A telecom 'plumber' tries to expand
Can NeuStar become as essential to the Net as it is to phones?
NEW YORK (Fortune) -- Cisco CEO John Chambers likes to talk about his company as the Internet's "plumber" - the company that provides the gear and services on which the world's data services run.
By that definition, tech company NeuStar (NSR) is a plumber of the telecom world: Practically the entire North American telecom system relies on its clearinghouse services in order to complete voice telephone calls.
"The industry has made us essential," NeuStar CEO Jeff Ganek said in a recent interview. "You can't make a phone call without touching our database." NeuStar (the "neu," Ganek says, is short for "neutral") basically operates a big directory of phone numbers that helps direct a call to the correct telephone company central office where the recipient works or resides.
The company, based in Sterling, Va., provides other critical services to the phone industry. It administers area codes, and helps assign phone numbers to competitive carriers. Mundane stuff, but someone has to be the plumber, right?
Of course, NeuStar is nowhere close to Cisco (CSCO, Fortune 500) in size or scope: Its market capitalization is about $1.25 billion, and annual sales last year totaled $489 million. (Cisco pulls more than $39 billion a year in sales, and its market value is about $83 billion.)
But NeuStar has Cisco-like aspirations, at least when it comes to becoming a plumber for the Internet. Specifically, it would like to provide some of the same clearinghouse-like services for the 'Net as it does for telecom.
"The essence of our base business is a directory," Ganek says, likening that directory to a giant spreadsheet with phone numbers in one column and central-office addresses in another. NeuStar's technology makes sure the phone numbers and the addresses match up. "What's DNS?" he asks, referring to Domain Name System, the naming system for computers and services attached to the Internet. "It is the same thing, except in one column you have a URL [uniform resource locator] and in another you have the IP [Internet Protocol] address of the server we need to deliver that packet to."
NeuStar already provides domain-name registry service for URLs ending in ".biz," ".tel" and ".us," among others - companies or organizations that want a Web address ending in those suffixes need to register with NeuStar. As a result, roughly a quarter of the world's Internet transactions pass through one of NeuStar's databases. And the company has branched into other data-management services, helping more than 3,500 Internet companies and e-tailers more efficiently direct Web traffic.
To further its goal of increasing its Internet-related businesses, NeuStar recently renegotiated contracts in its core telecom business, restructuring its agreements from a variable-priced model to a fixed-fee system that guarantees NeuStar small price increases each year. The move limits NeuStar's upside from the telecom-plumbing business. But Ganek says the new model gives NeuStar the financial footing to accelerate its move into more Internet-related services. Indeed, the new contract encourages NeuStar's telecom customers to contribute more Internet Protocol data to NeuStar's database, as some IP services are included in the price of the renegotiated contracts.
Analysts seem to think NeuStar's plan is a smart one: "We like the strategy, while acknowledging the need to marry it with strong execution, notably in the business development function," ThinkEquity analyst Eric Kainer wrote in a Feb. 11 report.
Of course, NeuStar faces tough competition as it pushes into the Internet. Unlike the telecom world, where NeuStar has nearly 100% market share as a clearinghouse for calls, the Web world is much more diverse in its suppliers - today no one company provides domain-name registry and other database services for the entire population of telephone companies, ISPs, e-tailers and others who have domain names. Competitors today include domain-name and hosting companies such as Network Solutions, but Ganek acknowledges that some of the biggest players in computing, including IBM (IBM, Fortune 500), HP (HPQ, Fortune 500), Telcordia and others may want a piece of the action.
"NeuStar's competitive advantage is our existing community of users, which is bigger than anyone else's community," says Ganek. Sounds like NeuStar has a head start; now it must figure out a way to keep it.