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Competition for Monopoly gTLDs

Alex Tajirian

The essay examines some of the new domain name managers' unjustifiable obsession with owning monopoly gTLDs when they should devote more energy and thought to making domain names more value adding.

For the last three decades, the discourse regarding competitive advantage has focused on the need to rely on rare/unique resources and capabilities. However, more recently, the focus has shifted to the imperatives of efficient utilization of nonunique resources that are readily available on the market (such as salespeople, website user-friendliness and logistics competencies for e-commerce, and revenue models). Businesses whose competitive strategy focuses on scarce assets tend to overbid for their resources and have an aversion to innovation. Add to that the disadvantages for new gTLD monopoly registries because of the nonexistence of an active secondary market for the gTLDs.

Bidding wars for unique assets can lead to overpaying for the asset (winner's curse), a problem exacerbated by the fact that gTLDs are winner-takes-all businesses. This is illustrated by the fact that small unknown registries have outbid giants such as Google and Amazon. In addition to the well-documented winner's curse in auctions, I have argued that some of the managers fell in love with their gTLDs to the detriment of economic viability. Moreover, in general, businesses built around such resources tend to focus on protection of their assets, not innovation.

Unregulated monopolies also have the tendency to charge higher-than-optimal prices in an attempt to capture higher returns, and that brings on lower long-term returns. Furthermore, they can also be blind to operational cost overruns on top of their high initial overbid investment outlay. Such unfortunate positions go unnoticed for lack of a viable metric that can signal performance; by contrast, consider the way stock market prices discipline managers. The obvious candidate, the number of registrations, is a biased performance measure due to differences in registries' pricing strategies, including giveaways of free registrations. New gTLD monopolies can also be insensitive to early low registration numbers on the grounds that businesses will eventually wake up to the benefits of these new gTLDs. Such a potential misconception is fueled by rhetoric from some industry pundits.

The domain name industry has been mistakenly obsessing over ownership of unique assets (legacy domain names as well as new gTLDs). A frequent selling spiel for legacy domain names sellers was that each name was unique, with no attention paid to actual or potential ownership values. A large number of sellers probably thought that they were making abnormal profits, but without knowing market values they could have been selling cheap. Three are currently over 800 new gTLDs and a second round of applications is expected in the next few years.

The general aversion of monopolies to innovation is best demonstrated by Kodak and Nokia. In 1985, Leo J. Thomas, SVP and Kodak's director of research, was quoted by The Wall Street Journal saying: "It is very hard to find anything [with profit margins] like color photography that is legal." So, to protect these margins, Kodak decided not to shift its focus to digital cameras. How many of us now use Kodak photo products or are aware of its earlier dominance? Similarly, Nokia made the mistake of refusing to acknowledge iPhone's competition to its unique competencies in design and logistics. Apple changed the game from a battle between devices to a war between ecosystems.

Evidence of profitable competition based on nonunique assets is ubiquitous. Southwest Airlines is a good example. The airline is driven by a low-cost business model, with nonunique assets (access to small regional markets, old airplanes, and relatively inexperienced workforce) competing with industry giants that had, what was seemingly important at the time, strategic assets (hub airports, connections, and diverse travel-range airplanes). More recent emerging low asset — specialization businesses are crowdsourcing (such as Wikipedia) and crowdfunding (such as Kickstarter, where investments as small as $1 can finance innovative start-ups). Nevertheless, the vast majority of businesses are profitable and competitive.

Thus, to create long-term viability, businesses in the domain name industry need not compete with each other and struggle to create more gTLD monopolies. Rather, they should focus on better serving users of potentially value-adding gTLDs.

By Alex Tajirian, CEO at DomainMart
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Share your comments

Business model Jean Guillon  –  Apr 30, 2015 1:19 AM PDT

Some new Registries offer business models with high retail prices and they clearly demonstrate - right at the moment - that they are profitable.

Jean, if a business is currently profitable, Alex Tajirian  –  Apr 30, 2015 9:41 AM PDT

Jean, if a business is currently profitable, does that necessarily mean that it’s currently doing well? No! Think about it! However, I am not sure how your comment is related to the post.

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