Attention: ICANN Board and Supporters
Re: Proposed VeriSign Agreement
As both an ICANN accredited registrar and new top-level domain name registry
operator applicant, I would like to take the opportunity to express my concerns about
the recent decision by the names council and the registrar constituency to reject
Verisign’s option “B”. I believe that both groups have this false perception
that by rejecting Verisign’s amendments, they can position ICANN to negotiate for
additional concessions. This strategy is extremely dangerous and could have
This posting will present the current status of the
registrar industry and will present possible risks associated with the industry
accepting option “A”.
The registrar industry is still quite immature and is struggling
to realize profitability. Competition has driven most registrars to separate
their retail and wholesale registration services in order to maximize revenue.
As registrants become more educated they continue to show motivation to transfer
their domains to the lowest cost provider, regardless of quality of service.
My statistics show that based exclusively on .com registrations, Versign not only
has lost more than 48% of the .com registration market, but for the first time ever,
last month they had a net decline in registrations. In other words, it would
appear that there were more customers who transferred or let their domains expire
than there were new registrations. If this data is accurate, it presents several
risks that the ICANN board must consider, the most significant of which is valuation.
the market valuation of Verisign directly impacts the valuation of all the individual
registration service providers in the industry. If Verisign’s equity valuation
were to significantly drop, the valuation of all registrars will be significantly
damaged. Low valuation makes it difficult to secure capital and reduces competition.
Because few of the registrar’s are profitable, most will go bankrupt if they cannot
secure sufficient capitalization. Currently, there are three ways to value
a. Market Price. In the event Verisign were to sell it’s registrar,
the market would immediately establish a valuation for a registrar based on the sale
price. However, because NSI the registrar is significantly losing customers,
it will be difficult to give the company a strong price earnings growth rate.
As a result, option “A” could almost immediately destroy the valuation for registrars.
multiples. Because Verisign is still considered an infrastructure company,
registrar’s benefit from their current multiple’s of value, which is still quite
good. Price/Earnings Ratio is a widely used stock evaluation measure. NSI’s
estimates on growth suggest that the company will grow 25.8% this year and
68.3% for the year 2002. This suggests a PEG ratio of 63.62 for 2001
and 37.80 for 2001 (as of March 28th, 2001). These numbers are reasonably good
and if realizable, could temporarily sustain the equity valuations in the industry.
In other words, option “B” could at least temporarily sustain the valuation for registrars
at a higher level.
c. Discounted cash-flow. There is significant risk that
the registrar industry could fall into the more traditional discounted cash-flow
valuation methodology. In other words, you figure out what the % risk is for
expirations and transfers, then guess out what your net revenue will be over the
next 5 years and apply an interest rate (appropriate to the risks) to that number.
Hopefully, this valuation methodology is still a year or so away, but it is coming
quickly. This valuation technique, won’t really be used until registrar’s begin
to declare bankruptcy, which I expect to be at least 6 months away.
major risk ICANN must consider is registrar insolvency. Of the 81 registrars
operational as of February, 2001, there are about 15 registrars managing more than
150,000 registrations, 28 registrars managing between 10,000 and 150,000 domain registrations
and 38 with less than 10,000 registrations. The 28 registrars between 10,000
and 150,000 pose the most sigificant risk because they cannot support their businesses
on domain registrations alone but have secured enough customers to warrant them to
declare bankruptcy rather than wind down their operations. In addition, it
will be difficult for them to justify spending additional capital to market and promote
their registrar’s based on the aggressive pricing that continues to damage the industry.
Under option “A”, Verisign would be unable to support the acquisition of these companies
and insolvency could threaten the stability of the industry. In addition, ICANN
could be indirectly held responsible for having accredited these companies in the
To conclude, while I do not think that ICANN negotiated the best
possible deal, when left with the option of choosing, there can be no question, I
would strongly support option “B”. Let NSI keep the registrar. The opportunity
to divest the registrar was last year, that opportunity is now gone. I do not
believe that the registrars appreciate the serious damage option “A” could bring
on the industry. I am also concerned that the larger registrar's have miscalculated
the macro-effects a sale of the registrar would have on their business at this particular
moment in time.
I am putting together a team of top industry analysts
to evaluate the registrar industry and to better understand: valuation; transfer
rates; expiration rates; pricing; affiliate programs; cost of sales and the other
macroeconomic factors that could affect future growth in the industry. I plan
to submit a proposal to the registrar constituency in the next few weeks suggesting
a plan for generating a private research report that will help us to better evaluate
these risks and attempt to protect ourselves from the risks ahead.
free to email me if you want more detailed statistics or information or would just
like to participate.
A Technology Company, Inc.