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How ".com" became ".$$$"

As Don Telage makes his way through Network Solutions' headquarters at the tail end of a long day, he wants to know one thing: "What are we at today?"

CNET News.com Newsmakers
February 15, 1999, Don Telage
How ".com became ".$$$"
By Courtney Macavinta
Staff Writer, CNET NEWS.COM

HERNDON, Virginia--As Don Telage makes his way through Network Solutions' headquarters at the tail end of a long day, he wants to know one thing: "What are we at today?"

"We're up five," a colleague answers. Telage responds with a fleeting smile, "That's good."

"Good" is putting it lightly. Thanks to an almost eight-year government contract, Network Solutions (NSI) has the lucrative domain-name registration market cornered. During the past year, the company's stock has climbed from a low of 17.50 per share to a high of 260 per share. On Wednesday, the firm reported fourth-quarter earnings that exceeded analysts' estimates, one day after it announced a secondary common stock offering to put 4.58 million more shares on the Street at $170 apiece.

Despite the good fortune, Telage, NSI's senior vice president, has to protect the fort. Since 1996, he has been part of the most contentious political debate in cyberspace: deciding who, alongside Network Solutions, will get the right to sell spots in the Net's white-pages directory.

Known as the low-key "idea man" behind Network Solutions, Telage is not the type of Net start-up honcho who calculates his net worth every ten minutes. For one thing, Telage isn't just an entrepreneur, he also happens to be a respected mathematician and engineer who helped implement the first TCP/IP commercial-based network in the country for GTE.

When his current employer, defense contractor Science Applications International Corporation (SAIC), acquired Network Solutions in 1995, Telage gave up leading the company's $65 million consulting sector and hand-picked the assignment of beefing up the new subsidiary's minuscule ".com" registry business. Telage remained head of Network Solutions until the SAIC decided to bring in financial heavyweights to take the company public.

Call it luck or cunning calculation, but Telage now sits on a gold mine--and we're not even talking about his stock options.

Within Network Solutions--behind multiple security checks, in a climate-controlled room--sit about a hundred racks of Sun servers rigged to prevent accidental or intentional tampering. And in the middle of one nondescript rack sits an ordinary server with a slightly crooked white label on it marked with black letters: "Root A Server." That box is home base for the entire commercial Internet--for everything from Amazon.com to Yahoo.com--and Network Solutions owns it.

Since 1993, Network Solutions has registered more than 3.4 million domain names, charging $70 for two years. The remaining ".com" names were signed up by middlemen of sorts, such as ISPs, which first have to go through Network Solutions.

But now the landscape is dramatically shifting.

In 2000, Network Solutions' exclusive government contract will end. By April of this year, the company could see the first sparks of competition, when five other registrars will get the green light to tap directly into the ".com" root server. The new players will be selected by an international nonprofit corporation, the Internet Corporation for Assigned Names and Numbers, which won the government's approval to oversee the technical underpinnings of the Net address system.

The evolution of domain name management also means that more top-level domain names will be added and that NSI could sidestep future antitrust lawsuits. Still, critics say that, going forward, NSI needs to establish better dispute-resolution policies to address trademark squabbles over Net names and to improve its currently piecemeal screening process for allegedly derogatory or profane domain names, among other things.

Although analysts expect NSI to come out on top, Telage says that during the next few critical months he will stay behind the scenes to ensure that the transition plan is "both good for the Internet and, of course, good for NSI."

CNET News.com sat down with Telage to get a peek at one of the most closely watched companies on the Net through the eyes of its leader.

NEWS.COM: Most people equate Network Solutions with the explosion of ".com" Web sites. What was the company like when you were placed at the helm?
Telage: Our goal at that time was to buy a strong consulting company in the Washington area that had good credentials in data communications and strong credentials in the Internet. And Network Solutions was primarily a data consulting company. People don't realize it, but the registration services business was a tiny little fixed-price or tiny little cost-plus contract capped at $1 million a year and was doing hardly any business, and there was virtually no automation. We talked about [domain name registration], but it had almost nothing to do with why we bought NSI.

In July of 1995, shortly after merging the company with my operating group, we split the company into two pieces--$65 million dollars of consulting business and the registration business. I was given my choice of which one I wanted to manage. I elected to send the consulting business--that I had grown--back to SAIC. I went with the small business in NSI and left the major corporation, which was kind of a risky thing at that time. In 1995, we didn't know whether NSI could survive. Our service honestly was not very good at the time.

When did branding start taking off on the Net, making the registration business an important moneymaker for Network Solutions?
NSI has been a pioneer. Long before people understood the notions of identity and the value of identity and real estate on the Internet, we had that vision. Shortly after we bought the company, I merged Network Solutions with my operating group, which was called Telecommunications Technology Group, and formed about a $75 million or $80 million operating group and put my management team over the top of the whole thing. It was about, I would say, May of 1995 when, in discussions with some of the technical people, I was doing contract reviews of the different programs and I discovered the growth on this program. At that point I began to realize that, although the numbers were still small, we were in a very significant exponential growth. I knew something funny was happening with the Internet way back then.

How did this growth affect NSI's exclusive contract with the National Science Foundation?
The National Science Foundation explained to me two of the dilemmas that were facing them at the time. One of them was that all the Pullquote registrations that were coming in--or almost the majority of them--were commercial registrations. So there they were sitting with a federally taxpayer-funded contract to support commercial registrations, and they really felt very uncomfortable in that circumstance. The Internet had evolved underneath them.

Furthermore, the usage numbers were growing, and the kind of capital that we would need to grow the equipment base and add to service offerings was way beyond the $5 million cap that that contract had for five years. So there was no way that they could figure out how to keep up with this growth and allow NSI to do the investments necessary to continue to meet the service requirements.

A second problem they faced is that they had their first domain name trademark suit and they were terrified of being embroiled in litigation. I worked with the NSF and a team of NSI people to try and put together a plan for how to deal with these problems. The plan involved invoking a clause in the contract where we recommended going to user fees. And in exchange for that, we agreed to pick up all the liability and responsibility with no indemnification for the legal issues, which took a big load off the government.

So prior to 1995 you didn't even have to pay to register a domain name--now people spend tens of thousands of dollars to buy domain names from their original owners.
Prior to September 14, 1995, the U.S. government, with taxpayer dollars, paid for every registration in ".com," ".net," ".org," and ".edu."

So how did allocating domain names go from a free service to a coveted and lucrative retail venture?
[Providing the service for free] seemed OK when the Net was research- and education-oriented, but once it became international and commercial, everyone deeply involved in it understood that there were issues that had to be worked on. There were volume issues here, in addition to issues of liability and growth of infrastructure, and it just made sense for the government to move to privatization. That's really what happened. It followed, by the way, the process that National Science Foundation used just about a year earlier in privatizing the NSF backbone system to four providers.

NEXT: A monopoly with an expiration date

 

Age: 53

Claim to Fame: Negotiating future of ".com" administration

Credentials: Chief operating officer of NSI, 1995-97; Science Applications International executive, 1986-1995; GTE systems engineer, 1980-85. Ph.D. and M.A. in mathematics, psychology undergrad

Family.net: Commutes between home in Boston and Herndon, Virginia; is planning a Great Gatsby-themed family reunion at a mansion once occupied by F. Scott Fitzgerald.

Latest exploit: Consuming his first Belvedere martini. "You can't smell it or taste it, and it's deadly. It's just like carbon monoxide."

CNET News.com Newsmakers
February 12, 1999, Don Telage
A monopoly with an expiration date

You have said that the government relinquishing control of the DNS administration and ending its contract with Network Solutions is good for NSI. Wouldn't it be better if NSI could keep its exclusive contract?
I don't think so. We want other competitors to legitimize the space. When you're the only competitor in this space, people don't take that space seriously. There's no comparison of service; there's no comparison of offering. And furthermore, all the marketing dollars are NSI dollars today because we're the only one trying to build this market segment. So although we expect to lose market share, although we expect to fall, the space is not a zero-sum game. The space is expanding. We believe that this market has a lot of growth potential in it, and NSI therefore feels that, even with a loss of market share, we'll still grow in a very similar way to the way we're growing now.

You say you want competition. But critics say NSI has tried to hold up this privatization process and will still corner the market even when other companies can be primary ".com" registrars.
You know, people say to me, "Why isn't NSI fighting competition?" And I'd like to point out a couple of facts that I think people NIS has been a pioneer, long before people understood the notions of identity and the value of identity and real estate on the Internet--we had that vision. have failed to think about: First of all, there is competition now, today. There are 241 other registries in the world. Some of those [domains] are really commercial, like ".tv" and ".nu," and those registries are marketing alongside NSI.

Another level of competition that may or may not come, depending upon whether we solve this trademark problem, is the issue of introducing new top-level domain names. The second form of competition is by allowing [companies] to directly register the domains that we think we have made very prestigious, especially ".com."

As part of the arrangement with the Department of Commerce, we will be both a registry--think of that as the wholesale division--[and a registrar that competes with other companies]. Individual customer data will reside at the individual competing registrars and all of those registrars will have the exact same, equal access to the online back office interface so that they'll all compete on equal footing.

Network Solutions consistently has emphasized that opening up its domain name root servers to competitors could send the Net into a tailspin. Is this still a fear?
One of the issues would be if a new registrar went out of business. If a small business came online and didn't have the financial means to make it through a period of time and it collapsed, we need provisions for backing them up so there is a fail-safe for their customer data. One other stability issue is, where is the responsibility for disputes? Well, the ".com" registry is just a back-office automated tool now, so is the registrar company liable? What happens if there's a registrar in one country having a dispute with a registrar in another country?

ICANN's job is to help foster registry competition. How could its decisions hurt your business?
I think they have to be very careful. ICANN is a private company. It doesn't have any God-given authority. It gets its authority from the governed, who basically legitimatize it because they are a part of it. Well, they could do things to harm my business in the sense of outrageous things, but I think it's generally reflected in the public opinion that no one really has authority over the Internet. It operates on a set of sort of mutual agreements with people working together. That's the beauty of it. So I can't foresee any reason that the U.S. government or anybody else would want to harm NSI, because it would be destabilizing. Whether you like us or not, we play a very important role and we have been a tremendous facilitator of growth on the Internet over the last several years.

Will ICANN have a hard time getting legitimized? Many Netizens think the ICANN selection process was secretive.
It was a pretty mysterious activity. And of course you saw the reaction at the first Boston meeting of the board. I was never invited to be on it, and although I submitted a list of really quality people, none of them were selected. I think that the efforts under way are going well. They have to be very careful to make sure that they live by the tenets that the administration's white paper put out--that is, that it would be a consensus-based position, that diversity be involved, that it not become a regulatory body.

The most disturbing trend that I've seen coming out of all of this governance is a trend that mistakes geographical diversity with what could quickly become the United Nations mentality. That is, I think it's important to make sure that not more than a certain number of players come from any one region to assure good cultural and social diversity. If you have a domain name or you use the Internet in any significant way, you probably have a right to have a say on all these issues.

Now let's assume they legitimize ICANN--how does it legally enforce policies? Well, there is no Internet policeman, there's no global policeman who can basically go to a registry and say, "You, you registry in Uganda, you have to do this!" The way ICANN [will] get things done is by signing agreements with the registries based on consensus.

NEXT: Staying ahead of the pack

 
Telage on NSF's dilemma

CNET News.com Newsmakers
February 12, 1999, Don Telage
Staying ahead of the pack

A big focus for NSI in the future will be improving service. But in the past the company has come under fire for not being forthcoming about technical snafus, such as when Web sites are inaccessible or when there are performance problems in processing registrations. How will this change?
I would be the first to admit that we have problems. No business goes from the tiny little business we had in 1995 to the monstrous business that we are now without difficulties. Of course, part of the privatization issue is to get some legitimate mechanism that's legally binding that will allow us to develop a policy that we can hang our hat on.

I think that there's a tendency, because we're so visible and because the domain name is so visible, for people to connect almost every problem on the Internet to the domain name registration process. It reminds me of AOL's problem with content being associated with provisioning. Well, this is the second step in that natural or unnatural progression.

Some say your company is managing a public resource. In that case, do you need to be more accountable for your actions?
Well I wouldn't use the term "public resource." That's a I can't forsee any reason that the U.S. government or anybody else would want to harm NSI, because it would be destabilizing. We play a very valuable role. debate that lawyers will have for the rest of their lives and that will no doubt put a lot of kids through Harvard. I won't get into that. But, we don't see it as an accountability [issue] as much as [an issue of] responsibility for good service. Just like any other company that provides a service--a broad service globally--we think we have a responsibility to continually improve that service and to make sure that service is always available and always reliable.

Is the pressure on to improve your technology in order to stay competitive?
Actually, I think the pressure is better now because we've improved our service. The pressure was pretty bad when we were poorly understood in the first year or two. It was a pretty ugly situation. When we started, we knew we had a tremendous growth curve and we had no billing system, no customer care system--we had no people to do that. There were only a few engineers running the system. At that time most people thought that [the chances for] making money in the Internet were pretty bad, and they didn't understand that the fee-based service was required in order to grow the quality of service.

Over time, people have exploited [our system] for what we think are some pretty illegitimate uses. Speculators [who try to register lucrative names so they can resell them] basically have automated robots pounding our system to the tune of millions of hits per month on our directory. We are in the process of trying to develop an approach that still meets customer needs, but puts the kibosh on the speculator community [in which people can hold names without paying for them for up to 60 days].

We took a kid's soapbox and we built a jet plane while going a thousand miles an hour. I mean, that's the difference in quality--in capability--between the original Internet and Network Solutions' current offering. And you know what? We need a Concorde, the way we're going. So we're building new systems.

What are some of your strategies to grow Network Solutions' business beyond ".com" registrations?
We recognized that there was no way for NSI to deliver alone all the services that needed to be delivered in conjunction with an identity. So what we have tried to do is really get good at our knitting and to partner with other players for two purposes: one, to employ their channels, like the ISP community; and two, to package services with NSI so that we bring a richer offering to our customer base. For example the American Express deal [to cross-promote services,] is that kind of a deal. Recently, we had gone in with the Yahoo and Netscape deals, which basically give us much greater visibility.

Centraal [which allows Web users to type in simple keywords instead of long domain names] is a perfect example. Most people, when Centraal came out, said, "Oh, Centraal, that will take all of the registrations. Domain name and URL registrations will disappear." Well, obviously, from the minute Centraal came out, we were having discussions. We bought a significant share of the company, and we've got partnering relationships to the point where the success of Centraal was in NSI's best interest. We own some of the channels that they have, and we get a bit of every dollar that they make. And conversely, we have relationships that induce us to make Centraal a success. So what people need to understand is that NSI is going to be a visionary in the new technologies that are coming out, and we're going to invest in them in a way that is both good for the Internet and obviously good to grow this market segment.

What specific revenue streams do you see?
The second leg is to basically decide what we need to have a well-founded, well-situated business. Obvious packagings would include the email, the directory offering that basically would allow a small business, with a very simple one-stop call, to get best-of-breed in the basic services that are required to put a presence up on the Net and to operate on the Net in a very low-cost, efficient way. Our ".com" mail, for example, is Web-based mail. It comes as part of your domain name. It's a really trivial, scalable system that is a very, very low-cost initial entry point for small businesses and grows with you as you move.

 
Telage on NSF's dilemma