Dueling Fools
Master of Your Domain?
April 28, 1999

Network Solutions Bear's Rebuttal
by Paul Larson ([email protected])

My fellow Fool and rookie Duelist David was correct in assuming that I was going to point to Network's lost monopoly as a reason to be bearish, yet I left reading his argument just as confused about the company's valuation as before. More importantly, I'm absolutely unmoved in what I see for Network's future. Network Solutions is a company headed for some dire straits.

David points to the services Network Solutions provides as one line of business that is attractive to him. I'd like to point out that 8.5% of the company's sales in 1998 were thanks to its ancillary services, many of which Network Solutions farms out. Put into dollars, this ends up being about $8 million (with an m) in sales from other services for a company valued somewhere near $3 billion (with a b) by the stock market. Do the math.

Hopefully David isn't planning on those other lines of business saving the company because they are minuscule in size. Having so much of a company's sales concentrated on a single product certainly raises the risk to investors, especially when that product is about to be faced with a dramatic increase in competition.

The bullish case for Network Solutions then goes on to illustrate that there are some 150 million unregistered top-level domains that remain to be reserved. The only problem is that nearly all of the "good" names are long gone. Even "www.braden.com" is already taken, certainly much to David's disappointment. And as the names start to get to be of the "www.mynameissolongthat-noonecanrememberit.com" nature, the utility of having a "dot com" drops dramatically.

David then points to the fact that all the names AOL and others register will ultimately lead to more revenue to Network Solutions. While this is true if you assume that Network Solutions sees no price pressure on its existing $35 annual charge, there is the larger question of who will ultimately run the master database down the line. If the database is managed by a non-profit organization as it looks like it will be two years from now, this source of revenue essentially goes to zero for Network Solutions. You can't charge others for access to a database you don't ultimately control.

Even the most ardent bear would find it hard to doubt that the Internet name registration business is booming. However, the uncertainty is what part Network Solutions will play in this business down the road. Competition will reduce prices and squeeze margins in the coming months, and in October 2000 it appears that the company will lose its controlling grip on the master name database if the Department of Commerce and others have their way.

The long-term outlook for Network Solutions is extremely hazy, yet the market is valuing Network Solutions like today's monopolistic glory days are going to go on in perpetuity. They aren't. The end of the party starts this week with phase one of increased competition, and stockholders of Network Solutions have plenty of other events to worry about over the next 18 months and beyond, not the least of which is the value of their shares.

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