Should Network Solutions shareholders be worried that the firm is losing its monopoly status?
While U.S. taxpayers mark April 15 as the day of reckoning, domain registrar Network Solutions may be looking at April 26 as
its day to start paying the piper. That’s when the registrar loses its monopoly grip on registering “.com,” “.net” and “.org” domains.
Consolation prize: Network Solutions gets to maintain the database.
While investing in NSOL before was a no-brainer, does it make as much sense now that the process no longer rests in its
default hands? I’m more than a little bothered that Network Solutions’ Web site talks about how far its stock ran in 1998 and
promotes a Wall Street Journal story about the stock.
In 1998 NSOL was one of my picks and topped the list of all gainers. In 1998 the firm had more than a year to grab ahold of
diversified revenue streams as only one firm with the reins on all things “dot com” could have.
That was then, this is now. April 26:
Pros:
- Its new affiliate network that allows others to sign up domains has more than 140 Web sites signed up. That’s one way to beat rivals, sign ’em up.
- With more than 4 million domains already in its system, Network Solutions appears able to match or beat any rival price to re-register at least that many domains as they expire after the initial two-year term. Resigns should boost margins.
- With $131 million cash and a rich stock NSOL can go buy complementary businesses (one example is its investment in Centraal, a natural-language URL finder).
- If NSOL can convert its affiliates and maintain momentum in revenue, I estimate it trading at about 20x 1999 sales, not a huge
premium for a market leader in any Web realm. My analysis shows market leaders should command more of a premium,
perhaps up to 30x forward revenue. The question is, can Network Solutions still be the market leader? - As it loses the control, Network Solutions will get paid for being the sole database provider and keeping track of domains.
So the more rivals, the more domains and NSOL could replace revenue lost via being the only act in town by revenue gained by letting others get in on the act.
Cons:
- If larger Web networks and large ISPs start knocking down domain sign ups for incremental
revenue that they don’t NEED to rely on then. . . - If new ways of packaging domain name services emerge and Network Solutions doesn’t find a way to benefit. Consider
AT&T/TCI and its reach. AT&T has more than 10 million businesses in its phone system. Or if Microsoft decides to make a
domain name part of FrontPage offerings. - Once the monopoly revenue stream is opened to others it must get aggressive in building its affiliate network and look further
at diversifying its revenue stream. Monopolists don’t always know how to act like entrepreneurs used to competing from day
one. Look at the telcos and many cable companies that think it’s their right to forever get dividends from the public for installing
a wire one time. - If any future regulatory controls come into play for domain names, they may adversely affect NSOL.
Outlook: Too soon to tell how the change will affect the firm. I think the next quarter may very well be the most important that
Network Solutions has faced as a company, and could be a turning point for its stock in its first real quarter as a non-monopoly.
That could set the pace for this firm, since the moves will either solidify its place or show how vulnerable the company is without
a carte blanche from the government to control the domain name game.
