|by Flemming Funch|
I hate monopolies. I have a lot of not very nice things to say about companies or governments that try to own and control the Internet, for example. Now, one of the companies that have been most successful in that regard is not Microsoft, but Verisign. I've never liked that company, but have found it hard to avoid as they methodically would buy up any competition. I was using Thawte for secure digital certificates, as they were the only competitor to Verisign, and much cheaper, but Verisign bought the company, and raised the prices instantly. I was using CyberCash for online credit card processing, but Verisign bought them. Verisign bought Network Solutions, who used to be the domain name monopoly, and their service dropped to even lower levels than before. I believe I've finally gotten all my domains trasferred elsewhere. Anyway, here is an article from business2.com about Stratton Sclavos who runs and owns most of Verisign.
Stratton Sclavos increasingly runs the Web. His company, Verisign, has erected cyberspace's largest toll booth and is now poised
By Fred Vogelstein, June 2001 Issue
A goofy, eight-minute animation on the Web depicts a certain businessman as the devil, hell-bent on taking over the Internet. No, it's not Bill Gates or Steve Case but somebody called Stratton Sclavos. If you visit www.paradigm.nu/icann, you'll see Sclavos' face superimposed on a cartoon figure, horns jutting from his head; he swaggers around the screen, pitchfork in hand, talking about all the money he's going to make and uttering his signature line: "Muhahahahahahahahaha." The animation is becoming a cult classic for the diehard tech set. Its creator, Kendall Dawson, a Massachusetts software developer, says it's been viewed nearly 35,000 times since he posted it on April 28. Hollywood hasn't called, but someone from Mexico has. "He wants to help me translate the thing into Spanish," Dawson says.
So who is Stratton Sclavos, and why do so many Netheads think he's the archfiend? The answer is that Sclavos and his company, Verisign, increasingly run the Internet. Think we're exaggerating? Consider this: Virtually every time you surf the Net, you run into one of his servers. Has your Website failed or been hacked recently? There's a good chance his company knew about the problem before you did. Do you have a domain name? He probably sold it to you. Bought anything online lately? He owns the business of making sure that no one steals your credit card number. And once you made your purchase, his company was probably responsible for aggregating that payment with other transactions and funneling them to the right banks and payment processors.
It's all part of Sclavos' master plan to build what he calls cyberspace's "first utility"--a company that handles all the boring but complicated and necessary details of life in the Internet Age. In effect, Sclavos has erected the Web's largest toll booth; and now, as more and more of the world's business migrates online, he is poised to extract a usage fee from just about everyone. Verisign is already the center of a monstrous amount of activity. Its servers deal with two billion domain-name searches a day, protect some $360 billion in annual Net commerce, and handle $500 million in credit card transactions a quarter. The electronic directions to every Website in the world with an address that ends in .com, .org, or .net--roughly 30 million in all--sit in Verisign's computers under government contract. The company gets $6 a year for each address stored in its database. It also owns the code for nearly every secure credit card transaction over a Netscape or Internet Explorer browser. That's the software that makes the little padlock appear at the bottom of a browser, assuring consumers that they aren't dealing with a fraudulent Website and that their transaction is secure. Companies like Amazon.com pay up to $900 for every server that runs Verisign's authentication software.
On top of all that, Verisign's data centers are becoming the most trusted for the online operations of more than 3,000 corporations, including Microsoft, First Union Bank, Bank of America, Texas Instruments, Ford, and GE. Built to the same security specs as missile silos, the data centers store a corporation's digital signature "pen," which allows legal documents to be signed and exchanged online. The pens are small memory cards that generate unique strings of characters; Verisign makes sure that they work and that they don't fall into the wrong hands.
If this sounds like a good business, well, you're darned right. For all the bloviating about how Amazon.com or Yahoo or B2B exchanges were going to change the world, right now it looks as if their impact is going to be marginal compared with Verisign's. To begin with, its operations seem practically recession-proof. The economy may be slowing and firms may be cutting back on technology spending, but corporate e-commerce initiatives, and therefore demand for domain names and Website authentication and security, continue to grow at near-double-digit levels. Think about it: Businesses can't put up a Website without a domain name, and can't conduct e-commerce without security. "No one is close to doing what Sclavos is doing," says Mark Fernandes, an analyst at Merrill Lynch.
So while the company's high-tech brethren announced tire-screeching slowdowns in the first quarter, Verisign's operating revenues were up 8% from last year's fourth quarter, to $213 million. Operating profits rose 14%, to $27 million. Domain-name growth slowed, but that was offset by a 7% jump in revenue per customer, a much more important metric for Verisign's business in the long term. Its deferred revenues--nonrefundable cash in the bank for services that are paid in advance but not yet rendered--now total $542 million. That means Verisign could close its doors to new business tomorrow and still generate revenues and profits for 24 months. Sure, Verisign's shares got whacked last year along with everybody else's, but they've doubled since April 3, to about $54, and for the past two years they've bested the Nasdaq and the S&P 500 by wide margins. Analysts who haven't had a lot to get excited about lately predict the stock will hit $100 a share in the next year or so.
How in the world did Sclavos ever amass so much power? Basically, he bought it. Sclavos, 39, spent five years building Verisign into a profitable albeit obscure e-commerce security business. Then last year, with the stock in the stratosphere, he used it as currency to buy Network Solutions, the company that had the government-sanctioned monopoly to manage .com, .net, and .org domain names. NSI had won the contract in 1992, when the National Science Foundation, the independent agency then in charge of the Internet, decided the Web was growing too fast for it to manage.
The Internet, you'll recall, was conceived under the auspices of the Defense Department during the Cold War as a decentralized communications network that could withstand a nuclear attack. But by the mid-1980s, its operations had largely been co-opted by academia and were run through the NSF by a bunch of hotshot engineers at major universities. Their de facto leader was Internet pioneer Jon Postel, the bearded USC engineer who helped develop the domain-name address system in the early 1970s. Even when NSI took over the day-to-day operations of the Internet, Postel and his crew still controlled who got what domain name.
But Postel died in 1998, and things haven't been the same since. ICANN, as the industry-funded Internet Corp. for Assigned Names & Numbers is known, took up many of his oversight duties; last year, in the name of stability, ICANN allowed Verisign to take control under its and the Commerce Department's supervision. Before the merger with Verisign, NSI executives had agreed to split the company into two parts--the side that ran the .com, .net, and .org database, and the side that sold new domain names and renewed existing ones. The government and ICANN had urged the breakup out of concern that NSI might grow too powerful. But this May, Sclavos, arguing that a loophole in NSI's contract allowed him to split the company into two parts without relinquishing control of either, persuaded the government to let him keep both assets indefinitely. Hard-core Webheads, who believe the Internet should not be controlled by anyone, were livid.
But Sclavos hardly needed black magic to spot the NSI opportunity. He was on Network Solutions' board. He had used his access to understand its business, and he knew the company was looking for a merger partner. "What I'd see in board meetings was that [NSI] had an incredible ability to acquire customers," Sclavos says. "They were the on-ramp to the Internet." There were other interested parties; insiders say that Inktomi, Infospace, and others were gearing up to bid. But Sclavos' stock price was over $200 a share at the time, so he bid preemptively, offering a stunning $21 billion of stock.
Many on Wall Street have accused him of overpaying for NSI, which is one reason Verisign's stock fell so hard last year. Sclavos disagrees: "We gave up 40% of the company to get an asset that represented 60% of our revenues and profits. That was true then, and it's also true now."
Indeed, the only downside of the deal so far is that it makes Verisign's financial results look bad. For complicated accounting reasons, the NSI purchase is forcing Verisign to write off $21 billion in goodwill. As a result, the firm will report huge net losses for the next four years, even though its operating income is expected to surge.
But since Verisign's mid-May deal with the Commerce Department, investors have become increasingly bullish. That's because the deal blows the biggest cloud of uncertainty--how long Verisign will be allowed run the .com database--out to sea. Indeed, when it became clear that the merger would be approved, Verisign's shares rose 20% in three days. As part of the agreement, the firm has to give up the much smaller .org and .net databases by next year and 2005, respectively. But it gets what it really wanted--the .com database--and avoids having to split NSI in two.
Competitors? They don't really exist. No one yet has the bundle of services that Verisign has. It already dominates the online-authentication market. Entrust and Baltimore Technologies once were considered threats, but they chose to sell authentication as software, not as a service. Now they are playing catch-up.
In the payment-services business, banks that were once Verisign's biggest potential rivals are now some of its best customers. Why? It hands them business, including payment-processing volume and new account leads. Moreover, banks have discovered that building and running your own secure data center is an expensive and complicated undertaking. "After we spent a year or two getting a data center up and running, who would use it besides us?" asks Tony Suarez, who runs digital security for First Union Bank. "Our competitor Bank of America certainly wouldn't." Even in the increasingly competitive business of selling domain names, Verisign has a big edge. It has already sold half the domains out there, giving the company an unrivaled customer list.
Microsoft remains the only real threat. Its .NET and Hailstorm initiatives are working to give consumers an end-to-end Internet experience too. But right now the talk out of Redmond is about partnerships with Verisign, not competition. "I don't think we could duplicate what Verisign has put together," says Sanjay Parthasarathy, Microsoft's vice president of business development.
Though most were too busy celebrating and then fretting about the stock market to know it last year, it's now clear that Verisign's purchase of NSI was one of the transforming events in Internet history--not to mention Sclavos' own professional life. Before the deal, he and Verisign were virtual unknowns. Among Silicon Valley insiders he had a reputation as a tireless, unflappable executive with a rare gift for mastering the intricacies of complicated technology and explaining its importance to laymen. He had also stood out for his refusal to adopt the industry's schlumpy dress code, wearing a tie to work most days. But few outside the Valley had ever heard of him, because he spent much of the 1990s working for a string of go-nowhere businesses. He was head of sales and marketing at both Taligent and GO in the early 1990s. GO, which was spun out of Apple and then backed by it and IBM, tried to develop a pen-based computing system. It burned through $75 million, then a Silicon Valley record, before flaming out in 1994. Taligent, another Apple-and IBM-backed venture, tried to sell Java-like develop-ment software to run exclusively in Apple's Macintosh operating system and IBM's OS2. But the product wouldn't work with Microsoft Windows, so it bombed.
Sclavos helped start Verisign, in Mountain View, Calif., six years ago with encryption pioneer Jim Bidzos, who spun it out of his business, RSA Security. Bidzos needed a CEO and selected Sclavos after a recruiter introduced the two. But in the long term, the two knew they were fighting a losing battle. The cost of acquiring customers was huge. Salesmen had to solicit each piece of business, and most of their pitches "went over people's heads," Sclavos says. Even the tech savvy had a hard time understanding what the company did--authenticating Websites--and why that was important. Powerful voices like Morgan Stanley analyst Mary Meeker questioned Verisign's long-term outlook. "We downgraded the stock in the fall of 1999 because they didn't have an act 2 that would justify the valuation," she says today.
Buying NSI has changed all that. Now instead of having his salesmen cold-call with a hard-to-explain service, they can pitch an array of offerings--from simple domain names to high-end security and payment services--to customers the company already has a relationship with. Sclavos thinks that together these markets will grow to $50 billion a year in five to seven years, and that he will capture 30% of them. It's an audacious boast: It means Verisign will generate $15 billion in revenues by the end of the decade, up from $1 billion in revenues projected for this year, making it about as big as Cisco is now. But even if he gets halfway there, it's clear the online community will be worrying about Sclavos' pitchfork for years to come.