VeriSign's domain name business slows

January 13th, 2003
By Michael Liedtke

ONLINE transaction security firm VeriSign has learned a hard lesson: Gold mines lose much of their lustre after a gold rush.

Tarnished by an ugly sales slump last year, the company, whose certifications aim to give web sites credibility is now trying to spruce up another key part of its business: registering and managing Internet domain names.

The business, bought from Network Solutions Inc. for $US19.6 billion ($33.6 billion) in stock in mid-2000, was supposed to provide a lode of profits as VeriSign pocketed fees from all the ".com" names that had the Midas feel during the Internet boom.

But it became a major drag as demand evaporated.

"This is a good business run by some smart people, but they didn't do a very good job analysing the data they had in front of them to anticipate this slowdown," said industry analyst Timothy Leehealey of Wedbush Morgan Securities.

VeriSign also faced customer service complaints it said have been addressed.

The problems so badly disillusioned investors that VeriSign ended 2002 with one of Silicon Valley's worst-performing stocks. Shares plunged by 79 per cent last year, wiping out $US6 billion in shareholder value.

To VeriSign, the fixation on domain names seems misguided.

Domain names account for roughly one-third of VeriSign's revenue, but get more attention than the company's foundation - certifying the identities of web sites and providing encryption software to protect transmissions of sensitive information.

"It's in fashion to complain about us, but the reality is that we do a phenomenal job," said Stratton Sclavos, VeriSign's chief executive.

Nevertheless, Mountain View-based VeriSign started the new year by retooling the domain name business that consists of two main parts.

There's a "registrar" that competes against about 150 rivals to sign up Web addresses. The other side is a government-approved monopoly called a "registry" that maintains the master list of names.

The registrar's standard one-year fee is $US35 while the registry collects $US6 for each ".com," ".net" and ".org" address, regardless of the registrar used.

With the number of names in the registrar off nearly 40 per cent from the peak volume, VeriSign is offering customers more discounts and incentives such as frequent flier points on four major airlines.

VeriSign also recently renamed the registrar Network Solutions, a brand that the company started to phase out in 2001.

Management said the name change is meant to herald a new era and capitalise on Network Solutions' solid reputation. But Walter Pritchard, an industry analyst with SoundView Technology, thinks the switch could foreshadow a plan to sell the registrar.

Things are also changing at the registry, which retains the VeriSign identity.

VeriSign is in the process of transferring the master list for the ".org" domain to the newly created Public Internet Registry. The transfer, expected to be completed January 25, affects 2.4 million names, or about 9 per cent of VeriSign's registry.

In exchange for surrendering .org, VeriSign received contract extensions to the more widely used ".com" and ".net."

But those rights look less lucrative today. As of September, the registry had 27.5 million names, some 15 per cent fewer than in June 2001, shortly after rights were negotiated. Year-end numbers will be announced Jan. 23.

Mr Pritchard expects the company's total revenue to fall another 7 per cent this year, mostly because of continued contraction in the registrar.

Last year's hemorrhaging prompted VeriSign to lay off 400 workers, a 12 per cent reduction from a work force of 3,270 employees at the end of 2001.

Mr Sclavos sees better times ahead.

He envisions VeriSign running a "network of networks" overseeing domain names, protecting e-commerce transactions and linking wireless phones to the Web.

Since its 1995 inception, VeriSign has been devoted to protecting the security of online transactions a mission that helped cushion the blow from last year's domain name woes.

This specialty has continued to grow as VeriSign vies against rivals that include Baltimore Technologies and Entrust.

As of September 30, VeriSign had issued 400,000 digital certificates verifying the identities of Web addresses, a 15 per cent increase from 348,000 certificates at the same time in 2001. Still, growth was lower than the 53 per cent increase reported the previous year.

VeriSign is now betting on the increasing use of mobile phones to send instant messages and surf the Web.

Stratton figures the company can make money by helping to make the connections and wading through the billing issues created by the increasing crossover between the Internet and wireless networks.

To establish a telecommunications toehold, VeriSign bought Illuminet Holdings for $US1.4 billion in December 2001 and paid another $US350 million for HO Systems in early 2002.

However, VeriSign's acquisition record so far isn't good.

The company has absorbed charges totalling $US21.6 billion as the value of Network Solutions and other acquisitions diminished. That's the main reason VeriSign gives for losses totaling $US21.4 billion since the end of 1999.

Despite all the headaches, Mr Sclavos remains upbeat. "We own all the assets that we wanted," he said. "I feel very good about how we have put all the pieces together."