VeriSign Spruces Up Domain Name Business

VeriSign Inc., a company built on managing the relationships of trust that Internet commerce requires, has learned a hard lesson: Gold mines lose much of their luster after a gold rush.

Tarnished by an ugly sales slump last year, the company whose certifications aim to give Web sites credibility is now trying to spruce up another key part of its business: registering and managing Internet domain names.

The business, bought from Network Solutions Inc. for $19.6 billion in stock in mid-2000, was supposed to provide a lode of profit as VeriSign pocketed fees from all those “.com” names that had the Midas feel during the Internet boom.

But it became a major drag as demand evaporated.

“This is a good business run by some smart people, but they didn’t do a very good job analyzing the data they had in front of them to anticipate this slowdown,” said industry analyst Timothy Leehealey of Wedbush Morgan Securities.

VeriSign also faced customer service complaints that it says have been addressed.

The problems so badly disillusioned investors that VeriSign ended 2002 with one of Silicon Valley’s worst-performing stocks. Shares lost 70% of their value last year, wiping out about $6 billion in shareholder wealth.

Investors began 2003 in an apparently forgiving mood. VeriSign’s stock surged 32% through Thursday. It closed Friday at $10.67 on Nasdaq.

To VeriSign, the fixation on domain names seems misguided.

Domain names account for about one-third of VeriSign’s revenue but get more attention than the company’s foundation -- certifying the identities of Web sites and providing encryption software to protect transmissions of sensitive information.

“It’s in fashion to complain about us, but the reality is that we do a phenomenal job,” said Stratton Sclavos, VeriSign’s chief executive.

Nevertheless, Mountain View, Calif.-based VeriSign started the new year by retooling the domain name business that consists of two main parts.

There’s a registrar that competes against about 150 rivals to sign up Web addresses. The other side is a government-approved monopoly called a registry that maintains the master list of names.

The registrar’s standard one-year fee is $35, and the registry collects $6 for each “.com,” “.net” and “.org” address, regardless of the registrar used.

With the number of names in the registrar off nearly 40% from the peak volume, VeriSign is offering customers more discounts and incentives such as frequent-flier points on four major airlines.

VeriSign also recently renamed the registrar Network Solutions, a brand that the company started to phase out in 2001.

Management said the name change is meant to herald a new era and capitalize on Network Solutions’ solid reputation. But Walter Pritchard, an industry analyst with SoundView Technology Group, thinks the switch could foreshadow a plan to sell the registrar.

Things also are changing at the registry, which retains the VeriSign identity.

VeriSign is in the process of transferring the master list for the “.org” domain to the newly created Public Internet Registry. The transfer, expected to be completed Jan. 25, affects 2.4 million names, or about 9% of VeriSign’s registry.

In exchange for surrendering “.org,” VeriSign received contract extensions to the more widely used “.com” and “.net.”

But those rights look less lucrative today. As of September, the registry had 27.5 million names, about 15% fewer than in June 2001, shortly after rights were negotiated. Year-end numbers will be announced Jan. 23.

Analyst Pritchard expects the company’s total revenue to fall 7% this year, mostly because of continued contraction in the registrar.

Last year’s hemorrhaging prompted VeriSign to lay off 400 workers, a 12% reduction from a workforce of 3,270 employees at the end of 2001.

Sclavos sees better times ahead.

He envisions VeriSign running a “network of networks” overseeing domain names, protecting e-commerce transactions and linking wireless phones to the Web.

Since its 1995 inception, VeriSign has been devoted to protecting the security of online transactions, a mission that helped cushion the blow from last year’s domain name woes.