VeriSign's Troubles

The popular Electronic Frontier Foundation (EFF) charged Network Solutions with negligence as VeriSign reported a net loss for the year 2001.

by Michael Singer and Jim Wagner of internetnews.com [January 28, 2002]

The Electronic Frontier Foundation (EFF) says Network Solutions, Inc. (NSI) is responsible for the mismanagement of the Sex.com domain name.

"A court has ruled that NSI can screw up its monopoly on dot-com domain name management and face no consequence for its actions," says EFF Intellectual Property Attorney Robin Gross. "We hope the appellate court will recognize the danger in eliminating all accountability for this key component of Internet governance."

Gary Kremen, the owner of the domain name, says he hasn't seen a penny from his well-documented court exploits, which resulted in a $65 million settlement.

In 2000, a lower court ruled that NSI, a private company, which is the sole domain name registry for dot-com domain names, is immune from civil suit in cases where it negligently handled a domain name. Sex.com then appealed to the Ninth Circuit Court of Appeals, and EFF filed their brief.

VeriSign, which purchased Network Solutions in 2000, was not available for comment.

"And we don't expect them hear from them either," says Gross. "We filed this amicus during the briefing period. Next up is the oral arguments, but the judge in the case is not expected to rule on this for about three months."

As to the reason for EFF's involvement, Kremen and Gross say it's a matter of principal.

"We want to make sure that that NSI and other domain registrars don't do this in the future," says Gross. "These companies need to be held responsible."

"Everyone reasonably assumes the registrar will prevent poaching of domain names. It's time the law backed that up," says Kremen.

Kremen has yet to receive his settlement money primarily because the other party skipped town.

U.S. District Judge James Ware found Stephen Cohen liable for fraud and forgery in a five-year battle over the ownership of the Sex.com URL. The judge slammed Cohen with a bill for $40 million in compensation for lost profits and an additional $25 million in punitive damages.

Cohen has not been seen since and is presumed to be living somewhere in Mexico.

The parent company has not had a great year either. VeriSign, Inc. executives claimed 2001, the year that marked the start of a long and protracted recession, a success despite the fact that the company lost nearly a half-billion dollars in the fourth quarter of 2001.

A net loss of $401 million for the quarter is actually less than what many analysts expected. Last year at this time, executives spent their time explaining a $1.3 billion loss for the fourth quarter of 2000.

Wall Street had predicted the company to make only $281 million for 2001; VeriSign beat those expectations with $284 million.

At a conference to analysts and investors Thursday afternoon, Stratton Sclavos, VeriSign president and chief executive officer, said the company had met a majority of the financial and strategic objectives for the year.

"Revenues for the quarter and the year came in at the low end of our guidance range, but we were able to show sequential growth in each quarter," he said. "The year held many challenges but we believe they are mostly behind us."

The slowdown in the domain name market, reported by many news agencies in recent times, had an effect on VeriSign's bottom line. Domain names handled by the registry fell from 6.5 million in the third quarter to 6.2 million, which Sclavos said happened "just as the first major renewal cycle in the industry's history was set to kick off."

VeriSign, like AOL Time Warner, is such a large operation covering so many sectors in the high-tech industry, that it becomes a sector in its own right. As such, it looks for new acquisitions to spur revenue growth for the company.

Despite the fact it holds a dominant position in the domain name registry space (in addition to managing .com, .net and .org, they are the registry for country domains .tv and .cc) and registrar business (through its ownership of Network Solutions, Inc.), in 2001 the company acquired Illuminet and H.O. Systems.

Illuminet is an independent telephone directory for local exchange carriers (LECs) and wireless telephone companies. H.O. Systems is a billing and customer care company catering to the wireless phone carriers.

The acquisition of these two organizations certainly added to losses in 2001, but officials expect to see a return on their investment in 2002, though the revenues will be small as much of the year will be spent on research and development to "bridge the gap between voice and data services," Sclavos said.

Sclavos said that while there are no plans for future acquisitions for 2002, "if the opportunity presents itself, we'll pursue them."

Dana Evans, VeriSign chief financial officer, said the company would post conservative predictions on its revenue growth for the first quarter of 2002 and its year-end goals. She predicted revenues of $340-$350 million in the first quarter with a 25 percent per quarter pro forma growth rate, totalling about $1.5 billion for 2002.

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