Commentary: Network Solutions: By Any Other Name, A Monopoly.ComDebra Sparks
Network Solutions Inc. isn't your average Internet company. For one thing, it's profitable. But even more surprising, in a world of freewheeling, venture-backed Net startups, Network Solutions is a monopoly created by the U.S. government. The company, under contract from a federal agency, maintains the exclusive worldwide registry for the .com, .net, and .org domain names--the address you type to get to a Web site. In one specific way, though, Network Solutions resembles other Net companies: Its 103 3/8 stock trades at a multiple of 170 times expected 1999 earnings, giving it a market capitalization of $3.4 billion.
But beginning this month, part of the monopoly the government granted Network Solutions will be taken away. Currently, NSI manages the fast-growing database of more than 4 million domain names and provides a registration service. For both services, NSI charges a $70 two-year fee and a $35 annual fee thereafter. Soon, NSI will compete with five other companies in registering Web names, though NSI will still maintain a monopoly over its .com, .net, and .org registry database.
WHAT'S REASONABLE? But a fierce fight has broken out over how much NSI should be allowed to charge new competitors for NSI's maintenance of its exclusive database. Critics fear that the government will be naive in gauging how much Network Solutions should collect. The Commerce Dept., which is expected to set the fee within the next few weeks, has said the price must "reflect NSI's costs and a reasonable return on its investment." Perhaps more important is a nagging concern that the government isn't going far enough in creating true competition.
Network Solutions is clear about what it thinks that fee should be. While NSI would not break out its costs, Robert J. Korzeniewski, NSI's chief financial officer, says the company is spending tens of millions of dollars on its registry database and deserves an annual fee of about $16 from the other registrars to cover the cost of managing the database.
Critics believe that's too high. They argue that NSI is intentionally overestimating its costs. Curt Mayer, the chief technologist of Emergent, a division of computer-services company Keane Inc., says his company could develop a registry at a cost of $2 a name. Emergent was involved in an unsuccessful independent effort a year ago to create a registry to compete with NSI. "NSI is inflating costs to maximize profits," he says. NSI says Emergent has never run a registry, so its estimates are not based in reality.
But other countries, which have domain names not controlled by Network Solutions, offer an opportunity to compare prices. While Germany has only 300,000 names in its databases, its registration fees have already tumbled from $20 a year ago to about $10 today. Since this is a fixed-cost business in which larger volumes reduce average costs, NSI's costs should be significantly cheaper than its smaller international competitors, say industry experts. NSI acknowledges that its costs could decline after the first year of dealing with competition.
NSI's $16 fee still sounds cheap. Real competition in the domain business can't be created if Network Solutions overcharges, making it possible for NSI to subsidize the customer-processing side of its business. That would give Network Solutions an unfair edge over rivals.
ACCELERATE. What to do? Admittedly, competition on the Net is a work in progress. But the government needs to speed up plans to introduce competition by creating new domain names and database registries--and putting these out to bid. For now, industry experts say, Commerce should allow NSI to charge no more than $5 a name.
Some advocate more drastic measures, including splitting NSI into two separate companies and running the database as a nonprofit organization. "This would level the playing field and give the new registrars an equal opportunity," says Michael M. Roberts, interim president and CEO of the Internet Corporation for Assigned Names & Numbers, the nonprofit group created last year by the government to foster a competitive Net address system.
It's major decision-making time at the Commerce Dept. Let's hope true competition wins out.