Caching shake-up at Inktomi

Inktomi is exiting the Web acceleration market it pioneered in 1997, deal a major blow to the once-high-flying industry.

Inktomi announced last week in reporting its third-quarter earnings that it was reducing its content network group and would lay off 270 employees, or about 42% of its workforce. The company has lost more than $600 million since September 2000.

In a conference call with analysts, David Peterschmidt, CEO of Inktomi, said the decision was prompted by the erosion of Inktomi's service provider customers and a tougher-than-expected entry into the enterprise market.

"Though we built some of the best products in the industry, the outlook for this market is still weak, and we don't see the markets going at the pace that we initially anticipated," Peterschmidt said. He said the company will continue to support existing content network customers and channel partners.

Analysts say they aren't surprised to see Inktomi ditch caching to focus on its search software business, a technology that has had more success in the enterprise market. Inktomi has more than 2,500 customers using its search software and says revenue for the software in the third quarter was up 16% over the third quarter last year.

Inktomi's move does lessen the amount of competition in the market, but isn't a good sign for caching survivors such as CacheFlow.

"I look at it as a serious blow because it shows that maybe there is not enough money to be made in this market for companies to survive around this business plan," says Richard Sun, network systems engineer at Volera customer W. L. Gore & Associates of Newark, Del., best known for its Gore-Tex fabric.

F5 Networks earlier this month announced that it would no longer sell its Edge-FX cache, powered by Inktomi software, because of lagging demand.

"This is not a good thing for the smaller vendors," says Lawrence Orans, an analyst with Gartner. "The fact that Inktomi and F5 have left the market makes it more difficult for smaller vendors to justify their value. It definitely casts a pall over things."

The caching market is not the same as it was two or three years ago when Inktomi was riding high on the dot-com wave. At that time, service providers such as AOL turned to Inktomi to provide value-added services to content companies seeking better performance.

The market took an initial hit in 1999 when Akamai Technologies entered the scene, placing its own network of caching servers on the Internet and selling the service to content distributors rather than to ISPs.

"The genius in what Akamai saw that Inktomi and the other caching vendors didn't was simply who would pay for cache acceleration. And that was people with content that wanted it delivered quickly," says Peter Christy, principal analyst with NetsEdge Research.

Inktomi forged on. But when the economy took a turn for the worse and Inktomi's service provider customers stopped spending, the company was forced to look to the enterprise market. It forged OEM deals with companies such as Hewlett-Packard, 3Com and Dell, but found the demand wasn't what it had expected.

"The deal they struck with their OEMs was not all that lucrative for them," says Cindy Borovick, an analyst at IDC. "Their assumption was that their OEMs would push the volumes out and they'd make it up on the volumes to the enterprise. That didn't happen."

In trying to increase demand, Inktomi and competitors such as CacheFlow and Volera added features to their caches such as security, intelligent content management and content filtering to provide companies with more than simple warehouses for static content. The transition wasn't easy, and bigger vendors such as Network Appliance and Cisco have had better luck in addressing customer need.

"As a stand-alone business, caching is hard to support because customers in the enterprise who are deploying caching-oriented solutions typically have them tied into other initiatives that they're doing in their remote offices," says Amit Pandey, senior director of content delivery marketing at Network Appliance, which IDC rated the No.1 caching company in 2001, with a 24% market share. "Caching alone isn't enough."

While enterprise IT spending has been ratcheted down, Cisco is seeing growing demand for its content networking products, including caching.

"We're seeing a ton of demand, and it's partly the result of the fact that we've added a lot of enterprise features that make the product very valuable to large, small and midsize businesses because of its role as an integrated network platform," says Jim O'Toole, CTO for the content networking group at Cisco.

According to IDC, the caching/content network market is expected to get some rejuvenation this year, after a dull 2001, as corporations start buying these products.

The market skyrocketed in 2000, with revenue jumping from $147.5 million in 1999 to $430 million in 2000, according to IDC. In 2001, revenue held relatively steady at $430.6 million, but IDC expects the market to pick up this year, with revenue reaching $560 million by the end of 2002.

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