Network Solutions: Still The Master Of Its Domain
You would think Network Solutions Inc. would be running scared these days. Last November, it lost its government-sanctioned monopoly over a building block of the New Economy: the registration of Internet addresses ending in .com, .net, and .org. Now, some 30 companies compete for the business of doling out Web addresses to retail customers--and nearly 120 others are ready to jump in. In spite of the competition, Network Solutions' shares are trading at about $315, up from a 52-week low of $49 last June.
What gives? Sure, rivals took 15% of new registrations last year. And there's even a threat of a price war that could squeeze Network Solutions' profits. But experts say there will be plenty of business to go around as everyone from the local taxidermist to multinational corporations clamors for a Web address to hang out as an e-commerce shingle. Indeed, investment bank Chase H&Q estimates that registrations in .com, .net, and .org will explode, to more than 6 million this year from 100,000 in 1995--and should top 18 million by 2002. Even if Network Solutions loses a big share of the total market, it still stands to gain. "It's not a zero-sum game," says Chase H&Q analyst James Pettit. "This is a big market that will support many successful players."
Network Solutions isn't sitting around waiting for the competition to catch up, though. CEO Jim Rutt plans to juice the company's revenues by selling customers Web services such as e-mail and Web-site design and dishing up Web pages with the help of partners such as Internet service provider EarthLink Inc. Rutt figures his company can capture Net newcomers at the front door, when they register their first Web address, and "follow them through their Web lifecycle" as they set up ever more robust sites. "The domain-name business, historically, is the building permit of the Internet," says Rutt. "Now, we're becoming the general contractor."
The payoff, however, may be slow in coming. In 1999's fourth quarter, 17% of Network Solutions' customers bought extra services, but those services contributed less than 1% of revenues last year. And Prudential Securities analyst Paul Merenbloom expects the new revenue streams to contribute less than 10% of total sales until at least 2004.
Even so, Rutt is building on a blockbuster business. Last year, customers paid the Herndon (Va.) company to log a record 5 million new Web addresses at $35 each--nearly triple the number of registrations from a year earlier. The company even makes money when people turn to its rivals. To minimize disruption to the Net, the government has allowed Network Solutions to remain the sole operator of the central database of all .com, .net, and .org addresses. Under the current contract, competitors pay Network Solutions $6 per year for each name they log. That helped the company earn a $26.9 million profit last year on $220.8 million in revenues.
Skeptics argue that the company's profits are in for a squeeze because of the increased competition. Some rivals are lining up to take advantage of the hefty spread between the $6 they pay to add names to Network Solutions' central database and the $35 Network Solutions charges retail customers. "It's a huge markup," says Bruce Keiser, CEO of Namezero.com in Los Gatos, Calif., which gives away Web addresses to individuals who accept advertising. So far, most larger rivals charge about the same as Network Solutions for commercial addresses, but that could change, and some are offering services such as Web-page design for free.
STEADY STREAM. There are other clouds on the company's horizon. It may not be able to keep both the central database and name-registration businesses forever. The government will let it extend its exclusive contract for the database for four years beyond its current term, which ends in 2003. But to do so, it will have to reduce its stake in either the database or the name-registration business to less than 25% by April, 2001, most likely by spinning out a share of the database business.
In spite of these potential difficulties, Wall Street is enthusiastic about Network Solutions' prospects. J.P. Morgan & Co. analyst Rai Archibold values its registry business alone at $4 billion, which could mean a financial windfall if the company spins it off. Best yet, in a world of Web companies with dubious earnings models, Network Solutions' predictable revenue stream looks pretty attractive. Owners of the 8.1 million domain names the company currently has registered are unlikely to take the trouble to move those registrations to a competitor.
If the company can put those revenues to work building up other businesses, it may indeed become the general contractor of choice in the Web's real estate boom. And it will demonstrate that losing a monopoly doesn't have to spell disaster.