NSI can flourish on its own

The pending expiration of the government contract that made the company the primary domain name gatekeeper in the United States isn't a death knell.

4 min read
The five-year government contract that has made Network Solutions the largest supplier of Internet domain names in the United States is slated to expire next week, but that doesn't mean the death knell has been sounded for the company.

Network Solutions (NSI) has held a monopoly on the process for registering the most popular ".com," ".net," and ".org" domain names ever since the Net began to catch fire commercially in the early 1990s. The ensuing rush to acquire domain names, a sort of digital land-grab, filled the company's coffers to the tune of $45 million in revenues in fiscal 1997. Revenue through June 1998 totaled nearly $37 million, the company said.

Now federal regulators, the private sector, and foreign governments are grappling with details of a plan to hand the Net's domain name registration process over to an international nonprofit body. NSI's authority to administer domain names, which already had been extended six months, was set to expire yesterday until the U.S. government continued the contract for one week. Negotiations on the plan are ongoing.

Although analysts said the expiration of the contract may look bad for NSI on paper--the company confirmed that 80 percent of its revenue comes from domain name registration fees--they say that the growth of the Internet will support several players and that NSI is positioned to be the market leader.

"They have the See related story: 
NSI could see downside name and they have the experience," said James Pettit, a senior analyst at investment bank Hambrecht & Quist. Pettit, who rates Network Solutions a "strong buy," said the company doesn't have to have a monopoly to be a good stock.

Keith Benjamin, a bullish Internet analyst at BancBoston Robertson Stephens, initiated coverage on NSI last week with a "buy" rating.

"The government contract is currently in transition, and we believe it is highly likely that NSI continues to be the dominant provider of registry and registrar services," Benjamin wrote in a report. "The company is in the process of more aggressive marketing of its primary and complementary services, which we believe can significantly increase revenues per account."

Indeed, NSI is reaching out to small businesses to offer value-added services to customers.

The company has been preparing for imminent competition for months, adding partnerships with top ISPs. It also has been broadening its services, adding a Web-based email program to its offerings, said spokeswoman Nancy Huddleston.

Seeing the writing on the wall, NSI also has expanded its business to include international domain names, such as the two-letter country codes ".de" for Germany and ".fr" for France. In April, for example, Network Solutions acquired Internet Domain Names Incorporated, which specializes in international Net Addresses.

Analysts predict that the market for Internet domain names soon will be so large that there will be room for several companies to compete. Network Solutions has 2.3 million registered names, up from 4,000 in 1993, and analysts estimate they will have 6 million names by 2000.

"This market is going to grow phenomenally," NSI's Huddleston said. "Competition is going to improve services for the end user and we believe we'll continue to be a leader in the domain name registration business."

Observers doubt that the registration process will change quickly, however.

"Nobody is going to turn into a pumpkin in a week or a month," Pettit said, noting that there is much transitional work yet to be done by the federal government, including the establishment of policy procedures and standards.

"I think if there's a prevailing message coming from the Commerce Department and [Clinton administration Internet policy advisor] Ira Magaziner?it is slow, stable change. Nobody wants this to be done in a hasty fashion where the Web goes down," Pettit added. "I don't think we're going to see competition for many months. My best guess is that there's another formal extension on the order of three to six months."

Nevertheless, uncertainty about who will handle registrations in the future has cast a pall over the company's stock, analysts said.

Stock in the company closed more than 4 percent higher today at 41.625. NSI shares have traded as high as 58 and as low as 11.75 during the past 52 weeks.

"On the surface it looks really ominous," Pettit said. "There's been an emotional overhang on the stock over this."

Added Benjamin: "The stock has been under pressure on concerns of potential new competitors, which we believe will not materialize for many quarters, if not years. Even then, we expect NSI will remain the leader by a wide margin."