cnbcs106

Analysts Divided on Net Registrar Group

by Hal Plotkin
Silicon Valley Correspondent

Financial and industry analysts are sharply divided on the long-term prospects of the stocks of companies that help other firms register or renew Internet-domain names, despite the recent spectacular performance of market leader Network Solutions Inc. {NSOL}.

Both sets of analysts, however, also say newer players in the market, such as Register.com Inc. {RCOM} will have a tough time following in the footsteps of the successful first-mover in the domain-name registration business.

So far, however, Register.com’s stock is off to a good start, making a strong debut Friday in the mid-60s and jumping way past that since then.


Register.com Post-IPO Stock-Performance Chart

Late Thursday, Register.com priced its 5 million share offering at 24 a share, above its revised filing range of 19 to 21 a share and well above its initial filing range of 15 to 17 a share.

“One of the things Network Solutions has going for them is a strong hold on the market,” says Michele Pelino, program manager for the Internet strategies marketing team at the Yankee Group, based in Boston. “Others are going to come after them, and they’re going to want the same thing, but I’m not sure you’re going to see them get it.”

On Tuesday, Network Solutions agreed to be bought by VeriSign Inc. {VRSN} for $21 billion.

New York-based Register.com, is after the market initially created by Herndon, Va.-based Network Solutions, which for several years enjoyed a monopoly on registering Internet-domain names. Recent changes by the Internet’s rule-making body opened up the domain-name registration business to new competitors, though all of them must still pay a fee ranging from $6 to $9 to Network Solutions for each registration they sell until at least 2003.

On Feb. 10, Network Solutions reported fourth-quarter net income of $9 million, a 142 percent increase over the same period last year. The company’s revenue increased at a similar 143 percent clip, topping $75.9 million for the same time period. The stock dipped slightly immediately after the earnings announcement, then quickly resumed the upward climb that has seen it skyrocket to more than 320 from 60 in the past six months.

Shares of Network Solutions jumped as high as about 437 Tuesday on the merger news.

“Over the next five years, we see a heck of a lot of opportunity for a number of firms in this market,” says Jim Pettit, managing director of the Internet research group at Chase H&Q, based in New York. “But Network Solutions still has the clear advantage.”

Like other financial analysts backing the stock, Pettit says Network Solutions, and to a lesser extent competitors such as Register.com, stand to benefit from the fact that only about 10 million domain names have been registered thus far, a number Pettit says could eventually top 200 million.

Domain-name registration firms typically charge anywhere from $35 to $75 annually for each registration. There are, however, signals newly allowed competition will drive down those prices, possibly all the way to zero.

If that happens, it would dry up much of the revenue stream that has propelled Network Solutions to the top ranks of Internet-infrastructure companies. It would also greatly complicate matters for other firms targeting the same market.

That is why diversification is key to the business model at all the domain-name registration firms. Executives at those firms are hoping customers will choose to purchase additional value-added services when registering domain names. The additional offerings include items such as Web-page design and hosting, business e-mail services, and assistance getting domain names listed in search engines, among many other related products.

And that is where the doubters come in.

“Domain-name registration is a nice little revenue stream, but I really don’t see it as a stand-alone business,” says Barry Parr, senior analyst at International Data Corp., based in San Jose, Calif. “The relationship with the end-user is not all that strong.”

One of the reasons for Parr’s skepticism is that customers have very little, if any, reason to regularly visit domain-name registration-firm Web sites, particularly after they have purchased multiyear domain-name registrations. In addition, many customers don’t ever visit such sites, as their domain-name registrations are handled by third parties, such as Internet service providers or Web-hosting firms.

The idea that domain-name registration firms will morph into thriving general-purpose online business hubs, industry analysts say, is about as likely as the Department of Motor Vehicles morphing into a shopping mall.

“That sort of thing might work,” Pelino says. “But the real question is ‘do their customers think of them when they plan their e-commerce activities?’ Or are they more likely to turn to a vendor that specializes in what they’re looking for? Most customers don’t even care who registers them. So that’s a little bit of a stretch right now.”

“I think the skepticism is well-placed,” says James Grady, associate analyst at the Giga Information Group, based in Cambridge, Mass.

Grady says there are already dozens and dozens of other firms that focus on the specific ancillary-business areas targeted for future revenue growth by the domain-name registration firms. “Tripod, for example, has been hosting Web sites for years,” he says. “They’re very good at it and they also register domain names.”

Grady says that in the future, registering domain names will be the tail on the dog, not the dog. “It works as a component of a business plan, it’s a nice service to be able to offer, but it’s not the basis of a business plan,” he says.

Like the other industry analysts, Grady says he expects to see domain-name registration services continue to be offered by an ever-increasing number of Internet business and professional-service providers. As competition drives down the price, domain-name registration services might even be offered free of charge as an inducement to sign up for Internet or Web-hosting services.

For that reason, Grady is especially skeptical about the prospects for newer players such as Register.com, even though that firm has already processed more than one million new domain-name registrations.

“There’s definitely some weakness in their business plan,” Grady says. “There’s a lot of uncertainty in the value proposition.”

Pettit shares at least some of the concern about newer players in the market.

“It’s going to be much tougher for them,” he says. “Register.com has clearly demonstrated the most momentum as the next horse. But it’s going to take significant dollars for any perspective challenger.”

Robert Fagin, an analyst at Bear Stearns, based in New York, agrees.

“Network Solutions is spending $80 million this year on computer equipment and networking,” Fagin says. “They have a 24-hour a day, 12-language customer support network. There are some extraordinary barriers to entry in the market. There is certainly room for competition, but it’s silly to think anyone who wants to be of the scale of Network Solutions can easily get there.”

“It’s just not going to happen,” Parr says.

Pettit says he is heartened, though, by news that fully 17 percent of the 1.6 million new domain-name registrants processed by Network Solutions during the most recent quarter purchased at least some value-added services from the company. Network Solutions didn’t break out those sales in dollar terms, but Pettit says the least-expensive ancillary service offered at the site goes for $119.

“We know that 18 percent of their customers paid at least an additional $119,” Pettit says. “That’s pretty encouraging.”

Both Pettit and Fagin say domain-name registration firms will probably see a nice revenue spike when the Internet’s rule-making body opens up new dot-com address suffixes, as anticipated, over the coming months and years. Dozens of new suffixes have been proposed, including “.web,” “.personal,” “.store,” and even “.sucks.”

“There will be a land rush when that happens,” Grady agrees. “But that doesn’t mean those domain names will take off. I don’t think you can count on that revenue pop for long-term revenues. It’s possible that for the domain-name registration companies, this is as good as it will ever get.”

Register.com posted a loss of $7.7 million on revenue of $4.4 million for the nine months ended Sept. 30, compared with a loss of $1 million on revenue of $790,000 for the same period a year earlier.

CC BY 4.0
This work is licensed under a Creative Commons Attribution 4.0 International License.