THE DAY AHEAD: Competition won't dent Network Solutions

Shares of Network Solutions Inc. (Nasdaq: NSOL) certainly got a lot of mileage out of its new "dot com directory" Thursday, but that's only a small piece of what investors should be excited about.

Despite the end of Network Solutions' monopoly over registering domain names such as .com, .net and .org in April, the company still won't have any real competition.

And the company won't have a lot of competition as long as it controls the database of domain names and can build services such as the "dot com directory."

Network Solutions: Too far ahead already?

The history

Here's the history of Network Solutions' monopoly. Network Solutions had an exclusive agreement with the government to register domain names. Network Solutions would charge $70 for two years to register a domain name. Without competition, Network Solutions has had 10 consecutive profitable quarters and now has a database of 5 million domain names. Network Solutions had $167 million in deferred revenue at the end of the first quarter.

But Network Solutions' easy days were supposed to end last month as the government said five companies -- America Online (NYSE: AOL), France Telecom's Oleane, Internet Council of Registrars, Melbourne IT and register.com -- were to begin a two-month test phase for registering domain names. The fab five was supposed to be battling Network Solutions by June 24.

AT&T and 28 other companies were to begin registering names after the first five. Network Solutions, however, was granted control of the domain database even though it would have competition to register the domains. No matter who signs the domains up, Network Solutions gets the database.

Competitors slow

The competition has been slow going.

The good news -- for Network Solutions' shareholders -- is that only Register.com is ready to be a competitor right now, according Network Solutions financial chief Robert Korzeniewski, who presented at a PaineWebber investment conference in New York. He added that the first wave of competitors may be ready by the end of the month, but don't count on it.

PaineWebber analyst James Preissler in a report said not all of the testbed registrars have even begun testing their systems and some may need the June 24 deadline extended. Meanwhile, Preissler estimates Network Solutions has signed up 200,000 names over the testing period so far.

And don't expect the other 29 companies in phase two test to jump in all as competition at once. "We can't take them all at once," said Korzeniewski, citing security problems with allowing a bunch of companies into the domain registry. "These companies also need a lot of handholding."

Preissler estimates that the additional competition will be taken in batches of five to eight companies at a time.

Korzeniewski said it's not easy plugging in the competition's disparate systems to its database of domains, the company's most compelling asset. Critics will scream, but Korzeniewski has a point. If the systems aren't stable, security could be breached and then a company like Amazon.com could be inaccessible.

New revenue streams

Even when the competition is in full gear, don't look for Network Solutions to trip. See Thursday's "dot com directory" and pact with Infospace (Nasdaq: INSP). The directory is nice, but the real point is that Network Solutions (chart) is able to extend into value-added services because it still controls the registry database.

Aside from the directory, Network Solutions plans to expand internationally, establish more small business services and basically take advantage of its headstart. Korzeniewski expects a potential 30 million in international domain names.

Competition in being a registar may become an issue, but it's not something to sweat about. And yes, Network Solutions is plagued with about 50 different lawsuits and will have to haggle over pricing and other issues with the Feds and the Internet Corporation for Assigned Names and Numbers. Under the government pact, Korzeniewski said new pricing will still allow a "reasonable rate of return." Given Network Solutions' scale and move to value-added services, it could add a lot of gravy to the government-negotiated return.

Sure you could fret about the competition, but why bother? You are betting on a horse with a two-mile head start.