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Verisign: Down, but Not Ready to Croak

By Sarah Lacy When software maker VeriSign (VRSN) announced first-quarter results on April 20, Chief Executive Stratton Sclavos peppered his remarks with words like "strong," "exciting," and "confident." After all, Verisign's Jamster/Jamba division, which sells ringtones and other mobile-phone content to teens, grew by 70% from the previous quarter, thanks in part to the success of a ditty called "Crazy Frog." The ringtone of a frog that makes motorcycle-like noises was set to music and released as a single, topping the charts in the U.K. for four straight weeks and eventually going platinum.

Finally, the staid, slow-growth software company that made its name safeguarding E-commerce sites and registering domain names had a business that was not only growing swiftly, but was actually hip. The company upped its full-year sales forecasts 13%, to $1.75 billion, and earnings guidance 16%, to $1.04 a share. The stock jumped 14%, to close at $29.17 on the day after Sclavos' announcement, reaching $32.99 in June. That $273 million purchase of German startup Jamba back in 2004 was beginning to pay off (see BW Online, 7/25/05, "VeriSign's New Personality").

Fast forward a few months. While no one has publicly declared the Jamba deal dumb, it's not looking nearly as smart. Sclavos & Co. have found out the hard way just how difficult selling to teens can be.

"UNPREDICTABLE SWINGS." On July 20, when VeriSign announced second-quarter earnings, it said the mobile-content division grew by only 20%, disappointing investors and taking a 16% whack out of shares the following day. On Sept. 29, the outfit had more somber news for the third quarter. The mobile-content business stumbled again, and comments by Sclavos included the words, "mixed," "shortfall," and "churn."

Mobile-content sales will be $115 million, vs. an earlier forecast of $140 million. Total revenue will come in at $410 million, less than the $435 million to $440 million forecast previously. And the fourth quarter is looking bleaker still. Mobile-content revenue will drop to between $90 million and $95 million.

Those days of 70% growth seem far away indeed. In after-hours trading, shares were down to $20.66, less than a percentage decrease from the day's trading -- but far off that June peak. "We've had dramatic and unpredictable swings in the past 12 months," Sclavos said on an investor conference call.

SLOW AND SLOWER. Some analysts were sanguine, pointing out that the mobile-content division is a young, volatile business that will benefit VeriSign in the long term. And the company says its other businesses are growing in line with forecasts.

Mobile content hasn't always been so challenging. In the first quarter, the outlook for Jamba was rosy. It was signing up new carriers and expanding to additional countries and, of course, there was the mega-hit, the Crazy Frog. Sales were the best in Germany, Jamba's home market, and Britain.

Then the summer hit. That's a seasonally slow time in Europe. And the U.S. was still slow to take off as VeriSign was mired in negotiations with two of the largest carriers: Verizon Wireless and Sprint, now called Sprint Nextel (S). And there was a bit of a Crazy Frog hangover, with no big hit waiting in the wings. Ringtone subscribers were canceling, and VeriSign was having a hard time bringing in new ones at the same rate.

ADULT CONTENT. Sclavos says VeriSign was able to stanch some of the hemorrhaging early on through customer-retention plans, like sending out "what's hot" lists of the most downloaded ringtones and offering free coupons. By August the customer churn stabilized.

Then, just as things were looking up, in late September, VeriSign got more unwelcome news. Britain's Advertising Standards Authority, hit Jamba with a ruling that certain ads could only run after 9 p.m., saying that racy ads featuring Crazy Frog and other characters featured in the company's ring tones -- including Nessie the Dragon and Sweetie the Chick -- were misleading and unsuitable for children (See BW Online, "VeriSign's Ringtone Menagerie"). That followed an April lawsuit filed against the company in San Diego, where a parent claimed the ads were misleading -- his daughter thought she was buying just one ringtone, not opting into a several-month subscription. Spooked, carriers have started putting more restrictions on VeriSign's advertising.

That's hurting business -- particularly in Britain, once the second-biggest market for the mobile-content division. VeriSign relies on these TV ads -- more than 500 a week on MTV in the U.S. alone -- to drum up impulse buying. The more restrictions on the ads, the harder it is to get new customers. The fewer customers a commercial brings in, the higher the costs of acquiring new business. "It just makes it harder to get new subscribers," Sclavos said during the call. "Our retention programs haven't kicked in well enough to keep existing ones on the system."

NEW OFFERINGS. VeriSign may need to find a new way to reach customers. Sclavos has vowed that this business won't lose money. As subscribers fall, he's pulling back on advertising. That could only worsen the problem in markets like Britain, where Jamba's fortunes are worsening.

Meanwhile, VeriSign is finally selling its content to Sprint customers in the U.S., but growth is slow, and talks with Verizon Wireless remain mired. Sales could get a boost from a new wave of popular mobile downloads, including streaming video, sports, more games -- but all of that will take time.

Lacking another frog with the charisma to go platinum, investors may need to brace for more turbulence. As for Sclavos, the word he's using to describe his six-month goal: "stability."

Lacy is a writer for BusinessWeek Online in Silicon Valley

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