Despite the outcry over
controversial new Internet search service, analysts are upbeat about the company's effort to profit from typos.
VeriSign has not disclosed how much revenue it expects to generate from its new Site Finder service, which provides search results for Internet users who mistype a Web site address. The company includes search results from paid advertisers, similar to the "sponsored links" offered on
search result pages.
Previously, Web surfers who mistyped a domain name address ending in .com or .net received an error message. But because VeriSign has sanctioned monopoly control of the domain registry that enables users to connect to domain names ending in .com and .net, the company can redirect incorrectly spelled Internet addresses to its Site Finder page. A large raft of critics -- from rival domain registrar services to search engines to regulators -- have lambasted VeriSign for using its monopoly position to draw revenue from the new search service.
The discord appears to be scaring some investors. Shares of VeriSign have dropped about 4% since the service launched Sept. 15, while the
has climbed about 3%. However, analysts see little reason for alarm.
"In all honesty, it has created a lot of noise, and I think that's just what it is right now -- noise," said Legg Mason analyst Todd Weller, who has a buy rating on VeriSign. At this point he doesn't expect Site Finder to generate enough revenue to change his model, Weller said. His firm hasn't done any banking with VeriSign.
Wedbush Morgan Securities analyst Tim Leehealey characterized Site Finder as one of several value-added products launched by VeriSign to incrementally boost the company's revenue. Site Finder, he speculated, is "probably a sub-$50 million opportunity." Leehealey has a buy rating on VeriSign and his firm hasn't done any investment banking with the company.
U.S. Bancorp Piper Jaffray analyst Gene Munster offered a more detailed estimate of Site Finder revenue. He figured Site Finder could add $10 million to calendar year 2004 sales and as much as 2 cents a share to the bottom line. His estimate assumes that Site Finder gets 10 million hits per day. Munster then estimates 1% of those hits come from Internet users who actually take the additional step of clicking through to a paid advertiser's Web site, generating revenue of about 26 cents a click.
Munster's estimate may not be far off. On Tuesday, VeriSign reported Site Finder has been visited more than 65 million times in its first week of service, resulting in an average of 9.3 million hits a day. The search tool on Search Finder has been used more than 11 million times to search for Web sites, although VeriSign does not receive revenue for every search.
Despite his detailed analysis, Munster said in an interview Tuesday that he doubts Site Finder will remain in its current form, given all the controversy. "The thing I can say with confidence is that Site Finder in six months will be either not operational or different than it is today," Munster said.
"The industry has a legitimate gripe against VeriSign," Munster added. Though careful to point out he is not a lawyer, Munster added, "They've been given a monopoly with .com and .net and you can build an argument that they're using that monopoly to their advantage."
Two companies are doing just that in suits against VeriSign over the Site Finder service.
Go Daddy Software
, which sells domain names, charges VeriSign misused its control of the domain name registry to gain an unfair competitive advantage by intercepting and profiting from traffic.
"VeriSign has been given the ability to run the DNS (domain name system) for .com and .net names and it was never contemplated they would redirect names in such a manner as to personally profit," said Go Daddy General Counsel Christine Jones. In addition, Go Daddy charges that the service will encourage people to buy numerous misspelled variations of their domain names, further benefiting VeriSign because the company receives $6 per year for every name registered with .com and .net endings.
A competitor in the search engine space,
, sued VeriSign for $100 million, also charging the company with antitrust violations and unfair competition. And
, which also offers search results for incorrectly spelled domain names to its subscribers, has publicly said it would be opposed to VeriSign intercepting those users and directing them to Site Finder.
In addition to fighting such criticisms, VeriSign also declined a request from the Internet Corporation for Assigned Names and Numbers to voluntarily suspend the service because it "considerably weakened the stability of the Internet, introduced ambiguous and inaccurate responses to the DNS and has caused an escalating chain reaction of measures and countermeasures that contribute to further instability."
Instead, VeriSign created an independent technical review panel to gather and analyze data on the service. "I think the users of the Internet will probably view this as a very positive step," VeriSign spokesman Tom Galvin said of Site Finder. Instead of encountering a dead-end error message when they mistype a domain name, they will get a set of tools to help them find the correct address, he added. "We actually think, long term, this is a service that will be viewed as a benefit because it improves Web navigations," he said.
Analysts agreed they can see the benefit of giving typo-prone Internet surfers a list of possible Internet addresses instead of an error message.
"I certainly hope it works," said Wedbush's Leehealey. He said he feels comfortable that VeriSign would direct Internet surfers to the appropriate Web site more responsibly than other entities. He noted, for instance, how some gaming companies have bought incorrectly spelled domain names to lure Internet users unwittingly to their sites.
J.P. Morgan analyst Sterling Auty, who has a neutral rating on VeriSign, echoed that sentiment. "I think fundamentally what they're trying to do is actually good for the usage of the Internet," Auty said. "I think this is a useful service." But that doesn't mean the service up and running now will look the same in the future, he added. "Chances are there will have to be some sort of modifications." Auty's firm has done banking with VeriSign.