Short Seller Asensio Hits Back at NSI Stock

Computergram International, April 9, 1999

By Nick Patience The day after Prudential Securities upgraded Network Solutions Inc's stock to a strong buy and issued a very positive research note about the Herndon, Virginia-based company, short seller Asensio & Co Inc hit back with two more counter-opinions against the company's stock. One calls Prudential's claims "false" and "absurd" and the other criticizes NSI's business practices, highlighting its ongoing negotiations with the Department of Commerce (DoC) over the price NSI will be permitted to charge new domain name registrars.

Asensio president Manuel Asensio called Prudential's claims "fraudulent," when speaking to us yesterday. Later this month five companies are scheduled to begin a two- month test phase, using NSI's shared registration system (SRS) to register domain names in the .com, .net and .org name spaces. Since it won a cooperative agreement from the US government in 1993, NSI has had the monopoly on both registering such names (the registrar business) and control of the database of all domain names (the registry). The registry monopoly will at least extend to the end of NSI's current contract, which expires on September 30, 2000, but competition will start in the registrar business this year. Prudential said earlier this week that it does not believe the test phase will start until around August and full competition until at least the third quarter. Asensio, which has a $30 short price target on the stock (though Manuel Asensio would not give a timeframe for it yesterday), takes the opposite view, believing NSI is actually in danger of having its registry contract terminated before September 2000 by the DoC. There's not much new or particularly surprising in Asensio's latest note. The New York-based company, which issued its first note two weeks ago, now claims the DoC has rejected NSI's proposal to charge registrars $16 per name, per year and that the DoC has solicited suggestions from others in the community as to how much it costs to maintain the registry, which is the purpose of the charge - it would be a surprise if the DoC had not solicited opinions, quite frankly. Asensio says the proposals include one to charge only $2 per name, including a profit margin - previously Asensio said the DoC was looking at $3 per name. NSI will be permitted to add a reasonable level of profit on top of its costs. The problem is that all these negotiations are taking place behind firmly closed doors and there is no way of knowing what is really going on, although we hear numerous rumors both in favor of NSI and against it. Manuel Asensio acknowledged to us that it is difficult to know what is being said with any certainty. Judging by the behavior of the US government and NSI over the past few years, we think NSI will be knocked down from $16 per name share, in part due to the number of companies who claim that they can run it for less than $5 per name. Whether it gets as low as $2 or $3 per name depends on NSI's negotiating skills and how earnest the DoC is in insuring a level playing field for future competition, while maintaining the stability of the internet. It should be mentioned that veteran Washington federal contractor Science Applications International Corp, which in January reduced its holding in NSI from roughly 75% to about 45%, has a lot of influence in Washington. Prudential's note omitted any mention of this per-name fee, which is fairly crucial to NSI's future. It concentrated instead on the delays in opening up the market to competition and NSI's relationship with the Internet Corporation for Assigned Names and Numbers (ICANN), the non-profit body chosen by the DoC to oversee the running on the domain name system and which will choose the registrars to participate in the test phase and accredit them to participate in the fully competitive market. Asensio says the claim within Prudential's' report that NSI has not yet "recognized" ICANN as the official body, is "purposely misleading," according to Asensio, adding that NSI "has no authority to refuse to recognize ICANN." There is another per name fee to throw into the pot, this one levied by ICANN on the new registrars. ICANN says it will not be more than $1 per name, but it is likely to be close to that. The money that brings in will likely be ICANN's main source of funding in the long term and could enable it to run its own registry by the time NSI's contract is up, or for it to establish some sort of cooperative registry, akin to the Nominet registry in the UK. Separately, NSI announced that it has been added to the latest Forbes 500 list of America's leading companies and made the top five lists in terms of market value and stock price growth, which are obviously inextricably linked. Its stock price in 1998 grew by around 767% and its stock by 726%. All the top five, predictably enough, are internet companies. NSI's shares closed down $3.625, or 3.1% at $111.875 on lower than average volume.