VeriSign (NASDAQ:VRSN) announced on Wednesday its decision to hike the price for .net domain registry by 10% effective July 1, 2013. This move follows the Department of Commerce’s amendment to its contract with ICANN to limit the price for .com domain registry at $7.85 until November 2018.  
The permitted hikes in .net domain fee and an increase in the number of registered .com and .net domain names are two avenues for revenue growth for the company. Due to rising costs of operating the registries, we had anticipated the hike and included it in our forecasts. We believe the company will utilize all the permitted hikes, as per the contract, to mitigate the negative effect of fixed .com registration fee on gross margins. We further expect a new substantial revenue stream to open up after ICANN introduces several new generic top-level domains (gTLDs) next year. VeriSign is expected to provide infrastructure services for many of these new domains. 
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.Net Registry Fee Hiked By 10%
The registry fee for .net domain will increase from $5.11 to $5.62 effective July 1, 2013.  The agreement between ICANN and Verisign for .net registry permits the latter to increase the price of .net domain registration by up to 10 percent each calendar year during the term of the agreement through June 30, 2017.  Faced with the prospect of declining margins as the number of registered .com domains grow with the fee remaining fixed, the company is expected to fully utilize the provision.
As of October 2012, the number of registered .net domain names stood at 15 million. In comparison, the number of .com domains was 105 million.  The weak strength of .net domains (15% of .com domains) will result in combined fee for .net/.com domain names growing only at about 2% through the forecast period by our estimates.
Moreover, the .com/.net renewal rate declined from 72.9% in the second quarter of 2012 to 72.5% in the third quarter. The change in Google’s search algorithm is said to be the primary reason behind this decline. In October 2012, Google made an update to its search algorithm to reduce the number of exact match domains (EMDs) that contain low quality content in its search results. EMDs are domain names that contain exactly the same keywords as in a search query.  This change has negatively impacted the search engine rankings of these pages and their revenue potential as fewer visits translate to lower revenue from ads. We expect the renewal rate to keep declining as the algorithm is further refined and the pages reach the end of their registry agreement period.
Further, the popularity and huge number of .com domain names lead us to believe that the renewal rate will be lower for .com domain names, which would increase the contribution of .net domain names to the .com/.net domain mix. An increase in the contribution from .net domain names could see the impact of the 10% hikes being larger than the current forecast and thus presents upside to our current valuation.
We have a $38 Trefis price estimate for VeriSign which is in line with the market price.Notes:
- Verisign Announces Increase In .net Registry Fee, VeriSign, December 2012 [↩] [↩]
- VeriSign Announces US Department of Commerce Approval of Newly Revised .com Registry Agreement, VeriSign, December 2012 [↩]
- VeriSign is backend for 220 new TLD applicants and applies for 14 itself, Domain Name Wire, April 2012 [↩]
- VeriSign Renews .net, Datamation, July 2011 [↩]
- Internet Grows To More Than 246 Million Domain Names In The Third Quarter Of 2012, VeriSign, December 2012 [↩]
- Google Warns of Upcoming Exact Match Domain Algorithm Change, Searchenginewatch.com, Oct 2, 2012 [↩]