You are not at fault if you haven’t heard of this company called Verisign. It’s not a household name such as the likes of Apple, Amazon or Coca Cola, but it’s hugely important. Among its services, Verisign is most known for being the exclusive registry of two popular top-level domains (TLDs) .com and .net. If you register a .com domain to your website, Verisign ensures that when people type in the domain, it goes to the right website. Think of it as the address book of .com and .net domains. Since .com domains are hugely popular, it’s safe to say Verisign plays an important role in keeping the Internet running. And it has a monopoly!
We are a global provider of domain name registry services and internet infrastructure, enabling internet navigation for many of the world’s most recognized domain names. We enable the security, stability, and resiliency of key internet infrastructure and services, including providing root zone maintainer services, operating two of the 13 global internet root servers, and providing registration services and authoritative resolution for the .com and .net top-level domains (“TLDs”), which support the majority of global e-commerce.
Verisign signed agreements with ICANN to be the exclusive registry for .com domains till 2024 and .net domains till 2023. Based on the language described in their latest annual report, it’s likely that the agreements will be renewed as long as Verisign doesn’t screw up. It’s reported that Verisign has 100% uptime record of accuracy and stability. Because of the important role it is playing in keeping the Internet running, it won’t be a surprise that ICANN doesn’t like to risk venturing out with a new unproven partner.
How does Verisign make money? It does have other services and domains, but let’s talk about the main TLDs: .com and .net. Basically, every time a .com or .net domain is registered or renewed, no matter through what entity, Verisign gets paid $7.85 a year. The fee sounds small, but given the number of .com and .net domains in circulation, as well as the popularity of .com domains to business, Verisign can generate serious money and profit.
In Q1 2020, the company reported more than 160 million .com and .net registered (160.7 million to be exact), up 3.8% year over year. The growth isn’t the same between the two domains. While .com has seen YoY growth in the past four years, .net has been on decline
In 2019, the company made $1.2 billion in revenue, compared to a tad higher than $1 billion in 2015. While it doesn’t seem like an impressive growth, it’s important to point out that profit margin in 2019 stood at 50%, compared to just 33% in 2015. That’s an astonishing profit margin and a sign that the business enjoyed the fruits of the economies of scale. Moreover, the company generated $714 mil free cash flow out of $1.2 billion in revenue. That’s 60% of free cash flow ratio to revenue, up from 54% in 2018. An increase in FCF that is already as of high percentage of revenue is a sign that the business is in good shape.
A couple of months ago, ICANN agreed to let Verisign increase domain prices by 7% every year on the previous price for the next four years. In case a new agreement beyond 2024 is finalized, domain prices will be frozen for the first two years before they can be raised again. Originally, the Obama administration put in place a cap of $7.85 per domain per year until the current administration repealed it, allowing Verisign to negotiate with ICANN on the annual increase, which it did. 7% per year, compounded, is a lot.
Let’s say that you have a domain in your name registered and pay $7.85 a year to Verisign. In 2024, the fee, if Verisign decides to raise prices by 7% every year, will be around $9.85. So in the next four years, the annual fee will rise by 25%. If you want to keep the domain till 2030 (who wouldn’t renew their business domain every year?) and Verisign increases prices by 75 every year, except in 2025 and 2026, the annual fee in 2030 will be $12.91, an increase of 64%.
If we assume that Verisign doesn’t expand its footprint for the next four years (which is highly unlikely), the new agreement with ICANN, by my estimate, will result in an additional windfall of $321 million in revenue resulting from the increase in price alone. Because cost structure doesn’t increase proportionately with the increase in revenue, it’s pure profit for Verisign.
I bought a domain under my name. I considered to have .io or .me domains, but settled with .com anyway because it screams formality and business. Every popular business or personal blogs I know of have a .com domain. It’s highly popular and doesn’t seem to be affected by new domains. Therefore, as a consumer, I find it annoying that a highly profitable business with a monopoly over a crucial commodity is free to raise prices even more. If I were an investor in this business, I; however, would rejoice over the new agreement between ICANN and Verisign.
Though it looks a healthy and stable business, Verisign is at the mercy of the US government and ICANN. Any fallout with those two parties would result in serious damage to Verisign’s business. However, as it poses an impressive record of accuracy and stability, likely no one would jump at an opportunity for change and be the one to blame if a new vendor screwed up.