IP: The Man Who Bought the Internet

[David Farber <dave () farber net>]

> From: "RV Head" <4whp () home com>
> Subject: The Man Who Bought the Internet
> Date: Tue, 15 Jan 2002 23:44:00 -0500
>
> http://www.business2.com/articles/mag/0,1640,12301,FF.html
>
> The Man Who Bought The Internet
> 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.
>
> FEEDBACK: fvogelstein () fortunemail com

For archives see:
http://www.interesting-people.org/archives/interesting-people/