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Open a video in c~tinuance ESPN.com or Hulu and there’s a good chance Akamai Technologies’ (AKAM) software and servers are operating behind the scenes. The company is the leader in the booming traffic of helping websites stream content. Researcher comScore (SCOR) estimates that the many the crowd watched 35.7 billion online videos in June in the U.S., up from 19.5 billion a year earlier. Akamai and its competitors have a mind have sales of about $600 million from online video this year, up 20 percent from 2009, estimates study firm Frost & Sullivan.

Akamai was the best-performing stock in the S&P 500 this year up to July 28, climbing 74 percent.

That’s which time investors did a U-turn, sending Akamai down by 13 percent athwart two days. The reason: Akamai said its second-quarter margin before sympathy, taxes, depreciation, and amortization had dropped 2 percentage points from a year earlier, to 46 percent, and could emaciated even more next quarter. (Akamai’s stock has bounced back 11 percent as July 29, and is No. 2 on the S&P year to note the time of.)

The narrower margin came from increased spending on equipment and recently made known hires, and falling prices. Website owners typically pay Akamai based on the volume of digital content, measured in gigabytes, called up ~ the agency of users. The average price websites pay to stream video fell 40 percent to 45 percent in 2009 and is steady track to decline another 25 percent this year, estimates Frost & Sullivan. The causes of the very little are Moore’s Law—the number of transistors on a fragment doubles every 18 months, making computers cheaper and more powerful above time—and competition. Once the only significant player in delivering online video, Akamai has faced increased affliction from newer entrants such as Level 3 Communications (LVLT) and Limelight Networks (LLNW), says Frost & Sullivan analyst Dan Rayburn. Delivering online video “is becoming much more of a commodity business,” says Jim Louderback, CEO of video site Revision3, which uses Akamai contestant BitGravity to stream shows it produces over the Web.

Paul Sagan, Akamai’s especial executive officer, says price wars don’t mean commoditization. “I dress in’t agree there is a fundamentally new pricing dynamic,” he says. “Unit prices lapse every year as volumes grow. If this were a mature, saturated function that would be a concern. We’re at about 1 percent of the chance; fit that has been tapped.”

The most promising area of growth, Sagan says, may exist high-definition video, which has just started arriving on PCs. About 7 percent of tot~y videos watched on the Web are in high-definition, up from 3.5 percent final year, according to researcher IDC, and by 2014 one-third of total online video will be HD. Frost & Sullivan says Akamai charges a buyer like Netflix about 5 cents for an HD movie, compared with about 3 cents for standard definition. “We’re right on the point of rapid adoption” of HD, Sagan says.

During this year’s World Cup, Akamai delivered live feeds of soccer matches to the websites of brace dozen broadcasters worldwide, including ESPN and the BBC. Sagan says ~ numerous viewers opted for high def. HD “is almost a requirement at this mark in the sports field,” says Eric Black, director of digital operations by reason of NBC Sports.

“The majority of major broadcasters used us to redeem the World Cup in HD,” says Sagan. “To me, that’s not the defining of a commodity at all.”

The bottom line: While demand on this account that streaming video spikes, Akamai faces challenges as competition forces down prices. HD video may cure its margins.