[Lecture Notes by Prof Yuen and possibly others 2000-2001] VERISIGN The Man Who Bought the InternetStratton Sclavos increasingly runs the Web. His company, Verisign, has erected cyberspace's largest toll booth and is now poised to extract a usage fee from just about everyone. FORTUNE By Fred Vogelstein [spacer.gif] 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.