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Username: Jason Hendeles
Date/Time: Thu, March 29, 2001 at 12:11 AM GMT
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Subject: Valuation and Stability in a Deteriorating Industry


Attention:  ICANN Board and Supporters

Re:  Proposed VeriSign Agreement Revisions

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 serious consequences. 

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.

Currently, 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 registrar:

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.

b. Comparable 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.

The second 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 first place.

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. 

Feel free to email me if you want more detailed statistics or information or would just like to participate.


Jason Hendeles
A Technology Company, Inc.


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