Security Concerns Boosted VeriSign's Dot-Net Bid

"We believed this was a big decision on ICANN's part, and we certainly wanted people to focus on that decision. We wanted people to scrutinize our bid. We wanted people to scrutinize other bids, and we wanted people to scrutinize the process that ICANN used," said Tom Galvin, who was VeriSign's vice president of government relations when the bids were submitted and now works as an outside consultant for the firm.

VeriSign also garnered support from some of the nation's largest high-tech companies, including Microsoft, Sun Microsystems and MCI, each of which sent letters to ICANN backing VeriSign's track record on security. Galvin said ICANN didn't do any formal briefings with those companies, but rather had informal conversations about the issue. In some cases, Galvin said the companies offered to write letters support, and in others VeriSign asked for them.

"For the .net registry operator to be less than dependable would harm business growth and could endanger the commerce that runs across the Internet Infrastructure," Microsoft Chief Technical Officer Craig Mundie wrote in a letter to ICANN last July. "We endorse VeriSign's performance to date and we hope they will continue to operate the .net registry."

The four other groups that submitted bids for dot-net responded that VeriSign was fear mongering. "There's no question that dot-net helps underpin the Internet. The one [assertion] that strikes me as incongruous is that if you touch dot-net, everything will fall apart," Ram Mohan, chief technical officer of Afilias, said last October. Based in Dublin, Afilias finished third in the five-way dot-net race.

A Valuable Line of Business

The domain name market is lucrative for the largest Internet registries and registrars, the companies that sell and catalog Internet addresses. Starting in 1999 when ICANN began the process of breaking up Network Solutions's monopoly, it focused on the retail side of the business. At the time Network Solutions was sole wholesaler (registry) and the sole retailer (registrar) for Internet addresses ending in dot-com, dot-net and dot-org.

In order to give consumers more choices and spur price competition for Internet addresses, ICANN created several new registrars, requiring Network Solutions to offer the new companies a fixed wholesale rate of $6 per domain per year. The move opened the domain name market to hundreds of companies (ICANN has now accredited more than 400 registrars), helping drive the annual price of an Internet address down from a fixed $35 to less than $10 in many cases. VeriSign left the retail business altogether in 2003 when it spun off its Network Solutions business.

VeriSign's share price climbed $1.40 to close at $27.40 the day after ICANN announced that dot-net would remain where it is, reflecting the importance some investors placed on the company maintaining a leading role the domain name market. "It's meaningful in terms of the bragging rights. It's not meaningful in terms of stand-alone revenue, but losing it would puncture a hole in VeriSign's story about how unique they are," Merrill Lynch analyst Ed Maguire said.

The dot-net operation generates about $30 million in revenue a year for VeriSign -- not a vast sum compared with the nearly $1.2 billion in revenues and $186 million in profits the company reported in 2004.

Scott Sutherland, an analyst at Wedbush Morgan, said losing the domain could have panicked some investors, who may have taken it as a sign that VeriSign would eventually lose dot-com as well. That's unlikely, since VeriSign's contract to run dot-com presumes that the company will retain control of the domain indefinitely unless it does something to warrant having it taken away, but Sutherland said winning the dot-net contract is likely to quell investors' concerns on that front. The dot-com registry generates more than $150 million a year for VeriSign.

Also, while dot-net may not contribute a large revenue stream, Maguire and Sutherland noted it is an extremely profitable line of business because the technology required to run the registry is already in place. The two analysts don't own stock in VeriSign and their firms don't provide investment-banking services for the company.

Unfair Advantage?

While it was stressing security in its dot-net bid, VeriSign also argued that competition at the consumer level wouldn't necessarily be served by moving the domain to another operator -- saying that from a consumer standpoint it's more important to bolster competition at the retail level.

"I don't think this was a choice between security and competition, security and stability are important, but Telcordia gave VeriSign it's highest score for competition," McLaughlin said.