FOOL PLATE SPECIAL
An Investment Opinion
Network Solutions Jumps Another "Hurdle"?

By Dave Marino-Nachison (TMF Braden)
May 8, 2000

Though partisanship divides the debate over the long-term future of its domain name business, investors would be hard-pressed to point to an immediate threat to Network Solutions' (Nasdaq: NSOL) cash flows since the company lost its monopoly on the racket about a year ago.

That point was emphasized this morning as the company announcing a "multi-year, multi-million dollar" marketing alliance with NOW 50 component America Online (NYSE: AOL). Though details of the deal were vague, the companies' press release pretty much reads like a typical AOL pay-for-placement deal, in which AOL, CompuServe and Web users will get an "unparalleled environment" to access Network Solutions' (NSI) registration services, as well as its Image Cafe website "superstore" and idNames country-code registration services.

AOL will also promote a number of Internet security software company VeriSign's (Nasdaq: VRSN) services on its business channel, notable since VeriSign agreed to buy NSI in early March.

The financial importance of today's news to NSI's business is perhaps debatable. I haven't seen a study of the effectiveness of marketing partnerships with AOL (would love to, if anybody has one), though anecdotal evidence unsurprisingly suggests best-of-breed clients have had better success selling on the Rule Breaker's webspace than have the Internet's smaller hopefuls.

What isn't debatable is that the deal effectively removes yet another of the potential roadblocks foreseen by company naysayers a year ago -- the entry of AOL and its now 26 million global users into the fray. Instead of offering such services itself, AOL will simply take NSI's money and let the industry's big baddie into its sales channel.

AOL was, for some time, rumored to be interested in buying NSI. The company was also recently chosen to host two of NSI's servers.

The NSI bear might interpret this deal to mean that though AOL was given the government OK to get into the registration business, it didn't see the opportunity as creating enough long-term value to make such a foray worthwhile. Some in the domain name business -- particularly those who run upstart businesses that seek a foothold in the industry -- are challenging NSI on price points and claim registrations might end up a free commodity.

It's a point worth considering for NSI investors. Working in the company's favor, though, is a powerful balance sheet (NSI and VeriSign sat on a combined $270 million in cash and equivalents at the end of 1999) and enviable business positioning and scale gained through today's announcement and the planned VeriSign merger. That may give the combined businesses the financial wherewithal to adapt to or even stave off any sea changes in the industry and emerge in a position of strength.

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