Digital Island’s Dream Alliance

It didn’t take long for investors to pick out the big winner in the
alliance between Digital Island, Inktomi
and RealNetworks to launch a global network for broadcasting video and
audio.

It’s international Internet services provider Digital Island (ISLD), whose
shares rose 32% to close at $25 Tuesday after the three-way agreement
was announced on Labor Day. Its shares continued up Wednesday, trading
at $28 at 1 p.m., a eye-popping 48% increase over last Friday’s $18.88
closing price.

Caching server vendor Inktomi (INKT) saw its shares climb more modestly in the
wake of the deal, trading at $120 early Wednesday afternoon, or 3.7%
above Friday’s close. Streaming multimedia software leader RealNetworks (RNWK), meanwhile, fell nearly 3% since Friday, trading Wednesday at $85.31.

The truth is the technology pact is good for all three companies. For
caching server vendor Inktomi, the new broadcasting network provides a
highly visible demonstration of its software’s ability to improve the
performance of bandwidth-intensive multimedia content over the Internet.

For RealNetworks, it’s another step toward the company’s goal to be the
Internet’s software infrastructure provider for audio and video. With a
market share exceeding 70%, RealNetworks continues to successfully
execute its strategy.

Digital Island, though, gains the most. By partnering with two of the
most notable Internet companies, San Francisco-based Digital Island has
positioned itself to be an integral part of a potentially huge success
story.

Bandwidth constraints have made multimedia transmission problematic and
unsatisfying for corporations and consumers. These three companies have
a chance to show how it can be done right. And with the demand for
quality multimedia over the ‘Net just beginning to take off, the timing
of the alliance couldn’t be better.

Digital Island offers international corporations a number of Internet
services, including content distribution, network management and
application hosting. It operates data centers in New York,
California, Hawaii and England that link via dedicated lines to ISPs in
17 countries.

The company already has shown impressive growth. For the nine months
ended June 30, revenue was $7.5 million, an increase of 429% over the
$1.4 million for the same period a year ago. Revenue in the quarter
ended June 30 was $3.7 million, compared to $725,000 in the year-ago
quarter.

By using RealNetworks’ G2 software for delivering multimedia and
Inktomi’s server software for storing data, Digital Island improves its
network and ability to attract and handle more corporate customers.

Digital Island went public on June 29, offering 6 million shares at $10
each. In the next two weeks the stock soared, hitting as high as $40 per
share before falling fast during the monthlong market selloff that began
in mid-July, and then trading in the teens for most of August.

At $18 per share, Digital Island was trading around 50x revenue. At $27
per share — with a market cap of about $900 million — it’s a little
pricier, at 69x revenue. But the company has consistently grown revenue
at least fivefold in each of the past three quarters, and seems poisedto break out as a new star in the infrastructure arena.


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