Court Loss Could Knock 20% off VeriSign’s Stock

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VeriSign (NASDAQ:VRSN), which holds exclusive rights to register .com and .net Internet domain names, is on the verge of losing an antitrust lawsuit filed by Coalition For ICANN Transparency (CFIT), a non-profit organization that represents website owners.

The CFIT case alleges that VeriSign violated U.S. competition law, and seeks to end VeriSign’s monopoly in the domain names market.

A CFIT victory would attract new players to the market, creating competition and forcing domain name prices down. While good for domain name owners, this scenario would pummel VeriSign’s stock value.  Our analysis follows below.

VeriSign versus CFIT

VeriSign controls all .com and .net domain name registries under a contract with the Internet Corporation for Assigned Names and Numbers (ICANN), which acts on behalf of the U.S. Commerce Department. VeriSign collects a fixed fee each time individuals or businesses register a new .com or .net domain name, or renew the registration of an existing domain name.

The CFIT suit alleges that VeriSign violated antitrust laws by abusing its monopoly position to charge artificially high prices for domain names. As a result, the suit claims, VeriSign’s deal with ICANN violates U.S. competition law.

Downside potential for VeriSign

We estimate that the .com and .net registry business contributes around 55% of $36 Trefis price estimate for VeriSign’s stock. VeriSign’s average fee for domain name registration has increased from around $5.20 in 2006 to $6.40 in 2009. If VeriSign maintains its monopoly position, we would expect the average registration fee to reach $8.50 by the end of the Trefis forecast period.

You can modify the chart below to see how changes in the average registration fee impact VeriSign’s stock price:

However, if VeriSign loses the case against the CFIT, competitors will enter the market and drive registration prices down.

There could be a downside of around 20% to the $36 Trefis price estimate for VeriSign’s stock if domain registration prices remain constant rather than increasing as we forecast.

You can see the complete $36 Trefis Price estimate for VeriSign’s stock here.

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