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The extent of adoption of newer domain names over traditional .com/.net domains by businesses will significantly impact the future growth potential of VeriSign (NASDAQ:VRSN) in the coming years. Verisign is the sole provider of registry services for businesses seeking a .com/.net domain name globally, with approximately 126 million registrations out of 265 million domain registrations last year. However, during the last few years, the company hasn’t been able to grow its revenue from its frontline .com/.net domains at the same rate as the global domain registrations’ market.
We take a closer look at risks involved in the VeriSign business and the heightening competition from country code top-level domain names (ccTLDs) and new generic top-level domain names (gTLDs). We have a $56 Trefis price estimate for VeriSign, which is approximately 10% lower than the current market price of $62.
Country Code TLDs See Rapid Growth Due To Innovative Marketing Strategies
In 2012, ccTLD registrations grew 18.3% compared to 6.4% for gTLD registrations. This trajectory continued in 2013, with a 5% growth in gTLDs in Q3FY13, compared to a 14% growth in ccTLDs for the same quarter. One of the reason for the rapid growth in ccTLD registrations is the relaxation in registration requirements for country code domains. A policy change from the Chinese Government caused a slip in growth for the otherwise strong ccTLD domain registrations in 2010. However, the impact of this change in policy was temporary and growth from the Chinese region resumed the following year, supported by the continuing boom in the Chinese Internet and e-commerce space. Last year, China was ranked third globally in the number of country code domains registered in 2012, behind the leader Germany.
Another important parameter driving businesses to choose ccTLDs over gTLDs is the free domain business model of the Tokelau, operating the .tk domain. Users or businesses are given access to register up to three domain names free of charge pertinent to certain requirements regarding their usage. This particular feature has boosted .tk domain registrations between 2010-2012, which gained market share from 2% in 2010 to 5% by 2012. Despite its small contribution to the global domain registration market at present, the business model of Tokelau could disrupt the business models of established players as small enterprises begin migrating to the free business model. The infographic shown below indicates the market share progression for various domain names between 2000-2012.
Given that ccTLDs are growing at thrice the pace of their .com/.net counterparts, and that the number of domain registrations are relatively comparable (at 120 million for ccTLD globally vs. 126 million for .com & .net for VeriSign) , ccTLDs could pose a significant downside risk to VeriSign’s present market share of 48% in the domain registration business in the future. Additionally, various agreements regarding domain pricing held in place by the U.S. Department of Commerce (DoC) and the Internet Corporation for Assigned Numbers and Names (ICANN) limit the upside potential for revenues through higher price points for VeriSign and other domain registrars.
Going forward, we estimate VeriSign’s market share to gradually decline as a result of greater adoption of ccTLDs and new generic TLDs, which is the reason for our discounted valuation for the stock. VeriSign bid for non-Latin equivalents of its .com and .net domains, and a win on these bids should lead to the opening of additional streams of revenue and support a higher valuation for the stock.