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Deeply, Deeply Flawed Economic Report and Analysis of New gTLDs Posted by ICANN

The reports and analysis by Dr. Dennis Carlton are deeply, deeply flawed. I will prepare a long rebuttal to it in the coming weeks, but wanted to go on the record early as to its weaknesses. The analysis appears to be based on a very limited review of the market for domain names, and utilizes little actual data. It fails to even consider how nuanced the market for domain names has become, and how registry operators can exploit those nuances, including tiered-pricing.

In paragraph 11 Dr. Carlton writes

Switching costs faced by registrants may create incentives for registries and registrars to act opportunistically by raising prices. However, ex ante competition to attract new registrants, as well as harm to the reputation of the registry and/or registrar limits their ability to engage in such conduct.

This is naive, and simply does not capture the real nature of the market for domain names and the ability to find substitutions. Here are some examples of real domain name transactions, to provide a reality check:

  1. Fund.com — USD $10 million
  2. DataRecovery.com — USD $1.7 million
  3. Kredit.de — 892,500 Euros: (in German)
  4. Vibrators.com — USD $1 million
  5. YP.com — USD $3.85 million
  6. Erotica.com — USD $850,000
  7. Fly.com — USD $1.76 million
  8. Toys.com — USD $5.1 million

These transactions were all relatively recent, too. If profit-maximizing monopoly registry operators had no price restrictions in place, they would not, as is implicit in Dr. Carlton's analysis, charge the same price for each domain name. That would not be profit-maximizing. Instead, they would price each domain differentially, based on its implicit "value" in the marketplace (price discrimination based on different "grades" of domain names, and their brand equity/goodwill). So, the renewal cost of Toys.com would be much higher than that for xyztoys.com, to give a simple example. The renewal fees of Sex.com, Hotels.com, Google.com, Yahoo.com, Microsoft.com would be much higher than that of an inferior domain name such as CompassLexecon.com (the domain name of the firm that produced the deeeply flawed report).

This is not some theoretical example, as this happens in reality in the dot-TV namespace which is operated by VeriSign (who also happens to manage .com). For example, at the time of this post, business.tv is priced by the registry at $500,000 per year (see here and here).

real.tv is priced at $150,000 per year, and so on. Dot-TV is widely considered inferior and less desirable to dot-com. If price controls did not exist in the dot-com registry, it is not a huge leap to realize that the renewal fees for currently registered quality domain names would skyrocket and this would not be affected by so-called "competition" to attract new registrants or reputational effects. Monopolists spend little time worrying about their reputation. Ask VeriSign and ICANN about SiteFinder, if you have any doubts.

If switching costs are truly "low", I offer to purchase the CompassLexecon.com (a very inferior domain name, but that of the report author's company) for $2000 (offer good until the end of the comment period plus 30 days, to permit the author to accept our offer). Note that even with simple assumptions of inflation and interest rates, a rejection of our offer of $2000 implies that they'd be willing to pay renewal costs of $100+ per year (far higher than the $7/yr VeriSign currently charges at wholesale, or under $10/yr they can pay at retail), i.e. what is the annuity value of their switching costs, if they were "only" $2000. A rejection of our offer indicates that switching costs for even such an inferior domain name, out of 80 million dot-coms and unlimited alternate domains in .info, or other gTLDs) are higher than $2,000.

Perhaps the author of this report can then document what the actual costs would be on their firm of switching to a different domain for even such a low value domain name in most people's eyes. That would be the tip of the iceberg, though, compared to the switching costs of a Hotels.com, Games.com (owned by AOL, after a large acquisition), or owners of millions of domain names.

If they reject our proposal to buy their domain name for $2,000, I'd like the author of the report to create a counter-offer price open for acceptance for an equal amount of time as my offer — if they price it too low, they bear the risk of me and friends of mine accepting their offer, in order to put their feet to the fire, so to speak, and face the "switching costs" that they perceive as only a theoretical possibility. Let me make it more real for them, by allowing them to name their price, after putting some thought into it.

I suspect the author of the report will refuse to name a price for their company domain name, rather than reveal to all the truly high value they place on it (one that would illustrate the enormous switching costs involved that they've severely misanalyzed in their report).

If ICANN truly believes switching costs are low, I offer to acquire the ICANN.com/net/org domain names, and all associated trademark registrations for $10,000, under the same time frame as above (end of this comment period plus 30 days). If ICANN truly believes switching costs are low, they will accept my offer. Or, as before, they can name their counterprice — and be sure not to price it too low, or I just might accept it. Most folks would not consider "ICANN.com/net/org" to be desirable domain names, either.

The switching costs are not in the ballpark of a person switching their home address, or even switching their telephone number. For many individuals and businesses, their domain name is their internet identity. It would be costlier than switching even their personal name (e.g. asking the recognizable "Tom Cruise" who has invested in his personal "brand" to switch to the name "John Smith" and start over from scratch wouldn't even begin to measure the cost of asking Amazon.com to switch to something like NewCo.web), and would destroy years of goodwill investment. It would represent bankruptcy for many.

Has the author of this report even provided one piece of survey data from companies asking what they place the value of their own domain names, to ascertain switching costs? No.

Has the author of this report discussed the possibility of tiered pricing? No. [You can bet that those salivating at the prospect of running new gTLDs, or who would benefit if price caps are removed from existing gTLDs, are well aware of that possibility.]

Does the author of this report appear to even be aware of the "equal treatment" clause of the current gTLD contracts, which would provide existing gTLDs like dot-com the ability to have price controls lifted if new gTLD receive that right? No. Indeed, the author makes the flawed assumption of the opposite in paragraph 20 suggesting that

The fact that major TLDs are currently subject to price caps further constrains the ability of new gTLD registry operators to charge non-competitive prices......While the appropriateness of these price caps may be debatable, the existence of the caps limits the prices that new gTLDs can charge by capping the price that the major registry operators can charge.

In other words, the author seems completely unaware of the fact that eliminating price controls for new gTLDs triggers the equal treatment clause in the "major TLDs," which eliminates price caps for these *existing* gTLDs. This is not some theoretical example, either. Neustar is on public record stating (page 123)

If price caps are not included for new gTLDs, then price caps must be removed from the .biz Registry Agreement. Any material changes for the newer, no-price capped TLDs regarding vertical separation and equal access in general must be applied to NeuStar - this is required under the .biz Registry Agreement and ICANN's Bylaws. Price caps are appropriate for larger TLDs that have a much higher percentage of the market and are not appropriate for gTLDs that do not have any real market power.

And the author implicitly seems to be aware that unlimited price increases for renewals is a tactic that could be employed by registry operators, note on paragraph 9

For example, some new gTLD operators might offer significantly lower initial prices without restricting their ability to increase prices in the future (whereas the existence of price caps likely would inhibit the introduction of extremely low initial prices). Some consumers may prefer to trade off a lower initial price for a potential future price increase.

I believe I can speak for most domain registrants in .com that this is not a fair tradeoff! It's asking the registry to "tax" them after they've achieved success, and tax them they will, more than you and I would want to know!

There are so many other points that are simply wrong in this report, that I'll have to leave to a longer future comment. But, I did want to mention:

a) the significant costs of domain name abuse (e.g. cybersquatting, counterfeiting, defensive registrations) are dismissed without any quantitative analysis. These are real costs that are simply not analyzed. I'm tempted to typosquat on the author's company's domain name as an experiment, so they can see firsthand what the cost is (is it worth them to spend the legal costs to fund a UDRP or lawsuit), but I'll leave that as a "thought experiment" for them to perhaps think through instead, for now. I find it ironic that a firm that owns the relatively worthless and undesirable "CompassLexecon.com" domain name would have defensively registered both CompassLexecon.net AND CompassLexecon.org. Defensive registrations are very real, even for worthless undesirable domains (to most people) like CompassLexecon.com.

b) we actually found a so-called "expert" who appears against competitive tenders for government procurement! See footnote 7 on page 6

The DOJ suggestion, however, does not address how ICANN should evaluate bidders that offer a low price by offering low quality service and those that offer higher quality/higher price services.

Hmmmm, registry operations are essentially a commodity. Whether Afilias or Neustar or VeriSign offer .com, .info or .biz or .store or .snafu or .junk, it is trivial for them to change a few lines of interface code to run a new TLD. It's like asking the publisher of the New York City White Pages directory whether they are able to publish the Atlanta City White Pages directory. It's a book with telephone numbers! All that's different is the cover and the contents/numbers inside. It's like Toyota offering blue cars vs. red cars, all from the same assembly line, or Taco Bell adding a new franchise location in New York vs. Boston vs. Cleveland vs. Miami using the same "business formula."

In the domain name space, just like any other procurement contract for Army Boots, laserprinting toner, paper, staplers, etc., one simply sets standards of performance (which are so low in the ICANN contracts that there is almost no risk of any entity failing to meet them) for name additions, deletions, DNS resolution, and other quality of service metrics. These are the same kinds of procurement contracts that exist for the management of the telephone database, for example (and if one goes to www.sms800.com and reads the Tariff Documents, under competitive tenders toll-free number costs are 10.49 CENTS per month (page 80), far below that in the monopolist and oligopolistic domain name registration business).

I believe the authors lost all credibility when they actually seemed to support ICANN using highest-bid auctions with the proceeds going to ICANN, instead of a lowest price auction benefiting consumers as the DOJ suggested, by criticizing the DOJ's thoughtful recommendations which have proven themselves in most procurements. From one economist to another, they should simply know better. Indeed, even Neustar won the .us registry contract via a tender process.

I challenged Neustar to declare whether NTIA's process for .us was superior or inferior to that of ICANN's proposed ascending price mechanism:

http://gnso.icann.org/mailing-lists/archives/ga-200709/msg02660.html
http://gnso.icann.org/mailing-lists/archives/ga-200709/msg02693.html

It's been several weeks, and they've failed to respond. It is very clear that the NTIA process, or that of the DOJ with a lowest bid mechanism, maximizes consumer welfare, instead of lining ICANN's pockets. Of course, it was ICANN, and not consumers, who paid for this "expert report."

In conclusion, this one-sided report could have been written by VeriSign or ICANN itself, given its deeply flawed analysis and conclusions, and should be disregarded by the community, and more importantly the NTIA/DOJ (who were spot on in their original analysis). I'll have far more detailed analysis of this report in the coming weeks, going through it paragraph by paragraph.

By George Kirikos, President, Leap of Faith Financial Services Inc.
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Promoted Post

Buying or Selling IPv4 Addresses?

Watch this video to discover how ACCELR/8, a transformative trading platform developed by industry veterans Marc Lindsey and Janine Goodman, enables organizations to buy or sell IPv4 blocks as small as /20s.