Network Solutions' Complicated Name Game
By Spencer E. Ante
Staff Reporter
4/6/99 9:03 AM ET
SAN FRANCISCO -- What's a fair price for registering an
address on the Internet?
It may seem like a simple question, but for Network Solutions
(NSOL:Nasdaq) the answer holds a whole lot of import -- and a
whole lot of impact on its bottom line. Network Solutions thinks
$16 is a fair price for registering a domain name, but some
analysts and the company's competition bristle at the
suggestion.
"NSI wants to charge $16 a year per domain name and all
they're doing is running a database," says Richard Forman,
founder and president of Register.com, one of the largest
registrars in cyberspace. With more than 4 million domains
registered, "that's $80 million a year to run a database." Forman
says a fair price would be between $1.50 and $2.
The decision to determine a fair price is one of several key
issues in the hands of the Commerce Department. In contrast
with most Internet companies, Network Solutions has always
found its fate inextricably intertwined with Uncle Sam. Since
1993, Network Solutions has had a cooperative agreement with
the National Science Foundation to handle the registration,
maintenance and renewal of the choicest real estate on the
Internet, in the popular .com, .net, .org and .edu domain names.
For that service, the Herndon, Va.-based company has charged
the public $35 a year for a two-year registration, paid upfront.
The $35 fee covers both the registry and registrar functions. The
registry service works like a wholesaler, holding a complete
record of all the addresses and the Net's root-zone servers. The
registrar is akin to the retailer of domain names, acting as the
interface between the registry and the customers buying domain
names. Under the cooperative agreement, Network Solutions
will continue to operate the registry until Sept. 30, 2000.
But Network Solutions' monopoly on the registrar side is coming
to an end as the Internet Corporation for Assigned Names and
Numbers prepares to select five registrars for the test phase.
During this two-month period, registrars -- including Network
Solutions -- will compete for customers. The test phase is set to
begin on April 26, and ICANN plans to announce the identity of
the registrars on April 21.
To stick to its timetable, the government must resolve certain key
issues, the most prominent of which is the ambiguity over
pricing.
Some feel Network Solutions is asking for too high a price. "$12
to me is absolutely insane," says Tom McDonald, founder of
domainwatch.com, a service that tracks the domain name
registrations of all registrars. "Who knows? They'll probably get
it. They've got quite a bit of pull and they've been around a while."
McDonald says a fair price would be less than $1 a year.
Top Registrars
Rank
Server name
No. of names
registered
1
Register.com
269,184
2
NTX.net
105,377
3
Nameservers.net
81,355
4
9Netave.com
79,257
5
Worldnic.com
68,542
6
Mspring.net
52,661
7
Interland.net
49,148
8
Aitcom.net
39,060
9
Netcomi.com
35,408
10
Secure.net
35,124
11
Nameserve.net
34,558
12
Best.com
32,933
13
Earthlink.net
32,547
14
Namesecure.com
32,350
15
Pair.com
29,808
16
Msintegrate.com
27,442
17
PSI.net
26,520
18
Valueweb.net
26,227
19
Webcom.com
25,543
20
Host4u.net
23,464
Source: domainwatch
Others remain a bit more sanguine. In his valuation model,
Friedman Billings Ramsey analyst Ulrich Weil, who has a buy
rating and $300 price target on the company, forecasts a $10
registry fee. That would give Network Solutions fiscal year 2000
revenue of $275 million. And Keith Benjamin, an analyst with
BancBoston Robertson Stephens, which has been an
underwriter for Network Solutions, believes "something in the
range of $10 to $16 per domain name per year would be fair and
reasonable to expect."
Elliot Maxwell, the new special "digital economy" adviser to the
secretary of Commerce, who is involved in the negotiations,
declined to comment on the specifics of the talks with Network
Solutions. Bob Korzeniewski, Network Solutions' chief financial
officer and acting chief operating officer, also declined to
comment. "The last thing we need to have is debates in the
media about a process that's so important," he says.
More Financial Question Marks
The negotiations are addressing other critical financial issues.
Network Solutions would like to charge a one-time licensing fee
to accredited registrars for accessing the shared registration
system. In a proposed contract, Network Solutions has asked
for a whopping $10,000 licensing fee. Korzeniewski says that
would help cover the development and distribution costs for the
new system, which the company must build.
On Friday, Network Solutions announced the installation and
testing of this new back-end registry system. When it's finished,
the new site will be available at www.nsiregistry.com, which will
be distinct from the company's recently consolidated registrar
site at www.networksolutions.com.
Other key issues include the terms of the licensing contract that
registrars will sign with Network Solutions and the rules that will
allow competing registrars equal access to expiration and
renewal information for existing registrations in the .com, org
and .net registry.
Perhaps the biggest question mark is hanging over the identity
of the test phase registrars. Michael Roberts, interim president
and CEO of ICANN, says that as of last week there were 12
applicants for the test bed. Roberts declined to specify which
companies applied, but said that "in some cases these
companies were larger than Network Solutions."
Several blue-chip companies, including MCI WorldCom
(WCOM:Nasdaq), America Online (AOL:NYSE) and AT&T
(T:NYSE), have inquired about entering the domain-name
business, though they may not necessarily apply. Network
Solutions concedes that additional competition may hurt its
business, especially if it comes from big-name outfits that have
strong customer service departments, robust data networks and
Internet industry experience.
The company also admits that competition is likely to introduce
pricing pressure in the registrar side of the business.
Friedman's Weil predicts that registration fees will tumble to $20
per domain name per year.
But even if Network Solutions' worst nightmare comes to pass
and it doesn't get the price it wants, company executives say they
will more than make up for it with an increased volume of
registrations and new revenue coming from recently launched
services and products. These include a personalized email
service, a premium registration service and a promotional
package, among others. Also slated for release before the end
of the second quarter is a .com directory service on which the
company plans to sell advertising.
"We're not competing for a fixed pie," argues Korzeniewski. "I
see the volume of partnerships increasing."
The uncertainty over Network Solutions' future has continued to
depress its stock price. After closing at 122 3/8 on March 22, the
stock has steadily declined, closing at 94 on Tuesday.
"We would not be surprised to see continued stock fluctuation
until we hear the last data points out of the regulatory
environment, which we believe will be the finalizing of the
registry price and which companies are selected as test bed
participants," wrote Robbie Stephens' Benjamin in a March 23
research note. "Once this news is known, we believe investors
will feel more confident in NSOL's leadership position."
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