Verisign Enjoys Higher Domain Pricing Under Lucrative Registry Agreements  

Equity Analyst

Emma Williams

Verisign provides registry services for several top-level domains, or TLDs, and infrastructure essential to the functioning of the internet. Verisign plays a vital role in supporting the Domain Name System, or DNS, which is akin to a massive address book that matches human friendly domain names to the accompanying numbers-based Internet Protocol, or IP, address. This allows an end user to browse the internet and access requested content via a network of interconnected servers. The company operates software and infrastructure globally to support the translation of domain names to IP addresses for its assigned domains, including managing zone files and registration and policies for the specified domain. Verisign also provides root zone maintenance services, operates two of the world’s 13 roots servers that are foundational to the DNS, and manages a shared registration system that allows registrars to query the availability of and manage second level domains.

Verisign has exclusive registry rights for two of the world’s most popular TLDs, .com and .net, under renewable contracts with the Internet Corporation for Assigned Names and Numbers, or ICANN. The lucrative contracts run for six years and have a presumptive right of renewal provided Verisign meets its contractual obligations. The .com and .net contracts are up for renewal in 2024 and 2029, respectively. Per the current contract terms, Verisign may raise .com pricing by up to 7% per year for the last four years of the contract and .net by up to 10% per year. Verisign currently charges $9.59 per year for a new or renewed .com domain and $9.92 for .net domain. While we anticipate Verisign will maximize price increases for .com within the limits of the contract, we expect the company can still generate attractive returns in the event of tighter pricing controls.

We expect Verisign will continue to meet its contractual obligations and for the registry agreements to renew into perpetuity, underpinning our wide-moat rating. The company has provided uninterrupted DNS services for over 26 years and continues to invest in infrastructure and cybersecurity measures to mitigate the risk of service disruptions.

Business Strategy & Outlook

Verisign has garnered a wide economic moat underpinned by intangible assets in the form of exclusive six-year registry agreements with ICANN and the brand power of the associated domains. The contractual relationship with ICANN essentially provides Verisign with a monopoly position to register websites with .com and .net top-level domains with fixed pricing terms. The United States Department of Commerce provides oversight of the .com registry rights through a cooperative agreement with Verisign that operates alongside the ICANN contract. The key terms of this agreement relate to .com pricing limits and restrictions on Verisign’s ability to vertically integrate for .com domain registrations. The ICANN contracts have a presumptive right of renewal, meaning that they instantly renew provided the company meets its contractual obligations that include paying fees to ICAAN, operating critical infrastructure, and meeting certain service level agreements such as providing uninterrupted service, which Verisign has maintained for over 26 years. We expect Verisign will continue to meet its contractual requirements and for the contracts to renew in perpetuity, supporting the company’s ability to earn excess returns on capital for at least the next 20 years. 

There are three key participants in the domain name registration process: registries, registrars, and registrants. Verisign is a registry that acts as a wholesaler managing registrations, policies, and a database on certain TLDs. Registries work with registrars that are the commercial partners that sell domain names to the public. Lastly, registrants are individuals or businesses that purchase domain names and operate websites. 

The presumptive right of renewal clause underpins our confidence in Verisign’s ability to earn excess economic profits for at least the next 20 years. This clause implies that provided Verisign upholds its contractual obligations, the registry rights will not go up for auction to competing registries such as Radix or Identity Digital and Verisign can automatically renew the contract for the next six-year term. Verisign has provided uninterrupted DNS services for over 26 years and continues to invest in secure data centers, high-speed servers, security infrastructure, and 24-hour customer support to maintain service levels. In the unlikely event that Verisign failed to meet its contractual obligations and forfeited its presumptive rights of renewal, the contract would go to auction, and Verisign would be permitted to bid again to regain the registry rights. 

In the absence of a material unresolved breach or a major regulatory action, we view it as highly unlikely that Verisign will lose these contracts given the presumptive right of renewal clause, or that ICANN or the DoC would attempt to alter the contracts to be economically unattractive. Verisign has a long-standing record of providing reliable services and enhancing the stability and security of the critical global internet infrastructure. The company requires a reasonable return to continue to do so and faces rising costs to mitigate against increasingly sophisticated cybersecurity threats. We see little incentive for ICANN to incite a change of registry operators given the potential for severe disruption to the public and Verisign’s stellar reputation. Further, the incumbent presumptive right of renewal clause encourages Verisign to make long-term investments in software and infrastructure to support a stable and secure internet ecosystem to the benefit of civil society. Verisign’s competitors may argue that they can provide similar registry services for a lower cost, however, we expect the potential operational disruptions and threat to the security and stability of the internet caused by changing registry operators to outweigh the benefits of lower costs per end user, which is relatively immaterial to begin with. 

The most recent amendment to the cooperative agreement between Verisign and the DoC in 2018 effectively created evergreen pricing terms for the .com domain that can only be altered with mutual agreement between both parties, reducing the risk of tighter pricing controls in the future. The amendment also reduced the oversight and approval responsibilities of the DoC, which will make future .com contract renewals with ICANN less burdensome for Verisign. 

However, we acknowledge there is still the risk of changes to pricing terms over the next 20 years, including potential price freezes or a reduction in allowed price increases depending on the prevailing administration, anti-competitive action, or the economic environment. For example, the .com agreements renewed in 2012 under the Obama administration included a price freeze for the full six-year term, whereas the 2018 contract renewal under the Trump administration lifted the price controls. Additionally, Verisign voluntarily extended the price freeze in 2020 amid the COVID-19 pandemic. While we view the cost per domain for an end user as relatively immaterial (about $9 per year wholesale for a .com domain, plus the retail markup), there is potential that Verisign’s highly profitable business model and effectively monopoly status over .com and .net may come under scrutiny, leading to greater pricing control. However, Verisign generated attractive ROICs and remained highly profitable during the term of the 2012 contract despite a price freeze, growing operating margins from 55% in 2013 to 65% in 2020. Therefore, we are comfortable that even in the event of more stringent price controls, Verisign can comfortably generate excess returns over the next 20 years, supporting a wide moat rating. 

We expect Verisign to benefit from the brand power of the widely recognizable and trusted domain names of .com, and to a lesser extent .net, and this brand power will support the company’s ability to maintain its dominant market position over the next decade despite price hikes. Further, the small absolute price increases are unlikely to be a catalyst for an end user to reassess their domain name contract in isolation given the necessity of maintaining an online presence and the potential disruption to end users. As of March 2023, .com and .net are the first and fourth most popular domain names globally, boasting market shares of about 46% and 4% of the total TLD market (excluding .tk), respectively. From 2013 onward, ICANN released hundreds of new generic TLDs, including .beer and .farm, which we expect hindered .com’s market share temporarily. We believe the recovery in market share from 2016 speaks to the appeal of the .com brand, even among more choices and soon-to-be higher pricing.

Wide

Economic Moat

VeriSign

VeriSign, Inc. provides domain name registry services and Internet infrastructure, which enables Internet navigation for many of the world's most recognized domain names. It enables the security, stability, and resiliency of key Internet infrastructure and services, including providing root zone maintainer services. The company was founded by D. James Bidzos on April 12, 1995, and is headquartered in Reston, VA.

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VeriSign, Inc. provides domain name registry services and Internet infrastructure, which enables Internet navigation for many of the world's most recognized domain names. It enables the security, stability, and resiliency of key Internet infrastructure and services, including providing root zone maintainer services. The company was founded by D. James Bidzos in 1995, and is headquartered in Reston, VA.

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