How ".com became ".$$$"
By Courtney Macavinta
Staff Writer, CNET NEWS.COM
HERNDON, Virginia--As Don Telage makes his way through Network Solutions' headquarters at the tail end of a long day, he wants to know one thing: "What are we at today?"
"We're up five," a colleague answers. Telage responds with a fleeting smile, "That's good."
"Good" is putting it lightly. Thanks to an almost eight-year government contract, Network Solutions (NSI) has the lucrative domain-name registration market cornered. During the past year, the company's stock has climbed from a low of 17.50 per share to a high of 260 per share. On Wednesday, the firm reported fourth-quarter earnings that exceeded analysts' estimates, one day after it announced a secondary common stock offering to put 4.58 million more shares on the Street at $170 apiece.
Despite the good fortune, Telage, NSI's senior vice president, has to protect the fort. Since 1996, he has been part of the most contentious political debate in cyberspace: deciding who, alongside Network Solutions, will get the right to sell spots in the Net's white-pages directory.
Known as the low-key "idea man" behind Network Solutions, Telage is not the type of Net start-up honcho who calculates his net worth every ten minutes. For one thing, Telage isn't just an entrepreneur, he also happens to be a respected mathematician and engineer who helped implement the first TCP/IP commercial-based network in the country for GTE.
When his current employer, defense contractor Science Applications International Corporation (SAIC), acquired Network Solutions in 1995, Telage gave up leading the company's $65 million consulting sector and hand-picked the assignment of beefing up the new subsidiary's minuscule ".com" registry business. Telage remained head of Network Solutions until the SAIC decided to bring in financial heavyweights to take the company public.
Call it luck or cunning calculation, but Telage now sits on a gold mine--and we're not even talking about his stock options.
Within Network Solutions--behind multiple security checks, in a climate-controlled room--sit about a hundred racks of Sun servers rigged to prevent accidental or intentional tampering. And in the middle of one nondescript rack sits an ordinary server with a slightly crooked white label on it marked with black letters: "Root A Server." That box is home base for the entire commercial Internet--for everything from Amazon.com to Yahoo.com--and Network Solutions owns it.
Since 1993, Network Solutions has registered more than 3.4 million domain names, charging $70 for two years. The remaining ".com" names were signed up by middlemen of sorts, such as ISPs, which first have to go through Network Solutions.
But now the landscape is dramatically shifting.
In 2000, Network Solutions' exclusive government contract will end. By April of this year, the company could see the first sparks of competition, when five other registrars will get the green light to tap directly into the ".com" root server. The new players will be selected by an international nonprofit corporation, the Internet Corporation for Assigned Names and Numbers, which won the government's approval to oversee the technical underpinnings of the Net address system.
The evolution of domain name management also means that more top-level domain names will be added and that NSI could sidestep future antitrust lawsuits. Still, critics say that, going forward, NSI needs to establish better dispute-resolution policies to address trademark squabbles over Net names and to improve its currently piecemeal screening process for allegedly derogatory or profane domain names, among other things.
Although analysts expect NSI to come out on top, Telage says that during the next few critical months he will stay behind the scenes to ensure that the transition plan is "both good for the Internet and, of course, good for NSI."
CNET News.com sat down with Telage to get a peek at one of the most closely watched companies on the Net through the eyes of its leader.
NEWS.COM: Most people equate Network Solutions with the explosion of ".com" Web sites. What was the company like when you were placed at the helm?
Telage: Our goal at that time was to buy a strong consulting company in the Washington area that had good credentials in data communications and strong credentials in the Internet. And Network Solutions was primarily a data consulting company. People don't realize it, but the registration services business was a tiny little fixed-price or tiny little cost-plus contract capped at $1 million a year and was doing hardly any business, and there was virtually no automation. We talked about [domain name registration], but it had almost nothing to do with why we bought NSI.
In July of 1995, shortly after merging the company with my operating group, we split the company into two pieces--$65 million dollars of consulting business and the registration business. I was given my choice of which one I wanted to manage. I elected to send the consulting business--that I had grown--back to SAIC. I went with the small business in NSI and left the major corporation, which was kind of a risky thing at that time. In 1995, we didn't know whether NSI could survive. Our service honestly was not very good at the time.
When did branding start taking off on the Net, making the registration business an important moneymaker for Network Solutions?
NSI has been a pioneer. Long before people understood the notions of identity and the value of identity and real estate on the Internet, we had that vision. Shortly after we bought the company, I merged Network Solutions with my operating group, which was called Telecommunications Technology Group, and formed about a $75 million or $80 million operating group and put my management team over the top of the whole thing. It was about, I would say, May of 1995 when, in discussions with some of the technical people, I was doing contract reviews of the different programs and I discovered the growth on this program. At that point I began to realize that, although the numbers were still small, we were in a very significant exponential growth. I knew something funny was happening with the Internet way back then.
How did this growth affect NSI's exclusive contract with the National Science Foundation?
The National Science Foundation explained to me two of the dilemmas that were facing them at the time. One of them was that all the
registrations that were coming in--or almost the majority of them--were commercial registrations. So there they were sitting with a federally taxpayer-funded contract to support commercial registrations, and they really felt very uncomfortable in that circumstance. The Internet had evolved underneath them.
Furthermore, the usage numbers were growing, and the kind of capital that we would need to grow the equipment base and add to service offerings was way beyond the $5 million cap that that contract had for five years. So there was no way that they could figure out how to keep up with this growth and allow NSI to do the investments necessary to continue to meet the service requirements.
A second problem they faced is that they had their first domain name trademark suit and they were terrified of being embroiled in litigation. I worked with the NSF and a team of NSI people to try and put together a plan for how to deal with these problems. The plan involved invoking a clause in the contract where we recommended going to user fees. And in exchange for that, we agreed to pick up all the liability and responsibility with no indemnification for the legal issues, which took a big load off the government.
So prior to 1995 you didn't even have to pay to register a domain name--now people spend tens of thousands of dollars to buy domain names from their original owners.
Prior to September 14, 1995, the U.S. government, with taxpayer dollars, paid for every registration in ".com," ".net," ".org," and ".edu."
So how did allocating domain names go from a free service to a coveted and lucrative retail venture?
[Providing the service for free] seemed OK when the Net was research- and education-oriented, but once it became international and commercial, everyone deeply involved in it understood that there were issues that had to be worked on. There were volume issues here, in addition to issues of liability and growth of infrastructure, and it just made sense for the government to move to privatization. That's really what happened. It followed, by the way, the process that National Science Foundation used just about a year earlier in privatizing the NSF backbone system to four providers.
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