Dueling Fools
Master of Your Domain?
April 28, 1999

Network Solutions Bull's Pen
by David Marino-Nachison ([email protected])

Unless he's got something super-sneaky up his sleeve, what Paul's probably going to hammer home repeatedly in his bear argument against Network Solutions is this: Network Solutions just lost a government-sanctioned monopoly on its core business, and that's bad.

I hope that's his plan, anyway, because it's a very important point that I'll argue first with the expectation that you'll read my argument before you get to his.

Here's what losing the monopoly means in technical terms: Until April 21, Network Solutions was the only company operating as registry and registrar of Internet addresses in the .com, .org, .edu, .net, and country-coded "top-level" domains. As registry, it maintains a database of "second-level" names for its top-level domains -- the "fool" in the fool.com, the "real estate" of the Internet. As registrar, it enters second-level names into a master database, which it operates.

On April 21, the world learned the identities of the five companies that will be the first to compete in the registrar business in a two-month trial: America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>, a division of France Telecom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTE)") else Response.Write("(NYSE: FTE)") end if %>, a nonprofit group, register.com, and Australian entry Melbourne IT. If the trial is successful, more than 20 additional companies will be allowed to join the fray.

Network Solutions kept exclusive rights to the master database -- access to which its competitors must pay a standard fee of $9 per address per year (that fee may be revised if other competitors enter after the first two months, but it's stipulated that Network Solutions must make a return on its investment). A nice arrangement, no? Think about that for a second: Five companies -- most notably leading Internet service provider AOL -- all generating revenue for Network Solutions. This arrangement ends in September of 2000.

How the market will interpret the company's near-term outlook is anyone's guess, but for those trying to look a few years into the crystal ball the important question is how Network Solutions has prepared itself for the coming dogfight.

Here's how:

-- The ability of Network Solutions and its competitors to market high-margin services to its customers is where the money will be in the coming years as consumer needs mature and develop. Exhibit A: the aforementioned register.com registered several hundred thousand names with Network Solutions before the April 21 news -- forking over all the revenue -- for the chance to offer its customers the sizzle atop the steak: marketing alliances, e-mail, e-commerce services, and so on.

Here is a link to a page detailing Network Solutions' service offerings, mostly rolled out over the past year. And here's a partial list of the services (note the attention paid to the small business community, seen as a burgeoning market on the Web): email, website building, search engine and other site promotions, network engineering, security and management, and an 8,000-member affiliate program for small ISPs and other businesses.

The move to boost service sales, while not as glaring on Network Solutions' income statement as its booming registration revenue, is clearly paying off. Net margins improved by nearly 3% last year to approximately 12% despite the fact that operating expenses grew almost twice as fast as revenues. That figure held fast in the first quarter of 1999, just reported April 22, in which service revenues more than doubled from year ago levels.

-- In the Internet universe, a strong brand means more these days than earnings. Network Solutions isn't quite Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %>, but its push to be known as "the.com people" is a step in the right direction. It launched an advertising campaign in 1997 aimed at the important small business market. It's bought advertising for 1999 on such Web locales as Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> and Netscape.

-- And then there's repeat business. Certainly, Network Solutions could lose every one of its customers -- and its more than 4 million current registrations -- when the contracts expire. Let's assume the company will fight for its business. In a competitive business environment, customer service is crucial and Network Solutions' beefed-up service offerings are a sign that the company listens to its customers.

-- Finally, and most importantly, there's that ephemeral concept known as "the growth of the Internet." It's estimated that there are 150 million unregistered Internet addresses in the current available domains. Anyone can have one, just like anyone can have a phone number like 555-DAVE or a license plate reading "BRADEN." I mean, I'm going to need at least two, with tmfbraden.com and marinonachison.com currently available (don't get any ideas, you squatters).

Throwing out a "potential" future number is a little cowardly, so let's look at Network Solutions' actual growth: total registrations as of March 31 were 4.2 million, as new registrations were 171% above last year's first quarter and nearly 50% above Q4's mark. Business is booming. Expect a bit of pricing upheaval in the registrar game -- Network Solutions currently charges $70 for two years -- to be offset by volume.

Network Solutions spent the better part of the last decade as the only game in town, the last few years of it in the first real maelstrom of Internet growth. It has the lead; if it is to give it up, it will probably be because it dropped the ball, not because it was taken.

Nothing about Network Solutions' situation right now suggests that the company is about to fumble.

Next: The Bear Argument