a widely distributed and interconnected network of networked computers. How could multiple sites go down simultaneously as if they were hosted on the same internal network? The Fastly outage highlights a key challenge of the internet today with the growing complexity of streaming media, high-resolution graphics and programmable objects. The original world-wide web served files and simple documents with hypertext links to other files and simple documents. A growing number of users and businesses are seeking better internet performance and security. So new and established tech companies are building out their own versions of a better internet.
Fastly has developed an Edge Computing platform made up of a global network of servers. Content is deployed through this Fastly platform so it can be distributed across their entire network of global servers. When you access a website deployed to this platform, Fastly determines the most efficient way to provide the content. Usually that is a server co-located in your city or region. This also describes the concept of Edge Computing where computing is pushed out closer to where it is used to improve performance.
The Fastly product strategy has been to go after large enterprises and high traffic websites like TikTok, Twitter, Yelp, Shopify and Stripe from the beginning. This allows each win to drive significant revenue. Scale is driven by how fast you can win these accounts. That also drives product requirements to win those deals. Fastly is not selling Volkswagens. They are selling Porsches to win those deals regardless of the price. And that also allows Fastly to attract top talent that want to work on those big deployments. But Porsche also has quality issues from time to time. Fastly can also lose key accounts they win. The end result is variability in the Fastly business. TikTok was a key driver of Fastly revenue as it scaled until it wasn’t anymore.
Fast response time can greatly improve internet performance for the applications that use this technology. But it also highlights the vulnerability of the technology. If a software bug makes it into that network and is triggered by either the normal course of business or a cyber attack, the whole network may be affected as in the Fastly outage. Maybe an occasional CNN or Twitch outage is an inconvenience, but the loss of business-related applications could have a more dramatic impact.
The Vision for Cloudflare is to build a better internet.
Cloudflare was founded in 2009 by 2 students at Harvard Business School as part of its New Venture Competition along with another colleague from a prior business venture as the CTO. The objective was to build a better internet with a focus on performance, security and access. But the Cloudflare founders were also impacted by the work of Professor Clayton Christensen at Harvard Business School on disruptive innovation so access was important to build the business.
Cloudflare offers a free service to host a blog or personal website. Paid services start at $20 per month for professional websites with basic security and performance. Small e-commerce websites and businesses requiring advanced security, performance and PCI compliance can access services starting at $200 per month. Cloudflare followed the strategy of Toyota entering the US market with the energy efficient and low cost Corona, then Corolla, Camry and eventually Lexus. Cloudflare has built a wide base with over 1 million customers today. Fastly has approximately 2,000 customers.
Both strategies are valid and can co-exist in a growing market. But they may lead to different outcomes in the future. The figure below shows the the stock price for Cloudflare (NET, orange), Fastly (FSLY, blue) and Akamai Technologies (AKAM, black) from September 2019 through today in June 2021. During the pandemic, Cloudflare and Fastly both brought on many new customers. This had a more immediate impact on revenue for Fastly winning more profitable enterprise accounts, but Cloudflare has been able to sustain their growth with a broader base. Cloudflare has grown revenue 50% year over year since 2016. And the market it serves is growing fast with a current total addressable market around $200 billion that could reach close to $1 trillion by 2030.
Fastly and Cloudflare are primary competitors for Edge Computing to build a better internet. But they also compete with cloud providers Amazon, Microsoft and Google who are expanding into Edge Computing plus cybersecurity companies like CrowdStrike, Sapphire, IBM, Snowflake, Rapid7 and CyberArk.
Some key features for the growing edge domain are:
Fast - low latency for high performance
Reliable - available when you need it
Scalable - network adapts with demand
Secure - deploy within a global network using the latest technology
Distributed - many global access points at the edge
Redundant - disaster recovery built into network design
Access - free accounts allow users to evaluate and add paid services later to meet growing needs
Programmable - code and deploy globally in minutes
Edge Computing really started as widely distributed Content Delivery Networks (CDNs) to improve the performance of delivering hypertext internet content. Akamai Technologies was one of the original CDN providers. Fastly, Cloudflare and the main cloud providers provide CDNs today as a core capability. Network security is another capability accelerating adoption of Edge Computing platforms. Edge Computer architecture is inherently effective at one of the more common cyber threats called a Distributed Denial of Service (DDoS) attack. This results when multiple computers overwhelm a website with traffic to hinder performance or crash the system. The distributed design of edge computing greatly reduces the threat of DDoS attacks.
But the real growth of Edge Computing over the next decade will be through 5G, Internet of Things (IoT) and artificial intelligence/machine learning (AI/ML) where performance approaching real-time processing is desired. Edge Computing at the extreme is on the device you are using like the biometric chip on your iPhone to enable Face ID. But in other cases, Edge Computing is a server near you with the resources you need.
So which corporate strategy wins over the next decade comparing Fastly and Cloudflare as Edge Computing evolves. Looking at the last few decades of history with Amazon, Google and Facebook, these companies build out vertically-integrated innovation stacks and work directly with a wide user base. This should predict some level of success disrupting existing technology. Whereas IBM, SAP and Oracle are more focused on the requirements and applications to win large enterprise accounts using the existing technology and its evolution versus disruption. Cloudflare is more like an earlier version of Google than Oracle. Cloudflare is using the Clayton Christensen playbook for disruptive innovation and offers free and low cost services to access their platform. They are Toyota entering the US market with the low-cost, energy efficient Corona vehicle, but now have the Corolla and Camry and just launched the up market Lexus. Fastly appears to be using the playbook inspired by Oracle. They are selling the speed and performance of a Porsche 911.
The internet is transforming into something much more advanced than the original concept. Online applications like YouTube, Google Flights, Zoom and Spotify play growing roles in our lives. But with the exponential growth and our dependency on these applications, cyber and ransom attacks are also an unwanted side-effect. Fastly, Cloudflare, Amazon, Microsoft, Google and other tech companies are competing to build a better internet.
Best,
Stephen
Nothing in this post is intended to serve as financial advice. Do your own research. I’m long NET, GOOG, AMZN, SPOT and IBM mentioned in this update.