[IP] VeryStressed VeriSign -- Site Finder issue is only the latest trouble for company since Network Solutions acquisition
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VeryStressed VeriSign
Site Finder issue is only the latest trouble for company since Network
Solutions acquisition
By Chris O'Brien
Mercury News
When VeriSign announced in March 2000 that it was buying domain name
company Network Solutions for $21 billion, the e-commerce software company
thought it was getting a cash cow that would cement its position as a
leading force on the Internet.
But like many grand plans hatched at the height of the dot-com bubble, this
one hasn't turned out as anticipated.
Network Solutions' business of selling rights to Internet domain names has
dropped sharply since the go-go days.
And a series of recent controversies related to Network Solutions' assets
have helped make VeriSign the company that Internet purists love to hate.
These ``technical zealots'' -- as VeriSign's Chief Executive Stratton
Sclavos calls them -- believe the Mountain View company is unfairly
exploiting its central role in the Internet addressing system for its own
profit at the expense of the Internet community.
Now there is growing speculation that VeriSign will sell or spin off the
part of the Network Solutions business that sells domain names to the
public. This registrar business competes with dozens of other companies.
But VeriSign would likely keep its business that maintains the master
directories of ``.com'' and ``.net'' addresses and their numerical
equivalents. This registry business, which VeriSign runs under an exclusive
government contract, is crucial to the Internet addressing system. But
lately it also has generated flak for the Mountain View company.
VeriSign is gearing up for a fight with the Internet's governing body to
establish its right to sell services related to this critical registry
technology.
The latest episode of VeriSign-bashing erupted in mid-September when it
introduced its Site Finder search service.
Site Finder directed Internet users who mistyped an address to a VeriSign
Web page that provided a list of likely correct alternatives. VeriSign
defended Site Finder as a useful service that would give Web surfers
something other than error messages.
If surfers didn't like the alternatives, Site Finder had a search engine
that would lead users to paid search results and listings for everything
from travel to gambling to computers.
The outcry came because Site Finder relied on the .com and .net directories
that VeriSign maintains under what many call a public trust.
Analysts had projected that Site Finder would only generate revenue of
about $15 million to $20 million annually -- small change for a company
with about $1 billion in yearly sales. But part of VeriSign's larger growth
strategy has been to develop incremental services around the upgrades it
has made to its Internet addressing technology.
VeriSign needs such add-on services if it hopes to return to profitability
and start growing again. The company lost $196.2 million in the first six
months of 2003, while sales fell 17 percent to $535 million from a year
earlier.
``It would provide them a nice little business,'' said Rob Owens, vice
president of equity research at Pacific Crest, an investment bank that does
not own VeriSign stock and has no banking relationship with the company.
``But right now it may also mean a lot of lawsuits.''
Dismay after launch
Almost immediately after Site Finder launched, two companies that run
similar services filed antitrust lawsuits against VeriSign.
Dozens of other companies and Internet organizations claimed that Site
Finder, by redirecting Web traffic, threatened to cause chaos on the
Internet by undermining other services such as security systems and spam
filters.
Even more annoying to some was the fact that VeriSign didn't consult the
technical community or the Internet Corporation for Assigned Names and
Numbers -- which oversees the Internet addressing system -- before
launching Site Finder.
``Not to heed these principles or the advice of numerous expert technical
Internet groups is extremely irresponsible and is putting the stability of
the Internet at considerable risk,'' wrote Lynn St. Amour, president of the
Internet Society in a letter to ICANN.
After initially refusing to comply with ICANN's request to shut down Site
Finder, VeriSign temporarily suspended the service last week and ICANN is
now holding technical hearings to determine whether it should be allowed to
resume operating.
``We have to realize what we're talking about here is not the production of
cars or widgets,'' said ICANN Chief Executive and President Paul Twomey.
``It's part of a network. And what they do has an impact on other parts of
the network.''
While the dispute has again inflamed anti-VeriSign passions, it has also
brought VeriSign's frustration with ICANN to the forefront.
``We don't believe that this is a service that comes under our contract''
with ICANN, Sclavos said. ``ICANN should not be involved here.''
Still, this is only the latest black eye VeriSign has suffered as part of
the Network Solutions acquisition.
Just last month, Network Solutions settled a marketing fraud case with the
U.S. Federal Trade Commission. The FTC had accused the seller of domain
names of sending misleading renewal notices to competitors' customers that
in effect transferred their domain name rights to Network Solutions.
Even before the ink dried on the Network Solutions mega-deal in 2000, the
Nasdaq had begun its epic tumble. The stock deal shrank from an announced
value of $21 billion to $15 billion when it closed June 2000. The following
year, with stock prices still falling, VeriSign had to take a one-time
charge of $9.2 billion related to the Network Solutions acquisition.
Revenue suffers
Analysts say the cash from Network Solutions helped VeriSign weather the
tech downturn better than many competitors and make investments in
research. But as domain names registered during the boom expired in recent
months, revenue at Network Solutions has suffered.
After initially ditching the Network Solutions name, VeriSign did an
about-face, reviving the brand name in January 2003 for the retail part of
the business that sells domain names, e-mail and Web site services.
Revenue for the Network Solutions unit dropped 25 percent in the first six
months of 2003 to $125.3 million, from a year earlier.
The reorganization and declining prospects have prompted speculation that
VeriSign will sell or spin off Network Solutions, which today consists of
just the business of selling domain names and Web services to the public.
VeriSign officials would not comment on the rumors. Sclavos would only say
the company plans to continue to improve operations of the unit.
But Sclavos also said he thinks much of the fury against VeriSign
originates with companies that compete in the retail sale of domain names.
Severing that part of the business could, in theory, blunt some of the critics.
No matter what, VeriSign is expected to keep its monopoly on the back-end
registry for .com and .net addresses. The company argues that it has spent
millions upgrading this directory technology, which benefits all Internet
users. In turn, it should be allowed to create services -- like Site Finder
-- to recoup its investment.
Calling this a ``religious war,'' Sclavos said VeriSign is ready to fight
for the right to develop and sell add-on services.
``What you've got are some technical zealots who are biased against
VeriSign,'' Sclavos said. ``How can we continue to make investments without
making a return on them?''
Meanwhile, such high-profile battles tend to overshadow the other parts of
VeriSign's business, such as online security and payment software.
Owens, of Pacific Crest, said even jettisoning the Network Solutions retail
business might not be enough to reduce what he calls the ``headline risk''
associated with continuing to operate the domain name directory.
``When you're in a monopoly position, you're always going to face a higher
level of scrutiny,'' Owens said.
Contact Chris O'Brien at
<mailto:cobrien@xxxxxxxxxxxxxxx>cobrien@xxxxxxxxxxxxxxx or (415) 477-2504.
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