Prudential Opens Wounds as It Talks Up NSI Stock

Computergram International, April 8, 1999

By Nick Patience

The stock cheerleaders at Prudential Securities Inc leapt to the defense of Network Solutions Inc, issuing a research note yesterday and giving the company a 12-month price target of $188 and a strong buy rating. In late March NSI was targeted by notorious Wall Street short seller Asensio & Co Inc, which has so far had limited effect on NSI's share price. However, Prudential sees fit to make some controversial remarks that will probably raise the temperature further as the domain name market readies itself for competition.

Asensio alleged that NSI would only be permitted to charge future registrars about $3 per name or less to register names in .com, .net and .org, rather than the $16 per name per year NSI suggested in a draft document. The current schedule calls for five test registrars to use NSI's shared registry system (SRS) to register names in the database that NSI controls system from April 26 through June 26. After that any company can apply to be accredited as a registrar by the non-profit Internet Corporation for Assigned Names and Numbers (ICANN) and use the SRS.

Prudential analysts Paul Merenbloom and Aydin Tuncer make no mention of that charge in their note, but do come out with some fairly contentious statements, which are presumably based upon recent meetings with senior NSI executives. NSI closed unchanged from Tuesday's close at $115.50, but rose as high as 126.71875 and fell to $109 at one point. The report was released yesterday morning while the market was open.

Prudential believes that deployment of the SRS will take 120 days or longer to deploy - that is, it is not likely to happen at least until around early August. At the end of last week NSI announced that it has now separated its back-end registry system from the registrar system and it will be up at nsiregistry.com pretty soon - and certainly before April 26 (04/06/99). Prudential predicts that NSI's monopoly will extend until at least the third quarter of this year "and possibly into the first part of 2000."

Prudential does a fairly good job pushing the stock, but at times it tries a little too hard. For example, Prudential notes that no agreements have been struck between NSI and the registrars yet. That's probably because ICANN will not announce the chosen five until April 21, so they are not likely to be signing deals with NSI until they have been accredited by ICANN, or at least not likely to be talking about it to analysts. After all, NSI wants to charge them a one-off payment of $10,000 each to use its SRS, which is not the kind of information potential registrars, many of which are small private companies, want disclosed.

Prudential also claims that "ICANN, to our best knowledge, has not yet been 'recognized' by NSOL [NSI's ticker symbol] as the official NewCo, and hence, no negotiations between NewCo and NSOL, as specified in the NSI/US agreement have begun." NewCo is the placeholder name given to the body chosen by the US government to oversee the transition from a system run by the US government to one coordinated by the private sector. The Department of Commerce recognized ICANN as that body in late November 1998 and its amended agreement with NSI signed in October 1998 states that NSI had to sign a contract with NewCo, which is now ICANN.

The longer that is delayed, the better it is for NSI's business as its monopoly, which was secured through a 1993 cooperative agreement, will have to be extended because no other company is in the position to take over both the registry and registrar functions with no interruption to service. Nobody at Prudential, NSI or ICANN was available for comment yesterday.

Prudential predicts that various factors, including the complexity of the process for creating a fair market, the obtaining of an international consensus for the development of the registrar business and the "sheer wealth potential effectively awarded to registrars will foster an environment of controversy, competition and confusion for the coming 12-18 months." Prudential says the polarization of views on this matter and various biases have led to "manipulation by both the press corps and investment community resulting in dramatic volatility in NSOL shares" and notes that "we do not expect the confusion to abate any time soon." This will surely only add to the confusion.