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Over the past few years, I have used Network Solutions to help me develop various Web ventures. You see, they issue top-level domain names - such as .com, .net, .org and .net. Then again, I had no choice in the matter. The reason? Well, Network Solutions has a monopoly.

Actually, Network Solutions has been in existence since 1979. The company was founded to provide computer consulting for major companies. However, in 1993, Network Solutions had the foresight to sign an exclusive agreement to basically control domain name registration services.

At first, the domain business was slow. But by 1995, Network Solutions was swamped. It was during that year that the company imposed a registration fee of $50 per year (of which the first two years are paid up-front).

Wanting to hop onto the IPO bandwagon, Network Solutions is using a group of impressive underwriters - Hambrecht & Quist, JP Morgan and PaineWebber - to sell shares to the public. The price of the IPO is estimated to be around $14 to $16 per share (about 2.3 million shares will be issued). The trade date is expected to be September 22, 1997.

But does the IPO make sense for investors? Let's first look at the financial statements:

Net Revenue: Revenue soared from $6.8 million in 1996 to $18.7 million in 1997. About 81% of these revenues were from Network Solutions' registration services - primarily from the purchases of .com domain names. From June 30, 1996, the number of .com domain names grew from 304,000 to 908,000 by June 30, 1997. This represents 87% of the total domain names registered.

Besides registration services, the company also makes money from helping companies develop Intranets (an intranet is an internal network for the enterprise). These revenues decreased from $4 million in 1996 to $3.6 million in 1997. The reason for the decrease is that Network Solutions' major client - NationsBanc - has lessened its business with the company.

Cost of Revenue: This includes the salaries and employee benefits, as well as fees for subcontractors, to support Network Solutions' registration services. These costs increased by 75%, from $6.5 million in 1996 to $11.4 million in 1997.

Selling, General and Administrative Expenses (SGA): These expenses include salaries for management, financial and professional fees. SGA increased by 102% from $2.4 million in 1996 to $4.8 million in 1997. $542,000 of this amount was the result of legal fees regarding Network Solutions domain policy for trademark disputes.

Here's an example of a trademark dispute: Several years ago, former MTV video DJ Adam Curry bought www.mtv.com. When the Web become hot, MTV wanted the domain name and sued Adam Curry, as well as Network Solutions. MTV claimed that since its name was trademarked, it had the inherent rights to the domain name. The result of the dispute was a settlement. So, the court did not have an opportunity to make a ruling on the case. Unfortunately, there is very little case law on these disputes.

Research and Development: This provides compensation for employees who develop and enhance the technology of Network Solutions. R&D expenses increased from $58,000 in 1996 to $718,000 in 1997. This represents about 3.8% of net revenues.

But, when you look deeper into the financial statements, you will see many troubling factors:

Security Problems: With the Internet becoming so crucial (after all, there are over a million brokerage accounts on the Web), it seems foolhardy to centralize the domain name system with one company. In fact, Network Solutions has had a variety of problems. In July 1997, someone found a security hole in the domain name system and temporarily redirected traffic. Then, on July 17, 1997, when Network Solutions employees performed a routine update of its root server, there were released corrupted database files into the .com and .net domain names. This disrupted a variety of Web sites.

Interestingly enough, most of Network Solutions' servers are located in one location. So what happens if there is an earthquake? Will the Net be down for several weeks?

Lawsuits: As discussed above, Network Solutions spent more than half a million in defending lawsuits. As of July 31, 1997, the company received approximately 2,700 written objections to the registration and use of certain domain names. The company has been named the defendant in 36 lawsuits (but 25 of the suits have been dropped). Also, no claim has been awarded against the company. However, the law regarding domain disputes is still in evolving. For example, it would not be unrealistic for a court to rule that Network Solutions should have had monitoring technology to reject certain types of registrations.

In fact, Network Solutions' financial statements make the startling statement: "Such litigation has resulted in, and any future litigation can be expected to result in, substantial legal and other expenses to the Company and a diversion of the efforts of the Company's personnel."

Uncertain Status of Monopoly Position: This is the biggest unknown. In March 1998, the exclusive right to the domain registration system will expire. It is unclear as to whether Network Solutions will remain the exclusive registrar. Although, even if Network Solutions does not remain the exclusive registrar, it will likely be a major player - because of its extensive experience.

Government Intervention: Lately, the federal government has been more aggressive in antitrust matters. On June 27, 1997, the US Department of Justice sent a Civil Investigative Demand to Network Solutions to determine if there are any antitrust violations under the Sherman Act.

Flaky Customers: On average, about 30% of Network Solutions' receivables are uncollectable. Perhaps the reason for this is that the company allows a customer to pay the fee after the domain name is registered.

Conclusion

By being the sole registrar for the Web, Network Solutions has amassed a huge database. With electronic commerce expanding, this list represents tremendous value for many companies.

But despite this, there are still too many question marks. After all, how can a Wall Street analyst predict earnings if Network Solutions may not be the exclusive purveyor of domain names?

For comments/questions, contact Tom Taulli at tom@taulli.com.