Can VeriSign Maintain Its Market Leadership In The Coming Years?

VeriSign (NASDAQ:VRSN), a leader in the Domain Name market (47% market share), regained its growth momentum in Q3 2014 after a disappointing performance in the first half of the year. The company saw the highest third quarter gross additions of 8.7 million to date, in Q3 2014. Some of the primary factors propelling this growth were:

• One of VeriSign’s prominent U.S. registrars concentrating on customer acquisition and acquiring domain names through discounts.
• China’s continued healthy performance which acted as a driver for international growth.

VeriSign is the authoritative registry service provider for all .com and .net gTLDs (Generic Top-Level Domains), as well as the sole registry service provider for gTLDs like .cc, .tv, .gov, .jobs, .edu and .name. The company has reached a matured stage in the industry and is currently seeing a saturation in the .com domain and intense competition from other gTLDs, especially ccTLDs (country code top-level domain names).

VeriSign’s .com business has limited capacity to grow any further. The .net zone growth has been flat so far for 2014. At the end of September 2014, the total base of active registered domain names in .com and .net was 130 million, consisting of 114.9 million for .com and 15.1 million names for .net.

A major factor adversely impacting the .net growth was introduction of a new gTLD program which gained around 2.8 million registrations until now. Additionally, there is confusion involving the domain names for the new gTLDs, and .net is being adversely impacted by that as well. Conversely, .com being a well established brand has created a niche in the market which is comparatively more resilient to competition, than the .net brand. However, the .com domain name has become increasingly saturated in recent years, causing limits to new additions. In the second quarter, 1.15 million net names were added to the domain name base after processing 8.7 million new gross registrations.

Another factor impacting VeriSign’s growth is the rising popularity of .ccTLD domain registrations in non-US markets. The .ccTLD is being increasingly accepted by companies due to the favorable government policies regarding their adoptions. The ccTLDs can only be used by countries and territories. An increasing number of businesses, especially SMEs, are migrating to this domain because of government policies intended to encourage their adoption.  These include  a registration requirement relaxation, free domain names subject to specific usages, and so on. In its Q1’14 Domain Name Industry Brief , VeriSign reported that .ccTLD registrations have grown at more than thrice the growth rate of the .com and .net domain names.

Our Trefis price estimate of $59.61 for VeriSign is almost in line with the market price .

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Is Price Hike A Sustainable Option?

In Q3 2014, VeriSign’s .net brand witnessed yet another flat quarter and the demand might further slow down with the hike in prices from $6.18 to $6.79 scheduled for February 2015. The company is trying to make up for the lack of volume growth in the .net domain, with an increase in price to generate more revenue. However, the plan might not be sustainable in the long run. Not only will it decelerate the .net demand even further but with the increased influx of competition, the existing users might decide to switch loyalties.

A survey was recently conducted by Research Now (on behalf of the Domain Name Association) to understand receptiveness towards new domain name extensions. The research included 7 countries, namely, Australia, China, India, Russia, Turkey, UK and US. It showed a receptiveness towards new domain name additions, especially in developing countries with high internet penetration, like India and China. The choices offered were .com, .ccTLD, and new gTLD options. The results revealed preference towards the first two. However, the survey also indicated a willingness to trust new gTLDs with industry associated words, such as, ‘worldco.international’. ^[1]. Hence, the confusion regarding new gTLDs might be alleviated in the future and the new gTLDs might capture a significant portion of the market putting VeriSign’s market dominance at risk.

Way Forward?

In our opinion, VeriSign needs to partner with registrars committed towards increasing awareness for the .net brand, especially in the developing countries, where the scope for growth is high with huge populations and rising internet penetration. Marketing is imperative in such a competitive market space, where the gTLD market crossed 3 millions recently. ^[1]

VeriSign also needs to build up the .net brand to be as strong as .com. The .com brand has been providing uninterrupted DNS (Domain Name System) service (100% uptime) for over 17 years. .net needs to improve services to match such standards.

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1. Research suggests consumers are ready to embrace new gLTDs, World Trademark Review, October 2014 [↩] [↩]