Is the Domain industry correcting, or just VeriSign?

Is the reported death of the domain name registration industry a little premature, Kevin Murphy writes? Despite the terrible results from market leader VeriSign Inc last week, which wiped out almost half its market capitalization, some folks would have us believe the market overall is still healthy.

New York-based Register.com reported Monday revenue that slid 11% to $27.3m compared to the year-ago quarter, 88% of which came from domain registrations. Net income was $3.7m, which was up against year-ago income of $2.0m, or down from $5.8m taking into account new accounting practices regarding amortization.

But Register disputed a recent research report that had the company losing a lot of its domain name registrations and slipping into third position by market share behind Tucows Inc. And both Register and Tucows are disputing the notion that the whole domain name industry is on the decline.

SnapNames.com Inc analyses the zone files of the major generic top-level domains (gTLDs, such as .com, .net and .org, (CNO)) to figure out which registrar is registering the most names. According to its first-quarter State of the Domain report, Register lost 287,876 CNO registrations in the quarter, ending March with 2,755,772 names.

According to SnapNames, this made Tucows the number two registrar in the CNO business, by a slim margin. But Register says the SnapNames report does not represent its business fully. The company reported that its total "names under management" in Q1 came to over 3.4 million. Of this number, a Register spokesperson said, 3 million were CNO names.

"There're several data sources out there," Register CEO Richard Forman said when asked about the SnapNames numbers in a conference call with analysts Monday. "What we can say is that there're not definitive sources, we're reporting the actual numbers for the company."

Register investors relations manager Stephanie Marks told ComputerWire that the company had "under management", at the end of March, about 3 million CNO names, about 300,000 country-code TLD names, and about 100,000 names in the new gTLDs .biz, .info and .name.

The difference in reporting boils down to what data is visible to registrars, compared to what data is visible in the domain name system's zone files, the master lists of registered names that are more less publicly available. SnapNames's numbers are accurate, but do not include domains that are in certain limbo-like states. Other domains, such as non-ASCII multilingual names, also do not show.

One reason for the roughly 250,000 name discrepancy between what SnapNames reported and what Register reported is likely so-called "registrar hold" names. These are largely, but not exclusively, registrations that have not been paid for, but are held in a 45-day "grace period" where they are not deleted, to give the registrant a chance to renew their registrations.

Registrar hold names are not visible to SnapNames or anyone else but the registrar, so do not show up in industry reports. The SnapNames report does give an indication, however, of registrations that are likely to be deleted. Whether Register will actually lose these registrations or not will not be known until the grace period on those names elapses.

Following VeriSign's poor performance in Q1 and the subsequent stockmarket effects, Register is keen not to be seen as a business on the decline. Of the shrinkage of the market overall, Marks said: "This is not a market problem, this is a VeriSign problem."

While VeriSign operates in many businesses despite domains, such as telecoms and security, its registrar and CNO registry do bring in a great deal of its revenue. When the company reported a decline in registrations and missed its financial targets last Thursday, almost a dozen analysts reduced their ratings on its stock, and its shares dropped like a rock, over 45% to hit a 52-week low.

SnapNames reports VeriSign's CNO active names dropped by 1.9 million to 10.9 million in Q1. VeriSign reported its CNO base was 11.5 million names, and said the overall CNO zone shrunk to 27.3 million names from 28.8 million. The shrinkage come from many areas, not least of which is the purging of hundreds of thousands of speculative registrations.

Register CEO Forman said: "There was a big speculative bubble in Q1 2000, and most of these were 1-year registrations. We believe we worked a lot of that that internet bubble speculative demand out of our customer base beginning in Q1 2001. We believe the domain name market is still nascent, and remain optimistic that long term this is a good and healthy market to be in."

Elliot Noss, CEO of top 3 registrar Tucows Inc, told ComputerWire: "The market itself is healthy. The shrinkage in the zone file is overwhelmingly the result of the cleansing of promotional and speculative names, and most of that is between just two registrars [VeriSign and Register.com]."

The huge increase in registrations during 2000 was an anomalous "upwards blip", said Noss, that is now correcting itself. There were 5 million new registrations across the whole market in 1999, 22 million in 2000 and 11 million in 2001, he said. Ignore the speculative activity of 2000, he said, and you have a healthy growth curve.

Noss said Tucows saw 18% sequential growth in registrations in CNO in the first quarter. The company will report its revenue to March 31 next week. Noss added that if you factor out the effect of the declining Register.com and VeriSign business, the domain industry is actually growing.

According to Tucows' interpretation of CNO zone file activity over the last six months, the market shrunk from about 30.5 million names to about 28 million names. If you take out the names managed by Register.com and VeriSign, the market actually grew from about 12.5 million names to about 14.5 million names.

Volumes aren't everything, however, and selling lots of domains does not always mean a lot of revenue.. As a rule, the big publicly listed registrars prefer to have higher quality customers that will buy more names at a higher margin, as well as add-on services such as digital certificates and web hosting.

Speculators, whose main priority is to buy low and sell high, have no need of these services, and are moving their business to the budget registrars as the potential resale value of their names declines.

Perhaps the reason VeriSign's domain business looks bad at the moment is that while its major competitors claim to have purged most low-quality customers last year, VeriSign has just purged its base. Analysts reportedly said Friday that they predict a period of up to two years until VeriSign's domain business becomes stable and predictable.

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