Trufflette,
I just like to look at partially filled glasses half-full: A view that is not as obviously agenda driven as Asensio & Co's.
Heard On The Street: Debate Over Network Solutions Rages
Dow Jones Online News, Wednesday, March 24, 1999 at 00:42
(Published on Tuesday, March 23, 1999 at 21:40)
By Robert McGough, Staff Reporter of The Wall Street Journal
In the wacky world of Internet stocks, monopolies don't seem to matter
much. Web sites do.
Especially if you catalogue them as Network Solutions does. The
Herndon, Va., company has thrived by registering ".com," ".net" and
".org" names. Thanks to a contract with the National Science Foundation
to be the exclusive registrar of these so-called domain names, the
company is one of the few profitable companies doing business on the
Web.
Now Network Solutions is losing its government-granted monopoly, as an
organization appointed to oversee Internet domain names last month
published guidelines for introducing competition to the business.
Potential rivals are circling. So Network Solutions shares have been
unmercifully pummeled, right?
Not exactly.
Yes, the stock plunged after the announcement of how competition would
unfold. It slid nearly 50, or 41%, to 72 1/2 in three weeks. But once
the news was digested, the stock came back to 153 3/4 intraday Monday.
The shares since have backpedaled to below 116 on the Nasdaq Stock
Market. (Prices are adjusted for a 2-for-1 stock split announced after
yesterday's close.)
In the long run, the loss of its monopoly will push up the company's
costs, depress prices and eat into market share. In the short run,
though, some say the prospect of incredible growth in the Internet will
win out -- unless a really big dog gets into the domain-name business to
compete with Network Solutions.
"This is one of the few Internet names that really can talk the talk,
that has a big market share, and that isn't reinventing itself every 60
days," says Jim Callinan, a mutual-fund manager at RS Investment
Management, whose fund owns the stock.
At its heart, the debate over Network Solutions is about whether a
company on the Web, where competitors can pop up in anybody's garage,
can build walls to defend its business.
Bulls on Network Solutions say that, by virtue of its previous
monopoly, the company has an insurmountable head start in selling domain
names. But there is no denying that competition will hurt the company --
especially if a really big competitor such as America Online, AT&T or
MCI WorldCom moves into the business of selling .com names. None of
those companies has previously expressed any interest, however, in
registering domain names. MCI WorldCom says it has no immediate interest
in the business. AT&T and AOL declined to comment.
And the annals of business history don't reflect well on companies
that lost their monopolies -- or even near-monopolies. AT&T stumbled for
years after it lost its virtual monopoly on phone service in the U.S.
And IBM, which had close to a monopoly on the computer business, handed
that monopoly away to Intel and Microsoft -- and their stock market
values soared beyond IBM's.
Earnings at Network Solutions more than doubled last year to $11.2
million, or 34 cents a share, and are projected to grow about 76% this
year. The company's accounting, unlike a lot of Internet companies, is
pretty conservative: It takes payment for domain names upfront, but
stretches the recognition of the revenue over time.
Network Solutions collects $70 for the first two years, and $35 a year
thereafter, for registering domain names. The biggest growth prospects
now, says Robert Korzeniewski, Network Solutions' chief financial
officer, are the myriad small businesses that haven't yet set up their
Internet site.
Network Solutions gets customers from a variety of sources. According
to the company, just 10% of its customers come to it directly for an
Internet name. The rest come through Internet service providers,
Internet "portals" such as Yahoo!, resellers and others whose main
business isn't Internet names. They sign up the customer, usually with a
markup, and Network Solutions gets a contract to maintain and protect
that Internet name -- along with its $70.
But under the new rules, when new rivals sign up a new domain name,
they can keep their fee -- instead of passing it along to Network
Solutions. At first there will be five competitors for Network
Solutions, yet to be named, but eventually there could be hundreds or
thousands.
Mr. Korzeniewski says he doesn't expect big firms to go into marketing
Internet domain names, but he instead figures they will continue to
steer clients to Network Solutions. He also expects pricing to hold
relatively stable among these new marketers of Internet domain names.
Yet even some bullish analysts expect competition to drive down prices.
David Brady, a manager at Stein Roe Mutual Funds, says he expects
pricing to come under pressure, but "the growth should overwhelm that
concern, at least in the early stages." Nevertheless, he held back on
buying the stock because of concerns about its lofty price.
Meanwhile, the company will continue to get a fee from every Internet
name for maintaining the registry of Internet names -- at least until
September 2000. Analysts suspect that this fee, which is supposed to be
charged on a "cost-plus" basis, will be only $10 to $19, and the company
doesn't dispute that price level.
The specter of competition has already caused Network Solutions to
branch into additional businesses -- and to boost spending on marketing.
Selling, general and administrative expenses climbed to nearly 41% of
revenue in the fourth quarter of 1998, up from 30% in the year-earlier
period.
So the prospect of huge growth, even with declining share and prices,
may be enough to keep Network Solutions stock selling for its
price-earnings multiple of 365 times trailing earnings, and 196 times
projected earnings for 1999-at least until the Internet bubble cracks.
---
John Simons contributed to this article.
Companies or Securities discussed in this article:
Symbol Name
NASDAQ:NSOL
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