The Internet’s Name Brand

Network Solutions Inc. is about to lose its six-year monopoly in the lucrative business of registering Internet domain names, the essential “.com” monikers that serve as identities in cyberspace. But to hear Chief Executive Jim Rutt tell it, the company couldn’t be more excited.

“We really do believe it’s a good thing for the company,” said Rutt, whose firm already has 87 competitors lined up. “It will stimulate new uses of domain names, and we’ll get a certain amount of that business. We don’t need 100% of the next 135 million domain names sold in the world to be successful.”

The image he conveys of a cheerful ex-monopolist may seem strange--if not downright disingenuous--given that Rutt and his company spent the last two years wrangling with the Clinton administration and influential groups within the Internet community that wanted to break NSI’s exclusive, federally granted hold on the domain name business.

After months of sometimes acrimonious negotiations, the adversaries agreed on a plan to bring competition to NSI’s core business in an effort to lower prices and improve service for consumers. That agreement will take effect this week if the Internet Corp. for Assigned Names and Numbers--the nonprofit group known as ICANN that is set to take over management of the domain name system--gives its approval during its annual board meeting on Thursday in Los Angeles.

ICANN is expected to approve the deal, but many of Network Solutions’ would-be competitors are urging the group to scrap it because they say it is too generous to a company that already has such a tremendous advantage.

By all accounts, Network Solutions would maintain the dominant position in one of the hottest industries in the world, and the agreement would give the company almost everything it sought, including retention of all 6.5 million customers it has signed up so far.

The registrars’ anger about the deal is directed more at ICANN and the Commerce Department--whose mandate was to produce an agreement that would facilitate competition--than Network Solutions.

“Network Solutions has tried and continues to protect its monopoly position, as I would do if I were a monopolist,” said Richard Forman, chief executive of New York-based Register.com, one of the most aggressive of the domain name upstarts.

For their part, NSI executives from Rutt on down are eager to shake off the monopolist image and begin selling domain names in a competitive environment.

“Right now, domain names is a Model T business--one size fits all, and you can have whatever color you want, as long as it’s black,” said Doug Wolford, the enthusiastic marketer in charge of the NSI division that registers names. “There’s a lot of innovation this competition will foster. It’s going to be fun to innovate. It’s going to be fun to beat the competition.”

Wall Street analysts agree that the company has plenty of reason to be optimistic.

“Their prospects are excellent,” said Ulric Weil, senior technology analyst for Friedman, Billings, Ramsey & Co. in Arlington, Va. Network Solutions will probably lose a few points of market share to competitors, but those losses will be more than offset by the exponential growth in the total market, he said. “Network Solutions will remain king of the hill.”

Jim Preissler, an Internet analyst with PaineWebber Inc. in New York, summed up the outlook for Network Solutions this way: “It’s their game to lose.”

Thanks to its six-year head start, Network Solutions is by far the biggest registrar of Internet domain names. NSI has registered nearly every name that ends in the popular suffixes “.com,” “.net” and “.org,” which together account for about two-thirds of the roughly 9 million domain names that have been assigned.

(The company doesn’t charge universities and other educational users to register names ending in “.edu.” The U.S. government still handles names ending in “.gov” and “.mil,” for governmental and military users. Names ending in country codes such as “.ca” for Canada and “.uk” for the United Kingdom are administered overseas.)

Network Solutions made an $11.2-million profit last year on sales of $93.7 million, mostly from fees it collected registering domain names. Sales and profit are on track to more than double this year as more companies, individuals and organizations scramble to build a presence online. NSI’s stock price has more than quadrupled in the last year and now trades at $118.50. Science Applications International Corp., the San Diego-based technology consulting firm, owns 45% of Network Solutions’ shares.

Scaling Up to Meet Demand

Demand for domain names has grown well beyond most expectations. More than half of the 6.5 million names Network Solutions has registered since 1993 were assigned this year, said Chief Financial Officer Bob Korzeniewski.

That skyrocketing demand has transformed Network Solutions from a sleepy government contractor into a titan of the Internet economy. The company was founded 30 years ago as a telecommunications consulting business, focusing on network security. NSI began working on the domain name system with the National Science Foundation and the Defense Advanced Research Projects Agency--two key research agencies that helped build the Internet--in 1989. The firm was awarded the job of handling domain name registrations for the federal government and began registering domain names in 1993.

At first, Network Solutions simply billed the NSF since most of the domain names were being assigned to government and university researchers. But as more businesses began registering names, the government decided to let NSI charge them instead. Network Solutions is currently required to register names for a two-year period and charge $70 for the service, with annual renewals for $35.

NSI lost nearly $6 million during the first three years of the contract, technically called a cooperative agreement. But by 1997, the private sector’s growing appetite for domain names allowed NSI to turn a profit. Today, the company handles 13,000 requests for new domain names every day.

“They’ve actually done a good job at scaling up for unanticipated demand,” said Joe Sims, a Washington attorney who represents ICANN, the group responsible for accrediting Network Solutions’ competitors. “They responded to a dramatic change in circumstances, and you’ve got to give them credit. In hindsight, it doesn’t look like much of a risk. But at the time, it was a risk, and they laid down capital.”

Planning for Post-Monopoly Era

Although Network Solutions stemmed its losses, profit brought a new set of problems. Would-be competitors complained that NSI’s contract granted the company an undeserved monopoly. Soon, officials with the Clinton administration and Internet engineers were devising ways to split up NSI’s registration business.

During the negotiations, ICANN interim chairwoman Esther Dyson accused Network Solutions of deliberately stalling the process to extend its monopoly as long as possible. The company’s combative stance strengthened critics’ claims that its goal was to thwart competition. Some observers speculate that NSI could have won a better deal if it had been more conciliatory.

Rutt doesn’t apologize for the positions his company took during the negotiations, though he does acknowledge that it did a poor job of communicating its side of the story.

Don Telage, NSI’s senior vice president for Internet relations, strongly denied that the company is afraid of competition. NSI has always expected its exclusive contract to come to an end sooner or later, he said.

“The idea of NSI trying to hang on to the last vestiges of a monopoly--like the last stages of the British empire--is wrong,” Telage said. “There’s room for competition. As America Online found, when the market grows, the front-runner will grow disproportionately.”

Marketer Wolford is busy planning for the post-monopoly era. His team has devised premium services to let companies lock up domain names for as long as 10 years and reserve them for as little as six months (to promote short-lived products like movies).

The company sees the bulk of its growth potential in serving small and medium-size businesses. NSI’s new Internet Starter Kit lets customers sign up for a domain name, set up a simple Web page and create e-mail accounts at a cost of $169 for two years. NSI also created the “dot-com directory,”--a sort of Yellow Pages for the Internet--and gives free listings to its customers. Wolford expects some businesses to sign up for domain names--even if they don’t build a Web site--just to have their phone numbers listed in the directory.

Analysts are encouraged by the new customer-oriented services, and they expect several more initiatives to be unveiled next week. They are also excited about the shared registry NSI will operate that will allow all of the registrars to keep track of which domain names have already been assigned and which are still available.

As part of the pending three-way agreement with ICANN and the Commerce Department, NSI would be able to run the registry for four years and collect a $6 annual fee for every domain name that is registered. The registry could generate $72 million for NSI next year without costing more than a few million dollars to run, analyst Weil said.

The agreement would require Network Solutions to separate the registry from its core registration business so that NSI’s registrar won’t have access to data that could give it a leg up on competitors. The deal also includes financial incentives for NSI to sell the registry business to another firm in the next 18 months.

Debate Over an Agreement

For all the reasons Wall Street likes the agreement, some of Network Solutions’ competitors hate it. The money NSI makes from the registry--either by running it or selling it--will help the company’s registration business, which already has a huge advantage over its upstart competitors, said Jeff Field, founder and president of NameSecure.com, a registrar based in Moraga, Calif.

Field and other registrars have also complained to ICANN and Commerce that it is unfair to allow Network Solutions to keep the customers it signed up during its monopoly phase. If ICANN approves the agreement without any amendments, “NSI would definitely be the dominant game in town, no question,” Field said. Register.com’s Forman predicts that it would take about a year for challengers like him to offer a true “competitive challenge” to NSI.

A source close to the ICANN board said the group is likely to approve the agreement without changes. But if it were to demand amendments, the source said, the entire agreement would be put in jeopardy and Network Solutions could end up with its monopoly officially intact.

Network Solutions isn’t expecting that to happen. The company’s 600 employees are busy pressing ahead with their plans for a competitive future. CEO Rutt said he expects to face two or three major competitors and a dozen formidable ones once the market matures.

“We said we’d go ahead with competition irrespective of the outcome” of the deal with ICANN and Commerce, he said.

Times staff writer Karen Kaplan can be reached at karen.kaplan@latimes.com.

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Masters of All Domains

Network Solutions has registered more than 6.5 million Internet domain names since it became the exclusive registrar in 1993. This week, NSI is poised to trade its monopoly status for competition with 87 companies ranging from behemoths such as America Online and AT&T; to upstarts such as Register.com and NameSecure.com. Analysts predict that the number of domain names could climb beyond 100 million, and NSI expects there to be plenty of business to go around. Cumulative number of “com,” “,net,” and “.org” registrations, in millions:

1992: 7,000

1999*: 6.3 million

* Through end of September

Source: Network Solutions Inc.