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Commerce to Verisign: are you making too much money?

U.S. government reviewing .com agreement price hikes.

Verisign has a wonderful business model. Running the .com registry has huge efficiencies of scale. As the .com base gets bigger, it throws off more cash.

For years the company and its investors have been able to count on two great upward trajectories: a growing base of .com domains and 7% price hikes in most years.

Although the growth rate of .com is slowing, it isn’t slower growth that has sent the stock down close to 20% today. It’s those 7% price hikes.

Yesterday the company announced that the Department of Commerce, in conjunction with the Department of Justice, is reviewing the .com registry pricing terms in its contract renewal.

Like the last agreement, the renewal would allow Verisign to increase prices 7% per year in four of the next six years.

Since adding additional domains to the .com namespace doesn’t cost VeriSign much, a 7% increase provides similar profit to adding another 7 million domains to the namespace. And when you add in compounding, it’s a pretty sweet deal.

On yesterday’s investment conference call, Gray Powell with Wells Fargo Securities, LLC asked if Verisign’s fat operating margins is leading to these price increases being called into question:

If someone looks at your operating margin, it says you guys have like a 55% operating margin and a very good business and you’re potentially earning too much on the .com contract, what do you say to them to counter that argument?

Verisign CEO James Bidzos gave a rambling answer that basically said the company’s focus on efficient operations is responsible for the fat margins.

The truth is Verisign is overpaid for running .com. Plenty of competent registry providers would run .com for a lot less money.

Verisign will get its renewal, but the U.S. government is right to question the price hikes. They don’t make any sense.

If they are ratcheted down, that would take a big chunk out of Verisign’s financial projections.

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  1. 2e

    What VeriSign and its investors are missing.. is that a great number of the registered domain names are owned by investors or speculators. In the past, you could register a domain name and monetize it, and the end result is that the domain name will pay for itself to be renewed, or you can get enough traffic from registering a domain name that you do not need to buy keywords from Google or other search engines. As the price of registering new domains increases, and the profit through monetization decreases, the number of .com registrations will suffer and only domain owners will renew the premium domain names or those they use for business. I see a future where the number of .com domains that exists will be much less than what it is today due to substantial slowdown of domain renewal, especially IDN domain names.

  2. John Berryhill

    You may be right, but I’d be interested to know how many speculators took advantage of the ‘renew it out for ten years now’ offer the last time they anticipated hikes. They can get a short term boost in revenue from that, but your basic point holds that marginal names become that more marginal. Some of this gets absorbed by the registrars in their price breakage. If you are registering names for, say, $19.99, then you don’t start registering them for $20.49 if the price goes up by 50 cents – unless you start “phone company billing” and count the “ICANN/Verisign fees” as separate add-ons to the price at checkout.

  3. John Kozlowski

    Rather than complain about a monopoly, which any IANA sanctioned TLD is, use technology to replace it. ShofarDomain is bringing to the market tools to break the monopoly and bring free market principles to TLDs.

  4. Lloyd G

    I totally agree with comment 1 by “2e”. VeriSign is the cat that ran away with the cream, but didn’t think hard about what happens when the cream runs out — and as their original investors no longer trust them, they won’t be welcome when they crawl back. They got greedy and undermined my investment by introducing new TLDs. As an example, consider if you decided to brand wireshelf.com and then you bought up all TLDs.. wireshelf.eu, wireshelf.asia, etc … and now you hear someone bought wireshelf as a TLD.. I bought many 100’s and I paid VeriSign a fortune — my reaction? Dump them. Completely worthless. Consider they day when “.com” becomes irrelevant… as it will. Domainwire.com will become obscure and all the money spent promoting the brand etc .. wasted. I do not trust them.

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