I received two LinkedIn requests from stock analysts yesterday asking for my thoughts on what Verisign (NYSE:VRSN) will be able to charge for .com domain names going forward. I suspect this is in response to Ted Cruz’s most recent letter.
Analysts typically want a lot of my time for free so they can make boatloads of money for themselves. So instead of spending time with each individually, here’s my take on .com pricing.
Recent history of .com pricing and why it matters to Verisign:
Verisign’s contract to run .com was renewed in 2012, but there was a wrinkle.
Its previous six-year contract enabled it to raise prices 7% in four of the six years of the contract. Verisign took advantage of each of these increases, ending the contract with a $7.85 wholesale price.
ICANN and Verisign agreed to a similar deal for the six-year contract commencing 2012, but the U.S. government stepped in and said the price increases were unwarranted. It froze the price at $7.85 per year until 2018.
The contract still allows Verisign to increase prices for .com in one of two ways:
1. It can petition for removal of the price cap if it can prove to the U.S. Department of Commerce that market conditions no longer warrant price restrictions. It will have to demonstrate “that competition from other top level domains, use of alternative Internet navigation techniques (including search engines, browsers and URL shorteners, among others), reduced demand for domain names, or other factors are sufficient to constrain Verisign’s pricing of Registry Services at the current Maximum Price.”
2. It can show that a new Consensus Policy or extraordinary expense “from an attack or threat of attack on the Security or Stability of the DNS” raised its costs.
A small price increase means big money to Verisign. There are nearly 128 million .com domains registered. If the price is increased 7% from $7.85 to $8.40, that’s another $70 million of pure profit per year for Verisign.
The .com contract extension:
ICANN is about to extend Verisign’s contract to run .com until 2024. The current .com contract doesn’t expire until 2018, but the extension is being made early to tie the expiration date to the new root zone maintainer agreement.
The root zone deal was previously part of a deal between Verisign and U.S. National Telecommunications and Information Administration (NTIA). The contract will now be direct with ICANN as part of the U.S. government ending “its role in the internet.”
The ICANN extension through 2024 does not include a price increase. It maintains the status quo price of $7.85 set the last time the contract was renewed.
How Verisign could still get a price increase:
But pricing wasn’t a discussion for the contract extension. The idea was that pricing would be discussed again when Verisign’s current agreement, Amendment #32 to the Cooperative Agreement with the U.S. government, expires in 2018.
Although it’s not entirely clear to me, I think there are two ways Verisign can get a price increase. One would be to petition the U.S. government based on the market power clause in its current contract. Another would be to strike an agreement with ICANN to raise prices, either for no reason or due to some Consensus Policy, and then this would be presented to the U.S. government for approval.
What are the odds of a price increase? On recent investor calls, Verisign CEO James Bidzos has hinted that he thinks the domain name market is moving closer to the point at which Verisign might be able to trigger price increases.
From a market power perspective, I think this point is way, way off. If you’re looking at competition in terms of other top level domains, other navigation techniques or reduced demand for domain names, that seems like something that’s at least ten years out.
Alternative domain names aren’t making a dent. Search engines, apps, etc. are important for navigation, but this hasn’t increased significantly since the last renewal. And there certainly hasn’t been a reduction in demand for domain name registration.
It’s possible that Verisign bought .web to jumpstart new TLD acceptance as a way to ultimately convince the government that .com no longer has market power. It will have to sell a lot of .web domain names to prove that point.
Take a close look at that contract language in the Cooperative Agreement, though. Verisign would have to show that there’s enough competition or reduced demand that market forces would push Verisign to keep a price of about $7.85. The entire point of removing the price cap would be to increase prices. It’s a circular argument, isn’t it?
A more likely (or nearer) prospect is that Verisign and ICANN agree that price restrictions should remain but be increased. ICANN might be shy about doing this after the U.S. government shot down its last attempt. And, let’s face it, if .com were put out to bid, other registries would offer to run it for less than a couple bucks per domain name. (It won’t be put to bid since Verisign has a contractual right to renew.)
Still, I could see ICANN agreeing to a small increase to make Verisign happy and then see what the Department of Justice thinks. It could do this under the guise of new policies increasing the cost to run .com.
What the U.S. government’s role change for managing the internet means for its role in approving price increases:
There’s another wrinkle in this whole pricing equation.
Some people have asked if the government dropping its role in certain aspects of domain management might mean it can no longer control .com pricing.
I wish I had a clear answer, but I don’t.
The NTIA told me the transition doesn’t eliminate its role in setting prices. Afterall, the Cooperative Agreement between Verisign and the U.S. remains.
But what incentive does Verisign have to continue the Cooperative Agreement going forward?
I think the U.S. government will always be able to exert control over pricing because of the anti-trust hammer, and perhaps the settlement between ICANN and Verisign last decade to end a dispute.
Senator Ted Cruz has been on a mission to halt the elimination of the U.S. government “handoff of the internet.” His most recent letter to the DOJ asks questions about .com pricing. It’s just one more letter in a long line of questioning Cruz has put forth, so I don’t put much stock in his concern over .com prices. But it shows that the government is paying attention and elected representatives might protest a .com price increase.
I see that Obama confirmed yesterday(?) he is moving forward with oversight of the internet.
“Obama Admin to Privatize Internet Governance on Oct 1”
I wonder if the analysts are counting on this?
If I had any uninvested money I’d buy some more Verisign stock, it had a nice big dip yesterday, but alas I am a poor domainer
Andrea Paladini says
As equity analyst, I see a .com price increase as totally unwarranted, also in light of what you said above.
IMHO the only acceptable option would be linking .com (and .net, and .org for PIR) to the inflation rate.
Hope the government will continue to keep a close eye on this to deter monopolists.
domin guy says
I agree a cost of inflation increase. Similar to social security ,gov retirement etc.
Very good analysis Andrew!!
Mike Sallese says
I agree with Nick here- time to buy some VRSN stock!
Here’s how this plays out with my read of the tea leaves:
Price increase happens when COM/NET add thick whois – a lose/lose for most domain investors and registrars – but the systems and scale required for capacity could stretch to fit the rationale of the price increase with policy makers
My personal opinion. Would be grateful to be incorrect
Andrew Allemann says
Interesting and plausible.
Andrew Allemann says
Of course, how much would that cost? A $.50 per year increase would yield $65M additional per year.
Joseph Peterson says
Very thorough. Articles like this are why people read DNW.
Andrew Allemann says
Ivan Rasskazov says
The anti-trust hammer is a substantial tool, it cannot be underestimated. There is also potential for financially based regulation. I can tell you from my observation of the CFTC that U.S. regulation of all entities (foreign included) is rising overall. I simply don’t see how the Internet would be different given its importance, no matter what occurs with the transition. The method of regulation may change, but there will not likely be less of it.
Recent examples with FIFA and other entities should underscore that point.
Thank you for the article Andrew.
might be a better idea to lower reg and renewal prices, then more marginal dot coms would be registered. if prices are increased then investors will be forced to drop marginal names. it’s economics stupid.
Andrew Allemann says
Verisign has toyed with ways to offer lower prices for domains that won’t be registered at $7.85, especially after they drop. I’m basing this on patent applications it has filed.
I do not anticipate any scenario where VeriSign will be able to increase prices on .COM domains. VeriSign already operates a monopoly through a no-bid, presumptive right of renewal contract which should have never been awarded by ICANN in the first place. VeriSign was able to land this sweetheart contract is as result of litigation settlement with ICANN. (phrased another way, in an effort to end a costly lawsuit, ICANN conceded to a settlement with VeriSign which granted the no-bid .COM contract.)
A much more probable scenario: VeriSign is forced to reduce prices for .com domain names because the amount of money being generated from this no-bid contract is staggering.
We have reached the point where this contract is simply too lucrative for VeriSign (or any other company) to operate without intervention. VeriSign is enormously profitable under the current $7.85 .com pricing. Nobody in their right mind would argue that VeriSign should make more money.
In 2010 there were less than 85 million .com domain names. Now in 2016 we have more than 127 million .com domains. But it does not cost any more money to operate the registry or sell each incremental domain name registration.
Over the past 4 years (2012 through 2015), VeriSign generated (numbers from Google Finance):
– $3.908 billion in revenue
– $2.316 billion in Non-GAAP Operating Income
– $2.705 billion in cash flow
VeriSign’s business is extremely predictable with most of their revenues originating from renewals of domains. Domains renew automatically are handled by a simple database command. With a 74% renewal rate (slightly increasing over time) this is a unbelievable built in SAAS recurring revenue model.
Furthermore, VeriSign is buying back its stock at an unprecedented pace, having spent $2.503 billion in the last four years alone. The current stock repurchase plan allows VeriSign to spend $1 billion more. End of day, VeriSign is using almost all of the cash from operations and buying its stock rather than re-investing into operation of the .com registry. Not to mention VeriSign currently has $2.0 billion in cash and cash equivalents in the bank and just spent $135 million for the new .web gTLD extension.
Most importantly, VeriSign continues to grow its margins with economies of scale. For full year 2016, VeriSign guided towards 62.5% to 64% Non-GAAP Operating Margins, up from 44.3% in 2010. To further prove margin expansion, in 2015 VeriSign spent the lowest amount ever on Capital Expenditures and R&D combined. These amounts will be lower in 2016 and beyond.
For full year 2016, VeriSign will generate just shy of $700 million in free cash flow!
THIS YEAR ALONE – for only 2016! ……… $700 million in FREE CASH is an unbelievable amount of money! At the cost of the global Internet community. This is free cash flow after all expenses have been paid.
Please tell me how VeriSign will ever be able to make the case that a price increase is justified!
It’s time to put this contract out for a competitive bid. When this happens, the cost of.COM domains will only cost a few dollars per year.
Analyst – care to add more color on VeriSign’s extraordinary financials?
Foolish to assume there will not be a massive public outburst if VeriSign attempts to raise prices, as there is absolutely no justification whatsoever. If I were VeriSign, I would remain as quite as possible and realize this contract is far from guaranteed.
1. all registry agreements are non bid presumptive renewal
2. all registry businesses have 80-100% incremental margin
3. COM at $7.85 is now among the cheapest gTLDs
4. Plenty more consumer choices now than 2012
“Foolish to assume there will not be a massive public outburst if VeriSign attempts to raise prices”
Who are they going to complain to?
Icann does not care if people complain. They just ignore them. There is no one (or organization) that can put any pressure on Icann.
Complain to Verisign? They don’t care. And, Wall ST. and stockholders would love a price increase.
Complain to U.S gov’t? The U.S. gov’t is already giving up any oversight over Icann. Furthermore, Icann and Verisign have the best lobbyist they can buy.
Once, again. Consumers (domain owners) are powerless.
Christopher Ambler says
Do these analysts every actually pay you?
When I’m hit up for my opinion, I ask, simply, “Are you hiring me?”
9 times out of 10 they say no, of course.