Register.com renewal strategy responsible for loss?
Register.com Inc may have shot itself in the foot to an extent when it introduced a controversial customer retention system in January 2001,writes Kevin Murphy
. The company reported yesterday that it will make a loss for the first time in over a year, and its SafeRenew system seems at least partly to blame.
The New York-based domain name registrar yesterday told analysts it now expects third-quarter revenue of $23m $25m, compared to a previous estimate of $27m. While not breaking out expected earnings per share, CEO Richard Forman said it would be negative, rather than the $0.01 to $0.02 profit it had expected.
The company blamed a number of factors, including the general slowness of the domain name industry and a goodwill write-off on its Afternic site, which will be closed. The company also blamed, and has warned about in recent regulatory filings, increased credit card chargeback penalties, which are forcing it to rethink its SafeRenew system.
When the term of a domain name registration expires, Register.com automatically attempts to bill the credit card of the registrant for renewing the domain for another year. The company implemented this SafeRenew system to reduce its customer churn, which became a significant problem with the entrance of budget registrars in the market.
The system is believed to be unique to Register.com, and is partly responsible for its very respectable renewal rates, but many customers dislike being billed without their explicit authorization, and choose to tell their credit card companies or banks that the charge was unauthorized.
These refunds not only mean Register.com loses the future revenue from the registration, but that it sees mounting chargeback penalties and threats from its credit card processors. Forman said the firm saw "significantly higher penalties" in the current third quarter resulting from excessive chargebacks.
In Register.com's report for the second quarter, the firm said it has been "assessed significant financial penalties from one credit card association and have been informed that if we do not reduce our rate of chargebacks and refunds to a level acceptable to it in the near future, we may lose our ability to accept payment through credit cards issued by the association."
A company spokesperson said: "Our problem with credit card chargebacks and refunds is not only due to SafeRenew. People who get their name renewed automatically may not want it, so SafeRenew is indeed one (significant) cause for a chargeback or refund"
Forman said during a conference call yesterday that the company has "changed the SafeRenew program to 'opt-in' for international transactions" in order to reduce the problem, and that the firm is considering increasing the marketing of the program domestically over the coming months.
The Register.com spokesperson said: "The other major issue that relates to chargebacks and refunds is fraud. Online credit card fraud is much more prevalent internationally than it is here."
Chatter on registrar mailing lists yesterday suggests that the problem of credit card fraud is industry-wide. Several Register.com competitors report users taking out 10-year registrations using stolen credit card information, and many concurred the problem originates largely overseas.
Register.com does not disclose the amount of the chargebacks, but includes the problem as a prominent "Risk Factor" in its quarterly filings with the US Securities and Exchange Commission and accounts for the expense on its cash-flow statement as accounts payable.
The company is also currently being sued by an individual in New York who claims SafeRenew breaches state law and amounts to "violation of certain New York statutes as well as a breach of contract, money had and received and unjust enrichment." The plaintiff seeks class status.
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