Dueling Fools
Master of Your Domain?
April 28, 1999

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

Since Paul decided to summarize his Bear Argument in one word, "competition," I guess I might as well respond with one of my own: "Duh!"

By now, investors know Network Solutions is no longer alone in the world. They know there'll be price competition, and margin pressure, and increasing marketing costs, and a renewed emphasis on customer service, and so on and so forth. I addressed several of those in my opening argument.

But Paul seems to believe that the entry of competition into the industry means Network Solutions has no competitive advantage at all.

Now, let's run down a list of the companies Network Solutions will be competing with. In the first five, there's AOL, but it remains to be seen whether 1) anyone not using AOL will register a domain with the company, and 2) all or even most of AOL's users will automatically fall into line and sign up, since AOL already provides its subscribers with free website hosting with generic domains.

Then you've got a nonprofit, an ambitious but relatively small independent registrar, and two foreign companies. Here are the next 29. While AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> and Verio <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VRIO)") else Response.Write("(Nasdaq: VRIO)") end if %> should be are familiar to many investors, the Seinfeldian question for the most part remains: "Who are these people?" You can frame it as Paul does -- that Network Solutions must now compete with so-and-so.com for business -- but another way to look at it is that those companies must compete with Network Solutions.

You see, this business isn't the no-brainer it might look like at first glance. Network Solutions, even with revenues increasing exponentially, was unprofitable until 1997, primarily because sales, general & marketing expenses ate up so much of the company's sales dollar.

So companies trying to steal some of the bread from Network Solutions' table will need to follow a similar formula, successfully marketing a suite of services, building a brand and establishing partnerships with advertisers, Internet service providers, and other companies that will draw business their way. Few of the 34 companies ICANN has named to compete with Network Solutions currently appear poised to do so aggressively enough to steal large chunks of future business given the potentially huge market for the company's services.

It's because of the sort of growth Network Solutions and the Internet has seen in recent years -- and the sort of growth the Internet appears to have ahead -- that makes me optimistic about the company's ability to weather a price war. The company's marketing efforts, as well as its moves to add new services and sources of revenue suggest there are plenty of reasons for consumers to pick the company out of the many that will eventually clamor for their dollar.

Finally, Paul talks about the stock's valuation in the waning paragraphs of his argument. I don't really have space here to get into the philosophy of Internet valuations besides to say that obviously investors will pay a premium for the kind of presence Network Solutions has built in as a former monopolist. Does the company still deserve such a lofty valuation? Until the company loses momentum and its market-leader status, I'd say yes.

Now, I don't want to give anyone the impression that Network Solutions is a sure bet, because it clearly isn't. The company's near-term future certainly merits close observation as it begins its swim in a sea of competition.

But the signs appear encouraging. Network Solutions has spent the past several years teaching its pony new tricks. We'll find out pretty quickly whether any of those lessons took.

Next: The Bear Responds