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Domain Registry/Registrar Cross Ownership: A Reality Check

Richard J Tindal

Funny how marketplace reality can poke holes in claims and theories. A debate is raging between some existing registries (Afilias, PIR, Neustar) and registrars like ourselves over the issue of 'cross-ownership' in Top-Level Domains (TLDs). At question: should the same set of shareholders be allowed to own all or part of a registry as well as a registrar that sells names in the TLD owned by the registry? These registries are saying 'no', and one of their principal objections is they think current registrars have an unfair advantage in pursuing TLD deals. Their argument is that we're better placed to get new TLDs as we can guarantee retail distribution of the TLD.

Our response has been:

(1) ICANN has no intention of changing the current rules requiring all registries to make available all potential domain names in their TLD for sale by any accredited registrar;

(2) We don't have an advantage because we don't have market power as a registrar — i.e. our customers can and will go to other registrars if we don't offer names and/or competitive prices for names;

(3) Whatever rules ICANN adopts should be about increasing competition to the benefit of consumers — not about protecting established market positions;

(4) Many registries (for example, DENIC and Nominet) have sold names directly to the public for years without apparent consumer harm;

(5) Registries have been affiliated with domain registration companies for a long time without negative consequences to competition — HostWay and .PRO, Poptel and .COOP, CORE and .CAT, GoDaddy and .ME, and, of course, Afilias and .INFO (before they got religious about cross-ownership);

(6) The purpose of the cross ownership rule was to protect against a registry favoring its affiliated registrar at the expense of other registrars. Why is it that registrars — who are the supposed beneficiaries of this needed protection — are, for the most part, not complaining about ICANN's proposed rules? Rather, it is the mid-sized registries that do not want compete with new entrants;

(7) If you buy into the argument that our registrar capabilities make us 'unfair competitors' then how about the 10 year head-start for mind-share that PIR, Afilias and Neustar TLDs will have on our TLD? That doesn't seem fair. Should they not be prevented from seeking more TLDs this round? (Again: We think this 'fairness' discussion is irrelevant. The debate should be about the effect on consumers — not the effect on business models of incumbent market players); and finally

(8) Forced ownership separation of wholesale and retail operations is a rare occurrence in most industries. Typically it occurs when there are exceptional circumstances such as monopoly market power and price controls. Also, the legal/ regulatory burden is typically on the party proposing separation rules. For example, Dell was not forced to seek regulatory approval when it decided to sell PCs direct to the public. Dell hurt the business models of established market players — and the consumer benefited.

All this is good stuff and worthy of an informed debate, but meanwhile in another part of town Minds and Machines (www.mindsandmachines.com) are giving us all a lesson in actual competition and consumer benefit. A reality check if you like. Minds and Machines, a new entity with no registrar capability whatsoever are kicking butt in the TLD department. They've announced deals to compete for .FOOD, .ECO, .NYC, .ROMA, .GAY, .RADIO and .BASKETBALL (and I'll bet there are more to come).

How did they get these deals when they couldn't guarantee registrar distribution? The answer is that the registrar market is intensely competitive. If one registrar says "no" others will offer the names and take market share. Let's say Minds and Machines win .FOOD and we (eNom) win .WEB. Will eNom offer .FOOD names even though they compete with .WEB for food related sites? You bet we will. .FOOD is a great string and it will make money for us as a registrar, so we'll sell the names.

A final thought, which I think Jon Nevett articulated well, so I'll quote him in the ICANN Sydney transcript: "Whatever rules we come up with, they should be no more restrictive than what's in the dot com contract. Because the whole point of new TLDs is to provide competition. We want vibrant competition. To straddle the new TLD operators with more restrictive rules than the market leader doesn't make any sense if you're trying to encourage competition and help these new TLDs succeed. So we should look at that. There's also an old adage in competition law: If competitors are complaining about proposed rules, it's usually good for competition. If consumers are complaining about proposals, then it's (time) to take a close look".

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RichardEvery argument, no matter how you word Michele Neylon  –  Aug 30, 2009 1:42 PM PDT

Richard

Every argument, no matter how you word it, has a counterargument.

1 - Regardless of any supposed rules that ICANN may or may not have it is incredibly hard for registrars to offer all TLDs, as the registries do not appear to want all registrars to offer their namespace and make it decidedly difficult for a registrar to gain accreditation outside the more popular TLDs.

2 - You may not wish to admit that you have market power, but you do. You are one of the largest registrars on the planet and account for a sizeable proportion of all domain activity at present. If you were to offer a TLD or not offer a TLD to your client base it would have a tangible impact on the market.

3 - What ICANN should or shouldn't do is moot. What ICANN does is all that really counts.

4 - Nominet doesn't sell directly to the public, but will act as a "registrar of last resort". Considering that they don't offer DNS services or anything else combined with the price they charge to direct registrants they're not a popular option.

5 - Can't really argue about that one and it's a very valid point

6 - Also a valid point

7 - Not sure what you're getting at, but I suspect that they'd be in a better position to bid on a new TLD than a new market entrant, though it's not a given.

8 - Very true

Regards

Michele

It's about Market Power Richard J Tindal  –  Aug 31, 2009 8:12 AM PDT

Hi Michele,

I’m going to focus on your ‘market power’ observation because that’s the key issue in this debate.  I think there’s significant hypocrisy from PIR and Afilias, who launched and grew their TLDs on a registry platform 100% OWNED BY REGISTRARS but now say that's a harmful thing, but that inconsistency isn't as relevant to the debate. 

What is relevant is market power.  ICANN staff hired highly respected, expert economists and competition experts (CRA International, Professor Steven Salop and Professor Joshua Wright) who all reached the same conclusion – Cross ownership is likely to cause consumer benefits (lower prices, better quality, innovative services) unless the registry operator exercises market power. 

So do we have market power?  Does anyone in this business have market power?  Market Power is a complicated legal/economic concept.  Under any definition, however, we do not have market power.  In relation to new TLDs I think ‘percentage of new registrations’ is the most relevant statistic.  We’re a big registrar, number 2 in terms of overall names managed, but our share of new gTLD registrations this year is just 7% (approx).  By any legal standard this would fall far below the threshold for considering regulatory action, and I think by any reasonable layperson's standard too. 

I appreciate your concern that we could harm or benefit a TLD by deciding to offer it, but that concern exists whether or not cross-ownership is permitted.  Per my .FOOD example, eNom will make an ‘offer/ don’t offer’ decision on the merits of the TLD at hand, and not on whether we own a TLD ourselves.  GoDaddy illustrate this point.  They've had joint ownership of .ME for a while, but they continue to aggressively promote other TLDs.  Importantly, they also encourage other registrars to sell .me names.  Unless we’re going to mandate that every registrar must promote every TLD with equal vigor, registries will always have the ultimate responsibility for promoting their TLD. 

Let’s look at a large registrar’s supposed “power” from a different perspective.  If we can make or break a TLD why did all those Minds and Machines applicants not choose us (or another large registrar) as their registry operator?  Why have the AusRegistry TLD clients not chosen us if we have power over the success of their TLDs too?  The same question for the many TLD applicants who’ve chosen CORE as their registry operator.  Are all these TLD applicants foolish or unsophisticated?  The ones I’ve spoken to seem to understand this business quite well and believe well conceived TLDs with valuable features, applications and effective registry marketing will be offered by registrars.  Worst case, these applicants are prepared to engage in their own retail operations to make their TLDs a success – unless the PIR/Afilias/Neustar proposal prevents this. 

Consumers and the marketplace need to be protected against the abuse of market power, but the net should not be cast too wide as to prevent competition and harm innovation.  Let’s put stringent provisions in the DAG and every registry contract to protect consumers against the abuse of market power.  Absent that presence of actual (as opposed to possible) market power, however, let’s open up this market to some real competition so consumers can benefit from the sort of innovation and pricing they see in most other parts of the internet, but not yet in domain names.

OK, but isn't this a policy decision? Milton Mueller  –  Sep 01, 2009 9:10 AM PDT

Some good points, Richard, some could be quibbled with. But shouldn't we be having this dialogue in a GNSO policy development process? Isn't that what the GNSO is supposed to be for? Who exactly are we trying to persuade at this point? Kurt Pritz? Who decides how we resolve this issue?

For this issue I dont think so Richard J Tindal  –  Sep 01, 2009 2:09 PM PDT

Milton,

A reasonable question, but for this issue I believe there are good reasons why it doesn't go to PDP:

1.  There are national laws that cover consumer protection and anti-competitive behavior. If Godaddy were to merge with Verisign I think it should be a topic for US anti-trust law to examine, not ICANN to prohibit preemptively.

2.  I think the issue of ownership is "outside the picket fence", just like pricing is.  I don't believe a PDP should decide who shareholders can be.

3.  There was no policy process in 2001 when the 15% acquisition rule was put in place.

4.  Even with that previous rule there is no prohibition on who the shareholders of VeriSign, for example, can be.  The .COM contract says VeriSign will not "acquire"* 15% of a registrar.  If I was to buy 16% of VeriSign, it would not cause VeriSign to be in breach of their contract.

5.  The Board will be the decision makers on this issue - as they will for all significant DAG issues.

Richard

This is a sideshow George Kirikos  –  Sep 01, 2009 1:09 PM PDT

This entire registry-registrar separation issue is a sideshow, a distraction from the real issue, namely price caps and tiered pricing. When VeriSign owned NSI, .com prices were $6/yr. Now, they've gone higher, even though VeriSign doesn't own NSI anymore, due to bad ICANN policy allowing price increases that were unrelated to costs, and indeed, unrelated to what the price would be if the registry operation was put out to competitive tender. Same for .org, .net and other gTLDs.

Now we have the registry operators, registrars and prospective registry operators presenting the public with a false choice, that we can only pick from Door #1 or Door #2.

Sorry, but the public deserves better, namely Door #3, which is regular competitive tenders for operation of a TLD at a fixed cost for consumers. It's what NTIA/DOC/DOJ recommended in their December 2008 comments. This ensures that the benefits from supplier competition flow to consumers. Door #1 and Door #2 are simply choices limited to which companies get to maximize exploitation of consumers, a clearly inferior public policy alternative.

When it comes down to it, most of the new gTLD lobbyists are only in favour of new TLDs if they themselves stand to directly profit from them. If one introduces simple procedures like having a tender process for operation at the lowest cost for consumers, like nearly every other procurement contract, then the new TLD lobbyists start to howl in protest, because that would eliminate their profit potential. The DOC and DOJ should put an end to this farce, and provide more direct instructions to ICANN on how to proceed. The current circus has outlived its entertainment value, and takes away from more important issues like DNSSEC, IPv6, and other security/stability concerns.

A reality check on a reality check Lesley Cowley  –  Sep 05, 2009 4:25 AM PDT

Registry of last resort registrations in .uk average at 12 per month out of c150,000 new registrations per month i.e. 0.0081%. When we first offered direct registrations, there were c100 registrars, but there are now c3,000 registrars offering .uk registrations.

Regards,
Lesley
CEO, Nominet

My point being that those registrants aren't harmed Richard J Tindal  –  Sep 05, 2009 9:16 AM PDT

Hi Leslie,

Nice to hear from you and look forward to seeing you in Seoul.

Yes, I understand the number of direct registrations at Nominet is very low, as it is for DENIC and many other ccRegistries.  My point in making the observation about Nominet is that I dont think those registrants were harmed by buying direct from you.  Even if 8.1% of your registrations were direct (rather than the actual 0.0081%) I still dont think those registrants would be harmed.  As a point of reference the proposed ICANN rules for new TLDs would only allow 1.28% of Nominet registrations to be direct.

Do I think Nominet should be a fully vertically integrated registry?  No I don't. Dot UK names are price-controlled (in the sense that wholesale pricing is set) and I agree with CRA International and Professors Salop and Wright who said we should be much more cautious in vertically integrating price-controlled registries.  New TLDs will not be priced controlled however. My central argument is that in this situation (registries that are NOT priced contolled and do NOT have market power) then vertical integration will benefit consumers by introducing efficiencies and increased competition.  If I was running the .CHARITY registry, for example, I dont think it would be in the consumers' interest to force me to only use unrelated registrars who may or may not care about my TLD or my intended customers.

Regards

Richard

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