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Once-hot Net business crippled by feuds

Companies in the business of speeding Net traffic are hard-hit from the dot-com shakeout, leaving behind a tangle of lawsuits and allegations worthy of a soap opera.

The business of speeding Net traffic, once viewed as one of the most lucrative and important parts of the Internet's infrastructure, has descended into a tangle of lawsuits and allegations better suited to a soap opera than a technology sector.

The few companies that remain after the dot-com shakeout have become bitter enemies, swapping allegations of rampant patent infringement, libel and even malicious hacking in the service of corporate greed.

This might have made more sense two years ago when Akamai's market capitalization was soaring near $35 billion. The stakes today are far smaller, and the ongoing hail of lawsuits has left analysts and customers asking whether the few remaining companies are crippling an already struggling sector with their bitter legal warfare.

"What we're all observing is the legal history," said Peter Christy, an analyst for the Nets Edge Research Group, who has followed the sector closely since its beginning. "Once you start the (legal) process, you can't just say you don't want to do it anymore."

At the center of the legal battles is Boston-based Akamai, the company that launched the content-delivery network craze when it burst onto the scene in 1999.

Akamai, like a handful of other companies before and after it, figured out clever ways to avoid network congestion by storing pieces of Web sites, applications or streaming media in hundreds of servers located inside local networks around the world. Using its system, Web surfers going to Yahoo's site might download much of the content from servers physically close to them, and avoid digital traffic jams at Yahoo's central servers, for example.

The idea took off, and Akamai became an overnight success. After going public, its market capitalization soared above $30 billion, without ever having turned a profit. Rivals sprung up using similar techniques, but only two serious competitors remain: Cable & Wireless-owned Digital Island, and independent Speedera.

All three are now mired in bitter interlocking lawsuits.

Akamai was the first to launch litigation, suing Digital Island in late 2000 for patent infringement. That first lawsuit against Digital Island has percolated through courts for nearly two years, and a judge finally issued an injunction against Akamai's rival last Wednesday.

Akamai claimed the injunction as a major victory, and the company's stock jumped nearly 25 percent on the news by the end of the week.

In fact, it is likely that the injunction will have little effect on anybody's business. Although the judge did forbid Cable & Wireless from using some of Digital Island's technology, the telecommunications giant says it long ago moved customers away from that part of the service, and that its new service is not affected by the order.

Akamai is seeking damages "as high as nine figures," said Akamai Assistant General Counsel David Judson. Damages in a patent infringement case are based on estimates of lost profits and the "impact of price erosion," and Akamai thinks these figures are high. "We think it's a big case," Judson said.

But the lawsuit did touch a firestorm of other litigation that promises to drag on for years.

Cable and Wireless has filed three patent-infringement lawsuits against Akamai. It's already lost one of them, but executives believe they have a chance with the other two, or at the very least, they're angry with Akamai and want to extract their own pound of flesh. They're not suing any of their other rivals.

"As a matter of course, we're not that litigious or aggressive," said Cable & Wireless Associate General Counsel Howard Lasky. "Akamai is another matter."

With Speedera, the only other pure content-delivery company, the relationship is even uglier. Akamai originally sued the company for violating the same patent allegedly infringed by Cable & Wireless. But earlier this summer, the suit took a bizarre turn when Akamai accused Speedera's chief technical officer of hacking into a partner's database and stealing proprietary marketing information.

Speedera, denying everything, has countersued Akamai for trade libel and unfair competition.

What, if any, effect all of these lawsuits are having on the underlying market is difficult to tell. Analysts say customers are still largely making their decisions on what technology actually works, and all three services seem to function reasonably well, offering slightly different cost structures and features. Though the business never reached the heights promised in the Net's go-go days, major Internet companies, from Yahoo on down, continue to see the services as a critical part of being online, analysts say.

Akamai, with yearly revenue of about $163 million in 2001, still has a commanding market lead, with about 60 percent to 70 percent of the market, according to Gartner analyst Robert Batchelder. Despite its smaller market share, Digital Island has several financial advantages over its larger rival, since it's housed inside a larger network that can help it defray infrastructure costs, analysts say. Speedera, the smallest of the survivors, claims it will be cash-flow positive by the end of this quarter.

All of this has left outsiders shaking their heads at legal battles that seem to be accomplishing little for anybody, but are draining the resources of the companies involved.

"When all the dust settles, I don't think (the lawsuits) will impact customers in any way," Batchelder said.