It's a strange fate for a brand that used to represent the government-designated domain name monopolist, but Network Solutions CEO Champ Mitchell says helping small-business owners build up a Web presence is high-growth industry that has his company turning a profit.
For years, Network Solutions presided without competition over the domain name system, maintaining the Internet's most important servers, administering the .com, .net and .org registries and acting as the sole registrar for those domain names. Now, following the company'sand , Mitchell illustrates his business model with the story of two women in Wisconsin who used Network Solutions services to turn their homemade cheese stand into a multimillion-dollar online store.
To some close to the company, Network Solutions' trajectory recalls one-time high-flying brands that suffered hard landings after the Internet bubble. But Mitchell, a Vietnam veteran and former tobacco industry executive, is having none of that. He says there's nothing lowly about the small-business market. What's more, Mitchell maintains that improvements in local search have made an online presence imperative for small businesses, whether they're selling locally or globally. He recently spoke with CNET News.com about where he wants to take the business.What's left of the company? We're all familiar with Network Solutions that had control over the Domain Name System, but that's clearly not the business you're in now.
Mitchell: We have several hundred thousand domain-centric buyers who are very important to us, who buy mostly domain names. We work very hard to try to keep them happy and to service them, but the growth in our business is not in the domain name business at all. And we are a growing business, which we weren't when we were spun out; we were a constricting, declining business.
We are the small-business experts online. We have in our customer base of about 4 million customers, over three-and-a-half million small businesses. To put that in perspective, that's a larger small business base than some offline giants like American Express small business have.
So what services are you providing with these small businesses, apart from domain names?
Mitchell: The domain name to us and to the small-business person is nothing but an activating device and an address. What we really provide to these folks is services online to help them move their business forward and to make their lives easier as small businesspeople.
In the United States today, the fastest growing segment online is small business, and that is because of search. We have today about 7.6 million small businesses online. Close to half of those are our customers. I think the most exciting part is that in the next 12 months, we'll add 2.6 (million) to 2.7 million more small businesses online.
Because of local search, small businesses have come to realize that they need to be found online. So the first thing they come to us for is a Web Presence Package, which generally includes a Web site, e-mail, a domain name as the activating device and their address--and frequently some additional features, perhaps private registration. But the main thing they come to us for is the presence, which gives them an identity online.
Of those three-and-a-half million small-business customers of yours, how many are just using you for domain name registration?
Mitchell: Probably 60 percent don't have a major value-added service. We have more than tripled the percentage of our business that comes from nondomain services that fall into this core group of small-business services, and that's in the last 18 months.
I hear you're not doing quite as well with the domain names themselves, Tucows is evidently beating you out in that sector.
Mitchell: No, Tucows is not beating us down. I think you may be mistaking them for Go Daddy.
OK, is Go Daddy beating you?
Mitchell: We have maintained our domain base, to everyone's surprise, at 7.3 (million) to 7.4 million domains under management. Go Daddy does have a larger number than that. They have probably a little over 8 million. Tucows is much under that. We are, as you can tell, slightly behind Go Daddy in total domains under management, and the rest of them are trailing both of us by a considerable number, by millions of domains.
But of course, you know, Go Daddy sells at an extremely low price point, and they do that to sell their software. They're really a software provider. They build their own software and use the domain as an acquisition device for customers. They don't have nearly the number of customers that we do. They have lots of people who buy lots of domains--in other words, tech folks who own lots of domains because they're the people who buy their software.
So while they have more domains under management than we do, they have only a fraction of our customer base. We have by far the largest customer base in the industry, and that's why I said nobody is beating us out.
What you want to have is the small business customer. We have a customer--two women who live on a farm in Wisconsin--and they wanted to continue living on the farm. But farming is economically risky. So they wanted a more reliable source of income. Since they were in Wisconsin and lived on a dairy farm, they decided to sell cheese. Not a great shock there, but they didn't have distribution because they were kind of in the middle of nowhere.
The younger of the two sisters decided they could get there by selling online, and she came to us and bought a Web site using our ImageCafe Web site building tool, bought an e-mail, bought a domain name--and we hosted all of that for her. She was up and ready to go and she found out she wasn't getting found, that when you type cheese into Google, she didn't come up on the first page. So she came to us and asked why. We explained to her about maximizing your exposure in search and how we could help her do that and how buying some ad words could help her there. So she did that and the business took off very nicely.
So you do search engine optimization?
Mitchell: Part of our online marketing package is that we do search engine optimization, we do banners, we sell , we provide a plethora of products within the online marketing package.
Let me drop back to my cheese ladies for just a second. So they started getting found online and started getting orders. There was a lady down the road who paints decorative milk cans and sells them at little craft stores. They bought a bunch of miniature milk cans, had her paint them up, made cheese bread in the kitchen using their mother's recipes and packed it in the milk cans and wanted to sell it. So they came to us and said, 'We want to put pictures up.' We got them some brochureware.
Business just took off, and the younger sister ended up calling me personally and saying, "Look, I've got a problem. We've been so successful with this that I'm spending 40 (percent) to 50 percent of my time everyday processing credit cards that come in through e-mails or over the telephone. Is there some way you guys can help me do that?" And so we explained to her about a payment gateway and a merchant account and helped her to get that, and so she could take payments online.
Today, those ladies run a $4 million business and employ something like 12 people in the community. You know, only 30 percent of our customers will sell online, but for that 30 percent, having a good solution for their online selling is important.
So you're seeing your major growth from just 30 percent of your customers?
Mitchell: Actually, we see our growth just as much in the other 70 percent of the small-business customers. These are the people who want to be found online but will never want to sell online--for example, your plumber and your electrician, your yard maintenance person and the person that you would call to put in a new window in your house. These are the fastest-growing segments.
What these people are telling us is, 'We now know we need to be found online.' Fifty-eight percent of our small business customers say their business jumped as soon as they went online. Forty-seven percent of them say after they went through search engine optimization and after doing some online marketing, they saw an increase in their profitability.
Let me ask you just a little bit about the trajectory that Network Solutions has taken. It is really one of the Internet's most storied brands, and now the company, in a sense, is a shadow of what it used to be, since much of what we associated with Network Solutions now belongs to VeriSign. If it weren't for the merger, you'd be sitting on top of the registry right now.
Mitchell: Yeah, but you know, that's not a business that excites me a lot.
Mitchell: That's a very static business. Their real growth is maybe 2 percent a year. They've got a lot of false growth because of the games being played by these advertising people, where they'll add a name for four days. There's a five-day grace period with the registry when you don't have to pay, so they'll add a name for four days, run traffic, cross it, delete it so they don't have to pay for it, go back and add some more names.
We've seen people who never registered more than 1,000 domains in a month register 900,000 in a day. So the growth statistics that the registry likes to quote are essentially all based on that kind of gaming. It's just a business that you could run with a few people and some machines. There's absolutely nothing exciting about it. It's a very nice business because it's a monopoly, but it's not a fun business.
But when Network Solutions was in that business, VeriSign valued the company at $21 billion.
Mitchell: Yeah, but what did they pay for it with? They paid for it with a VeriSign stock that, at the time we spun this company out, the whole purchase price?would have been about $600 million. And we think that this business is worth a substantial portion of that and so do the investment bankers. We have the growth part and the fun part of the business. I mean we have double-digit growth, which is something we did not have under VeriSign. We had declining sales under VeriSign because we were constricted in what we could do, and I don't say that critically. VeriSign had some large corporate issues that took precedence over our desire to grow a business.
Where does the company go from here?
Mitchell: We're relaunching the brand and trying to make it clear that our identity has changed and how we do business has changed.
When I walked in the door, this company had the worst customer service I've seen in 30 years of business--and I was one of the customers. I absolutely hated them. It has gone from 30 percent abandonment rate and over an hour of wait time to under 3 percent abandonment rate. We were just nominated by the American Business Awards and made the finals of best customer service in the country. We have an 87 percent high-satisfaction rate versus when I came in the door and more than 50 percent of them were trying to get away from us.
And of course there is no similarity in the people, because the people who had the monopolistic attitude were allowed to go home, and we have an entirely new management change.
Any plans to go public?
Mitchell: We certainly are looking at that as an option. As you know, the markets are looking pretty nice right now. Our numbers are looking very strong, we're showing astronomical growth, and we're highly profitable. You know, our free cash flow margin is 20 percent. There are very few business that can claim that. We're in excellent financial position. We've got a growing customer base, we've got a growing business and we're increasing the number of products and services we sell to people online. So yeah, we're in a good position to do that and we're looking at it.