Network Solutions' Complicated Name Game

Pricing proves contentious in the business of registering Internet domain names.
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SAN FRANCISCO -- What's a fair price for registering an address on the Internet?

It may seem like a simple question, but for

Network Solutions

(NSOL)

the answer holds a whole lot of import -- and a whole lot of impact on its bottom line. Network Solutions thinks $16 is a fair price for registering a domain name, but some analysts and the company's competition bristle at the suggestion.

"NSI wants to charge $16 a year per domain name and all they're doing is running a database," says Richard Forman, founder and president of

Register.com

, one of the largest registrars in cyberspace. With more than 4 million domains registered, "that's $80 million a year to run a database." Forman says a fair price would be between $1.50 and $2.

The decision to determine a fair price is one of several key issues in the hands of the

Commerce Department

. In contrast with most Internet companies, Network Solutions has always found its fate inextricably intertwined with Uncle Sam. Since 1993, Network Solutions has had a cooperative agreement with the

National Science Foundation

to handle the registration, maintenance and renewal of the choicest real estate on the Internet, in the popular .com, .net, .org and .edu domain names. For that service, the Herndon, Va.-based company has charged the public $35 a year for a two-year registration, paid upfront.

The $35 fee covers both the registry and registrar functions. The registry service works like a wholesaler, holding a complete record of all the addresses and the Net's root-zone servers. The registrar is akin to the retailer of domain names, acting as the interface between the registry and the customers buying domain names. Under the cooperative agreement, Network Solutions will continue to operate the registry until Sept. 30, 2000.

But Network Solutions' monopoly on the registrar side is coming to an end as the

Internet Corporation for Assigned Names and Numbers

prepares to select five registrars for the test phase. During this two-month period, registrars -- including Network Solutions -- will compete for customers. The test phase is set to begin on April 26, and ICANN plans to announce the identity of the registrars on April 21.

To stick to its timetable, the government must resolve certain key issues, the most prominent of which is the ambiguity over pricing.

Some feel Network Solutions is asking for too high a price. "$12 to me is absolutely insane," says Tom McDonald, founder of

domainwatch.com

, a service that tracks the domain name registrations of all registrars. "Who knows? They'll probably get it. They've got quite a bit of pull and they've been around a while." McDonald says a fair price would be less than $1 a year.

Others remain a bit more sanguine. In his valuation model,

Friedman Billings Ramsey

analyst Ulrich Weil, who has a buy rating and $300 price target on the company, forecasts a $10 registry fee. That would give Network Solutions fiscal year 2000 revenue of $275 million. And Keith Benjamin, an analyst with

BancBoston Robertson Stephens

, which has been an underwriter for Network Solutions, believes "something in the range of $10 to $16 per domain name per year would be fair and reasonable to expect."

Elliot Maxwell, the new special "digital economy" adviser to the secretary of Commerce, who is involved in the negotiations, declined to comment on the specifics of the talks with Network Solutions. Bob Korzeniewski, Network Solutions' chief financial officer and acting chief operating officer, also declined to comment. "The last thing we need to have is debates in the media about a process that's so important," he says.

More Financial Question Marks

The negotiations are addressing other critical financial issues. Network Solutions would like to charge a one-time licensing fee to accredited registrars for accessing the shared registration system. In a proposed contract, Network Solutions has asked for a whopping $10,000 licensing fee. Korzeniewski says that would help cover the development and distribution costs for the new system, which the company must build.

On Friday, Network Solutions announced the installation and testing of this new back-end registry system. When it's finished, the new site will be available at www.nsiregistry.com, which will be distinct from the company's recently consolidated registrar site at www.networksolutions.com.

Other key issues include the terms of the licensing contract that registrars will sign with Network Solutions and the rules that will allow competing registrars equal access to expiration and renewal information for existing registrations in the .com, org and .net registry.

Perhaps the biggest question mark is hanging over the identity of the test phase registrars. Michael Roberts, interim president and CEO of ICANN, says that as of last week there were 12 applicants for the test bed. Roberts declined to specify which companies applied, but said that "in some cases these companies were larger than Network Solutions."

Several blue-chip companies, including

MCI WorldCom

(WCOM)

,

America Online

(AOL)

and

AT&T

(T) - Get Report

, have inquired about entering the domain-name business, though they may not necessarily apply. Network Solutions concedes that additional competition may hurt its business, especially if it comes from big-name outfits that have strong customer service departments, robust data networks and Internet industry experience.

The company also admits that competition is likely to introduce pricing pressure in the registrar side of the business. Friedman's Weil predicts that registration fees will tumble to $20 per domain name per year.

But even if Network Solutions' worst nightmare comes to pass and it doesn't get the price it wants, company executives say they will more than make up for it with an increased volume of registrations and new revenue coming from recently launched services and products. These include a personalized email service, a premium registration service and a promotional package, among others. Also slated for release before the end of the second quarter is a .com directory service on which the company plans to sell advertising.

"We're not competing for a fixed pie," argues Korzeniewski. "I see the volume of partnerships increasing."

The uncertainty over Network Solutions' future has continued to depress its stock price. After closing at 122 3/8 on March 22, the stock has steadily declined, closing at 94 on Tuesday.

"We would not be surprised to see continued stock fluctuation until we hear the last data points out of the regulatory environment, which we believe will be the finalizing of the registry price and which companies are selected as test bed participants," wrote Robbie Stephens' Benjamin in a March 23 research note. "Once this news is known, we believe investors will feel more confident in NSOL's leadership position."