Below is an excerpt on VRSN from our Q2 2014 Partnership letter.
While I don't get into specific financial analysis or valuation
estimates, I shared this with my investors after discovering a
tremendous amount of confusion around VRSN, its capabilities, and
its current regulatory status.
Founded in 1995, VeriSign (
) was initially a "certificate authority" or issuer of "digital
but sold this part of their business in 2010 to focus on a far
better line of business, one that would usually be described as a
"monopoly." Of course, VRSN is far too prudent to use the m-word,
and instead prefers "registry services" as the title for the line
of business responsible for nearly all revenues and profits. But,
as I detail below, "registry services" is really secret code for
"the internet won't work without us, and we have contracts that
ensure our ongoing monopolist opportunities will continue to fill
Before delving into the details of VRSN's business and those
contracts, it is important to understand something called top-level
domains (TLDs). TLDs are the last part of every internet domain,
examples of common TLDs would be .com, .net, .org, etc. Each time
anyone - anywhere in the world - goes to a website of their
choosing, they do so by typing a name (e.g., cnn, google, facebook,
etc.) followed by a TLD (e.g., cnn.com, google.com, etc).
In the digital world, VRSN is the "
" of all .com domain names AND "the
of domain names within the .com" generic top-level domain (gTLDs).
As a registry, VRSN maintains "the master directory of all
second-level domain names in these TLDs"
(e.g., johndoe.com, example.com, facebook.com, etc). To fully
comprehend the significance of these terms, consider the following
- As the "authoritative directory" VRSN ensures that the web
address "amazon.com" directs all internet traffic to the famed
web retailer (instead of a page dedicated to the Amazon rain
forest), or that "cnn.com" directs all internet traffic to a site
filled with "breaking news" rather than the homepage for Charles
Nicholas Nelson (i.e., someone, or something, with the initials
of CNN). The technical name for this function is Internet
Assigned Names Authority (IANA) and involves control of something
controlled by VRSN - known as the "root zone." A full explanation
of this responsibility is addressed a bit later in this letter,
and will - of course - require several more acronyms.
- Better than a directory - even when it's an
directory - is an "exclusive registry." Exclusive registry simply
means that every .com (or any other TLD for which VRSN is the
exclusive registry) must - without exception - always pay VRSN
when they 1) first register a domain and 2) when the domain is
renewed every year thereafter. While consumers are free to buy
and keep their domains at any registrar of their choice,
no domain for which VRSN is the "exclusive registry" is issued or
renewed without first paying VRSN and its humble
Only Sure Things Are Death, Taxes . . . and Domain
It is VRSN's role as the exclusive registry for .com that is by
far the largest contributor to revenues and profits. Fortunately,
there are only a few factors to consider when thinking about the
.com registry and any potential impact this may have on VRSN's
success going forward:
- Active Domains: VRSN makes money when either new .com domains
are issued or old .com domains are renewed. As of YE 2013, VRSN
reported a total of 127.2 million active .com and .net domains,
representing a 5% improvement from the year before.
While the active domain counts
seem to ebb and flow based on trends outside of VRSN's control
(e.g., economic condition, registrar promotions, etc.), growth in
active domains over the last five years has ranged from 5-9%, and
better than 70% of all .com and .net domains are renewed each
- Continuity, Exclusivity, and Profitability of .com Registry
Agreement: In 2000, VRSN acquired the core registry functions
that would form the basis for VRSN's registry services division.
The .com Registry Agreement (Agreement) is a periodically renewed
contract between VRSN, ICANN, and the United States Department of
Commerce. The last iteration of the Agreement was signed on
November 29, 2012 and provides the following key points:
- VRSN will remain the
registry operator for domain names in the .com TLD through
November 30, 2018.
- The price of a .com domain name shall
exceed $7.85 for the term of the Agreement.
- Just in case the other terms weren't favorable enough, VRSN
and their lawyers have seemingly managed to effectuate this
Agreement into perpetuity with the following legalese: "The
2012 .com Registry Agreement provides that it shall be renewed
for later terms unless it has been finally determined by an
arbitrator or court that the Company has failed to cure a
fundamental and material breach of certain provisions of the
2012 .com Registry Agreement and, following the decision of
such arbitrator or court, the Company
fails to comply with such decision." Thus, VRSN's exclusive
monopoly on .com registration will remain in place unless 1) a
court or arbitrator rules that VRSN has defaulted on their part
of the Agreement; AND 2) despite said ruling, VRSN still fails
to take steps necessary to fix their default! Maybe John
Rockefeller was on to something when he said "competition is a
The Less Favored Children
It is worth noting that VRSN does provide the registry for a
variety of other TLDs including .net, .name, .tv, .cc, and others.
But, for brevity's sake we will simply note that VRSN's other
registry operations are generally based on terms even more
favorable (especially in terms of pricing) than those found in
their .com Registry Agreement.
Additionally, ICANN is in the early stages of introducing a
whole slew of new gTLDs possibilities including such "blockbusters"
as .today, .ninja, .company, and .tips!
While much has been made of this new "land-rush" of domains, .ninja
hardly seems like a plausible threat to the long establish standard
of .com or any of the alternatives already available. Nonetheless,
it is always good to be prepared. Accordingly, should any of the
new gTLDs prove more popular than anyone expected, VRSN stands to
benefit as applicants for approximately 200 of these new gTLDs are
already in contract with VRSN to provide back-end registry
No Good Deed Goes Unpunished
VRSN's role as "authoritative directory" - while fundamental to
the daily functioning of the internet - involves a slightly
complicated web of contracts and organizations: At the very
foundation of the internet is a role called Internet Assigned
Numbers Authority (IANA) which is the right and responsibility to
assign names among domains.
Because the original architecture of the Internet was developed in
the United States, this responsibility was initially managed by the
US government. However, since the 1990s, the US government has
offloaded much of the IANA responsibility to a non-profit group
known as the Internet Corporation for Assigned Names and Numbers
(ICANN). ICANN was essentially created for the purpose of being
able to contract
the running of the IANA function - a power given to them (and
periodically renewed since) by a contract from the National
Telecommunications and Information Administration (NTIA).
While ICANN manages the IANA function under contract to the NTIA,
the actual work of maintaining the core list of gTLD domains and
their operators is handled by something known as the "root zone."
The technical work of maintaining the root zone is managed under a
cooperative agreement between the US Department of Commerce
The reason the above detail is important to understand is that
recent market pessimism for VRSN seems to indicate that most
investors simply misunderstand - or are too lazy to even try - the
dynamics of the non-registry part of VRSN's business. This became
especially clear - and all the more important - given the
government's recent noise-making:
- In March of 2014, mainly in response to pressure from
revelations made by Edward Snowden about the National Security
Agency and its spying activities, the NTIA announced that the US
would relinquish federal government control over "the
administration of the Internet." The government plans to
relinquish this control by simply not entering into another
contract when the current contract
expires in 2015. Instead of renewing the contract with ICANN, the
US government plans on simply surrendering the IANA function to
ICANN going forward. Because nothing is ever clear or easy when
it comes to government actions, ICANN will have to meet a list of
currently ambiguous specifications, and our elected officials
will need plenty of time to pontificate one way or the other.
Thus, no one really knows when - or if - this change will
- Nonetheless, investors spooked by these developments seem to
be unaware of the following:
- The contract to manage the root zone is separate (i.e.,
100% unrelated) from the contract with ICANN that stipulates
VRSN's ongoing role as the exclusive registry of .com domains
(officially known as the ".com Registry Agreement,"
unofficially known as the monopoly money printing
- The role of managing the root zone - something ICANN may or
may not renew post transition - is currently provided by VRSN
"as a service to the internet and the world."
- Given the continued importance of a functioning and
reliable internet to the global economy, we suspect ICANN is
unlikely to make flippant changes to key parts of the
underlying infrastructure - especially when such infrastructure
is maintained for free and without problems . . .
Ultimately, an investment in VRSN is a bet on the future of the
Internet, and VRSN's continued role as a stable and reliable
provider of several core functionalities. Developments related to
the NTIA's departure may provide some near-term turbulence, but we
suspect any turbulence will largely be noise and misunderstandings.
Either way, we are confident that VRSN's dominant position will
remain intact, and may even rise stronger whenever the dust
settles. At just 14 times earnings, we suspect manning the .com
toll both may be significantly more promising and enduring than
current market consensus seems to think.
1 Digital certificates serve as a trusted third party in
cryptography to enable secure connections over the internet. For
example, if two parties (i.e. you and me) are seeking to securely
transact or communicate over the internet, a method is needed to
verify each party is representing themselves truthfully. As a third
party, trusted by both parties, a certificate authority serves as
the verifier to each party that 1) both of us are who we say we
are, and 2) the transaction is thus valid and secure.
2 If drawing an analogy to the physical world, the name might be
the street address, while the TLD might be the state or country of
such address. Either way,
the name and the TLD are necessary to avoid getting lost in both
the physical and digital worlds.
3 From Wikipedia: "a gTLD is one of the categories of TLDs
maintained by the Internet Assigned Numbers Authority." "The core
group of generic TLDs consist of the .com, .info, .net, and .org
4 While a much smaller part of their business, VRSN is no
one-trick pony, it is also the exclusive registry and authoritative
directory for .net, .cc, .tv, .name, .gov, .jobs, and .edu domain
5 Popular registrars include GoDaddy, Network Solutions, and
eNom to name a few.
6 As of YE 2013, VRSN reported 112 million .com domains and 15.2
8 The operations for .com, .net, and the .org TLDs were acquired
in VRSN's acquisition of Network Solutions. VRSN would later divest
the retail part of Network Solutions (i.e. the domain name
registrar), while retaining the wholesale domain name registry that
is now their main line of business.
9 Except that VRSN will have "the right to increase the price of
a .com domain name during the term . . . due to the imposition of
any new Consensus Policy or documented extraordinary expense
resulting from an attack or threat of attack on the Security or
Stability of the Domain Name System (DNS) not to exceed 7% above
the price in the prior year."
10 In both cases, Company is VRSN.
11 On June 13, 2012, ICANN announced it had received 1,930
applications for over 1,400 unique new gTLDs.
12 (amazon.com = online retailer,
a site about the rain forest).
13 The NTIA would actually "let out for bid" the contract for
the management of the IANA function. However, the contract has
historically been written in such a way that there was only one
entity, ICANN, that could realistically win the contract.
14 of which the NTIA is a component.
15 between the NTIA and ICANN.
The author is long VRSN. The author wrote this article themselves,
and it expresses their own opinions. The author is not receiving
compensation for it. The author has no business relationship with
any company whose stock is mentioned in this article.
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