A new era in domain name economics?

As we enter an era of hundreds or even thousands of new top level domains, how will the industry evolve? The ICANN Working Group on vertical integration was one attempt to answer that question. In the course of its lively and extensive debates, the policy setting group confronted some fundamental issues about the organization of the domain name industry. Back in March the ICANN Board threatened to impose a draconian ban on any and all forms of vertical integration and cross ownership between registries and registrars if the group failed to reach consensus on a new policy. The working group (WG) will complete its work this week.

First, the bad news: the WG was not able to agree on a single, comprehensive new policy. It did, however, manage to reach consensus on one thing: that the Board’s threatened ban on cross ownership and vertical integration was not desirable. About five distinct reform proposals were developed. The WG conducted a poll about how much support there was in the 50+ person group for each proposal. In that poll, the Board’s Nairobi resolution, and its proposed implementation in version 4 of the draft applicant guidebook (DAGv4), was voted on along with the other proposals. The Nairobi resolution received not a single vote in its favor. While a significant minority (29%) said they could “live with” DAGv4, a two-thirds majority expressed outright opposition to it.

The poll results provide a fascinating glimpse into the political economy of the domain name registration business. Incumbents (Afilias, GoDaddy, some members of CORE) favored a continuation of the status quo. Their proposal, known by the acronym RACK, would force all new top level domain registries to use the same business model that is being used now. This would mean a functional and technical separation of domain name registrars and registries, equal access for registrars across all TLDs, and 15% limitations on cross-ownership. No exceptions would be allowed, not even for .brand TLDs. The RACK+ proposal had a small but significant core of supporters, most of them on the payroll of Afilias in one way or another. Eleven WG members (27%) favored it and another 4 WG members said they could “live with it,” meaning that the RACK proposal was acceptable to 37% of the group.

At the other end of the spectrum, a proposal that became known as “Free Trade,” initally proposed by At Large member Siva Muthusamy, would eliminate cross-ownership restrictions altogether while retaining registry-registrar separation. It would even allow registries to own a registrar that distributes its own TLD, although it would still have to offer equal access to other registrars, providing a substantial liberalization of the current ICANN regulations regarding registry-registrar relations. The Free Trade proposal garnered more support than RACK+, with 16 WG members (39%) favoring it, and another 4 WG members saying they could “live with it.” Thus, the overall acceptability rating of Free Trade was about half (49%) of the WG.

The JN2+ Proposal (name after its proponents Jeff Neuman and Jon Nevett) proposed to restrict Registry Operators and their affiliates from distributing names within their own TLD, but otherwise liberalized cross-ownership. For example, it would allow Neustar to own a registrar and enter the registrar business, but its registrar could not sell .biz or any other TLD controlled by Neustar. Like RACK+, JN2 contains limits cross-ownership among affailiated registrars and registries to 15% or less. Importantly, it allowed exceptions for single registrant TLDs, community TLDs and Orphan TLDs. For the first 18 months, restrictions apply towards back-end registry service providers (RSPs) that control policies, pricing or selection of registrars and resellers affiliated with the Registry Operator or RSP. After 18 months, these suppliers would be allowed to petition ICANN for a relaxation of those restrictions depending on a number of factors. The JN2 proposal was thus significantly more liberal than the RACK+ proposal. It also attracted stronger support. It was second in the number of supporters but more importantly, also had a large number of WG members who said they could “live with it.” JN2 thus had the highest “acceptability” ranking of all the proposals, with 25 WG members, or 61% of those polled, saying they favored it or could live with it.

The Competition Authority Model (CAM) was based in part on the economist reports (Salop and Wright) commissioned by ICANN. It would have allowed any and every business model, including full vertical integration or 100% cross-ownership, but these innovations would be reviewed by a special panel on the basis of market power and consumer protection implications, and referred to national antitrust and consumer protection agencies if issues arose. This proposal was the first choice of very few WG members (2). Its chief supporters were the two noncommercial WG members (including me) and Michael Palage. But another 12 WG members said they could live with it.

Essentially, CAM defined an exceptions process. Seemingly unpopular, as the WG confronted the possibility of the DAGv4 option being imposed a CAM-like exceptions process began to look more and more acceptable to a larger number of members. Indeed, when the question of “exceptions” to the general rule of no vertical integration was posed in the abstract, it obtained overwhelming support, nearing consensus. Twelve (12) WG members favored an exceptions process, 16 said they could live with it, meaning that over two-thirds of the polled members favored some kind of exceptions process.

The problem lay in the details regarding what would qualify for an exception. There was strong support among commercial and noncommercial users for what became known as a “Single Registrant, Single User” top level domain. This would include the .brand TLD, in which a single company or organization ran its own top level domain for its own employees and departments. There was also strong support for an exception for so-called “orphan” top level domains –TLDs that were ignored by registrars and failed to gain distribution channels. WG members favored letting these small TLDs vertically integrate or own their own registrar and distribute their own domain, though they differed on the terms and conditions. Another exception that had strong support was the linguistically oriented domain. Fears that TLDs oriented toward smaller linguistic groups might not find registrars capable of selling registrations using the language of the targeted community led many to support allowing such domains to vertically integrate.

What did all this work add up to? For the Board, the bottom line on vertical integration is clearer than it might seem. Despite the failure to reach consensus on a single alternate policy, the vertical integration working group has succeeded in conveying the message that there is consensus against the complete ban on cross-ownership and vertical integration proposed in DAGv4. Moreover, although vested interest groups prevented the working group from agreeing on policy specifics, the more liberal options had more support than the more restrictive, status quo-oriented ones, and almost everyone agrees that there should be room for exceptions. The surprising level of support for the free trade option; the intense interest in the User House in single registrant, single user TLDs; the widespread agreement on the need for permitting small linguistic and community groups to run their own TLDs without becoming ensnared in a business model designed for .com – all these signs and more point toward a more open market structure in the years ahead. How quickly the slow and politicized ICANN Board can get us there remains to be seen, of course.

Proposals can be found here: https://st.icann.org/vert-integration-pdp/index.cgi?vertical_integration_pdp

Poll results:

Ranked by # supporters
1 Free Trade 16 39%
2 JN2 12 29%
3 RACK+ 11 27%
4 CAM3 2 5%
5 DAGv4 0 0%

Ranked by acceptability
1. JN2 25 61%
2. Free Trade 20 49%
3. RACK+ 15 41%
4. CAM3 14 37%
5. DAGv4 11 29%

Ranked by strength of opposition
1. DAGv4 27
2. CAM3 24
3. RACK+ 23
4. Free Trade 20
5. JN2 15


21 comments

  1. Anonymous

    Hi Milton,
    Is this based on the final poll results? It seems to vary in some places from that final poll.
    Richard Tindal

  2. Anonymous

    Thanks for the summary Milton
    It captures the current state of affairs very well

  3. Anonymous

    Excellent post thank you!
    Take away the market leaders from voting, then the obvious choice is free trade and adding exceptions.
    It is quite interesting that most have opposed the status quo and ICANN's current DAG4 proposal.
    A move in the right direction but still means nothing without the desired change. Where do you draw the line though? There will never be 100% consensus.
    Why not consult actual applicants as opposed to look into economic reports and concepts? More useful and relevant information can be derived from prospective applicants.

  4. Anonymous

    Milton,
    Good summary. I noticed you did point out that a number of existing registries favored limitations when talking about the more restrictive proposals, you neglected to state that most of the support for the so-called “Free Trade” proposal came from existing registrars wanting to get into the registry businesses and wanting to distribute their own TLD. In fact, a large composition of the group consists of such registrars. I am not saying this is a bad thing, but it cuts a little against your message about more liberalization.
    In addition, we need to be careful as to how the numbers are used. Remember my ice cream analogy I posted here (which I will reprint unedited here):
    “My caution, however, is that some are now describing the “Free Trade” proposal as the one that most people support because of the number of people that either said “yes” or “can live with.” I do not believe that view is entirely accurate. This is because both the JN2 proposal and the RACK+ proposal both dealt with limitations on ownership/control. People were divided on how exactly to limit ownership/control, but not on the concept of whether to apply restrictions.
    The analogy I use is my oldest daughter’s birthday party this year where the kids had a choice of “Mixed Fruit”, “Chocolate Ice Cream” or “Vanilla Ice Cream”. 7 kids (surprisingly) chose mixed fruit, 6 kids chose chocolate ice cream and 6 kids chose “Vanilla Ice Cream”. So of the 19 kids at the party, more of them chose Fruit than any other choice, so that would be a true statement. However, it would also be true that more kids choice “Ice Cream” in general instead of fruit.
    Here we have the same type of thing. Taken one way, more people chose the Free Trade Proposal than chose RACK. But, looked at a different way, more people chose to apply limits on cross ownership/control than chose Free Trade.
    We just need to remember the ice cream/mixed fruit analogy going forward.
    P.S. Never have a party with 19 screaming 5 year olds and offer them ice cream….very messy and the sugar high afterwards is a killer ☺”
    But I do appreciate your summary.

  5. Anonymous

    Thanks for a great summary, Milton – it's a clear guide to both the various proposals and the status within the Working Group, and I hope more folks will get to read it as the Board prepares for its September retreat (where vertical integration will be their focus).

  6. Anonymous

    Jeff,
    Be very aware that broad support exists outside the registrar community (and indeed outside your WG) for the 'free trade' option. There are many in the end-user community who want an increase of options in TLD business models, and that they should not be forced to go through an indirect channel should they see no value-add from that channel. The contracted parties may have their internal arguments, but what is best for the end-user is usually ignored in such squabbles. In my own informal polling, the free trade option is widely (though not universally) liked within the at-large community.
    In any case, it should be no surprise to anyone that those contracted parties who feel most constrained by the existing rules are most in favour of liberalisation, while those who have most to lose from relaxation — as well as those simply fearful of change — would support the status quo.
    As for the Ice Cream analogy, that cuts many ways, even more of them arguing against the RACK option than against free trade.

  7. Anonymous

    .CO Roll-Out is Starting to Taper OFF
    Reasons?
    High-Pricing compared to .COM
    Uncertainty of Future Pricing [compared to .COM]
    Major DNS Platforms are Blocking .CM & .CO
    Looks like .XXX has an up-hill battle compared to .COM

  8. Anonymous

    .PRO to Sponsor ICANN North American Meeting in Chicago
    Obama to give the Keynote and bow to Cerf kissing his ring
    ISOC now part of the United Nations Security Council

  9. Anonymous

    The real goal is to create distractions AWAY from a .ORG RE-BID
    .ORG owners never voted for an ISOC endowment
    Where does $56,000,000 go?

  10. Anonymous

    David Conrad slips out the back-door at ICANN ?
    Shades of APNIC moving from Japan to Australia ?

  11. Anonymous

    Denise Michels can't seem to find that exit door.
    Since she can barely find her desk, that is not a surprise.
    Working from home and the health club. Uh Huh
    (doing what?)

  12. Anonymous

    David Conrad – Jon Postel's main man (after Mark Kosters)
    3 new IANA RIRs are in the planning so maybe DC is headed back to be CEO of Pacific Island NIC ?
    .HI
    .HAWAII
    nice low-hanging fruit for a Postel worker

  13. Anonymous

    Yo, Milton – Domainers are really a strange crowd. You may want to spend some time trying to learn their culture. They view domains like baseball trading cards. Buy low sell high. It pays for the RV and Harley.

  14. Anonymous

    Thank you so much for this information…I really appreciate the effort Milton..

  15. Anonymous

    At church today we prayed for Milton Mueller
    and took a collection to hire an Exorcist