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Verisign's Attempt to Increase its Fees Still Unjustified Despite Diversionary Tactic

Zak Muscovitch

Shortly after the National Telecommunications and Information Administration (NTIA)'s recent announcement allowing Verisign to pursue increased .com registry fees, Verisign published a blog post questioning the business practices of registrars and domain name investors. The ICA, on behalf of its registrar and domain name investor members, had previously spoken out against a .com fee increase, as did others in the domain industry. Rather than justify a fee hike, Verisign attempted to shift the community's attention elsewhere. Yet the issue remains that the fee cap currently in place was put there for good reason: because there was no justification for any increase and because the public needed protection from excessive fees. Higher fees for Verisign are not justified, as demonstrated by considering these four key points:

  • Verisign is a provider of technical registry services, it does not own the .com name space;
  • Unlike Verisign's fees, the prices set by registrars and domain name investors are held in check by competition;
  • Verisign is already well-paid for its services, as evidenced by its substantial profits;[1] and
  • ICANN need not approve fee hikes; on the contrary, ICANN ought to assert its right to set reasonable fee levels for its hired registry manager.

Verisign's Role

1. Verisign is a Manager, Not the Owner of the .com Registry

Operating a database in a reliable and secure fashion is the primary job of a domain name registry, and by all accounts, Verisign has done that well. ICANN, the ultimate owner of the .com registry, contracted with Verisign to operate the registry as a service provider. ICANN did not relinquish ownership of the .com name space to Verisign.

The role of a domain name registry manager is comparable to that of a land registry manager. The registry manager, whether the registry is for land or for domain names, is entitled to a fee — nothing more. Verisign is not entitled to treat the .com name space as its corporate asset, any more than the land registry manager is entitled to treat the land that it enters into its records as its own. The wholesale price[2] of domain names accordingly is not a matter for the manager to determine, and its fees should never be equated with the wholesale price which is a determination that should be exclusively made by the owner of the name space.

In 2006, in response to a lawsuit brought by Verisign, ICANN granted Verisign the .com registry management contract with a presumptive right of renewal and without a competitive bidding process. This agreement was, and remains, quite controversial, as it is clear to many observers that it is extremely one-sided in Verisign's favor.[3] Yet while the ICANN Board granted Verisign what many considered a sweetheart deal to operate the .com registry,[4] Verisign's role continues to be that of a manager, not an owner. The .com name space, as one of the original legacy extensions, is therefore fundamentally different from a new gTLD which is created and paid for by a private company. When it comes to the .com registry, whose existence pre-dates Verisign's involvement, it is the ICANN community as the owner which is entitled to set fees, not its hired manager.

2. Verisign's Fees

Verisign is entitled to a reasonable fee for running the registry. Verisign currently charges $7.85 per .com domain name per year. The cost to operate the registry, after taking into account the expensive infrastructure necessary to provide reliable and secure operations and high overhead, has been estimated at $1.00[5] to $3.50[6] per domain name per year. Verisign enjoys an enviable and highly lucrative operating margin of 60%[7]. If the proposed fee increases go into effect, by the end of the six-year agreement term, the fee for each .com domain name will increase to $10.29 per year, a 30% jump from current levels.[8]

Despite benefiting from the economies of scale from operating the largest domain name registry together with the .net registry, Verisign already charges far more for its registry services than other registry operators. For instance, as reported by Domain Name Wire, a recent bid to manage the registry for India's .in domain name was made by Neustar at just 70 cents per domain name per year, and registry operator Afilias offered to run it for $1.65 per domain name per year. Apparently, other qualified operators could manage the .com registry for far less than the $7.85 per domain name per year that Verisign charges, resulting over time in billions of dollars in cost savings to the registrants of the approximately138 million registered .com domain names.[9]

The owners of other name spaces, in particular, the authorities in charge of certain national domain name (ccTLD) extensions, are not shackled by a one-sided agreement that gives one company the right to manage their registries in perpetuity. These authorities have more flexibility in their arrangements with their registry operators, including the right to open the registry management contract to bid and the right to replace their registry manager. When the .fr authority put the .fr registry contract out for bid it resulted in lower fees to run the registry,[10] while open bidding for the management of the .au registry resulted in a change of registry operator and expected cost savings.[11]

The ICANN community is now able to benefit from knowing the results of competitive bids to run other registries. Although Verisign has a presumptive right of renewal, ICANN has a say in setting the fees that Verisign charges. ICANN can and should set the fees for operating the .com registry at the market determined level for these services: profitable for the manager, but not exceedingly so. Accordingly, not only is hiking the fees for .com unjustified, lowering the fees appears warranted.

3. Verisign is Not Entitled to Take Entire Credit for .com's Success.

The .com extension was widely adopted as the de facto address for the commercial Internet long before Verisign was awarded the privilege of operating the .com registry. In the United States, the vast majority of the top commercial websites use .com domain names. The billions of dollars spent by companies promoting their .com websites has firmly entrenched .com in the minds of consumers as the pre-eminent and most sought-after Internet extension. Verisign ought not to reap outsized rewards which are disproportionate to its role as an effective and competent manager.

4. Registrants Would Have Little Choice but to Pay Higher Fees

If a business that is already established on its .com domain name is unhappy with the higher renewal fees, moving to a different domain name would be highly disruptive and expensive, if not entirely impractical. All of the prior advertising promoting a business' .com domain name, all the existing links, and all its email addresses, would need to be changed. All the goodwill that a company had developed around its .com brand would be lost. Verisign, therefore, benefits from having a substantially "captive audience" that is generally forced to absorb any and all fee increases which Verisign decides to impose. Accordingly, there should be no consideration of any increase in .com registry management fees in the absence of clear and compelling justification for raising them on a substantially captive market.

5. .Com Registry Fees Are Not Constrained by Competition

Because of the unique role .com plays in the Internet Economy, the availability of other extensions is not sufficient to constrain .com registry fees. The .com extension enjoys a dominant position as the brand extension for much of the commercial Internet. Most of the world's best-known companies and most heavily-visited websites operate on a .com domain name. This has created an expectation in the minds of consumers, especially in the United States, that a business website will be found on a .com domain name.[12] Globally, .com has also become the preferred extensions for companies operating internationally, as unlike country code extensions, it is not tied to any one particular country. Indeed, as Verisign's own marketing proclaims, .com is "revered as the global online standard".[13]

In part, because .com offers unique branding value, it does not face effective competition. If it were the case, as NTIA appears to claim, that lifting the fee freeze is justified due to the development of a "more dynamic DNS marketplace",[14] one would reasonably expect that such purported genuine competition would compel Verisign to lower fees, not raise them.[15] Yet even the availability of hundreds of other new domain name extensions, often available for far lower registration and renewal fees than .com, has had little significant impact on the continuing and burgeoning demand for .com domain name registrations.[16]

It is therefore misguided to believe that market forces will naturally constrain fees to register or renew .com domain names. The .com extension offers unique benefits, and those desiring those benefits can only obtain them by selecting a .com domain name.[17] Furthermore, the large installed base of .com websites has little choice but to pay whatever fee is charged to renew their domain names, regardless of whether that fee has any bearing on the actual costs incurred by Verisign in running the .com registry. If Verisign is wrongly permitted to act as the de facto owner of the .com name space, it will be able to seize for itself the windfall profits that come from controlling a monopoly — the largest, most lucrative and most dominant name space that has evolved on the Internet.

Domain Investors and Registrars Operate in a Competitive Marketplace

In its aforementioned blog post, Verisign made some unfortunate suggestions that domain name investors and registrars who participate in the domain name aftermarket may be considered "scalpers", and that domain investors' businesses are "questionable". The domain name aftermarket, to the contrary, is entirely lawful, highly competitive, and any profits earned are the result of successful investment in a free and open marketplace.

1. Investment Lawfully Exists in Every Marketplace

Whether in land, a catalogue of Beatles songs,[18] or domain names, investing in assets is a natural by-product of a free and open market. Domain registrants use and risk their own money to lawfully purchase generic and descriptive domain names on a first-come, first-served basis and from prior owners, and they have every right to continue to do so. Domain name investors range from an at-home mom making a casual investment in a handful of names, to a top branding agency that offers for sale thousands of domain names that were registered as a by-product of brainstorming new name candidates for clients,[19] to professional domain name investors who spend substantial money and efforts on building a portfolio and marketing it to the public. Domain names are also sold by companies large and small who originally registered the domain names for future development, defensively, or because having a valuable .com domain name is helpful for their business. Such business activities involving domain names are entirely legal, expected, and natural. There is nothing "questionable" about it. As one commentator recently put it, a domain name investor is engaging in no more "questionable" business activity than a Verisign shareholder who purchases stock in the hopes of reselling it for more than they bought it for and for whatever the market will bear.

Domain name investors risk their own capital to register or purchase a domain name with no guarantee that they will ever see a return on that investment. Domain investors compete with thousands of other market participants around the globe, seeking out desirable domains, and bidding against each other at auctions where the price is set by the market through the combined actions of thousands of participants. Many domain name investors lose money on their acquisitions, as they find that they have overpaid to acquire domain names that others do not regard as an attractive investment or which others do not want.

Investing in valuable generic and descriptive domain names is comparable to investing in vacant real estate. Both investments are made on the basis of an expectation that there will be an appreciation in value upon resale. A businessperson who wishes to open a storefront on 5th Avenue in New York City would expect that land to be already owned. Similarly, it should not come as any surprise that a valuable domain name already has a registered owner, whether it be a professional domain name investor or another kind of business, and that the owner is prepared to sell it at a market-determined price.

2. Professional Domain Investors Control an Estimated 10% of .com Domains

The best estimates are that the holdings of professional domain name investors represent approximately 10% of all registered .com domain names. The other estimated 90% of .com domain names are held by individuals, small businesses, and in the portfolios of large corporations. Those estimated 90% of domain name registrants may never interact with the domain investment community, and may never purchase an aftermarket domain name, but 100% of .com domain name registrants may soon be subject to higher registration and renewal fees from Verisign. As such, if Verisign were permitted to raise the fees for .com domain names, most of the burden would fall on the vast majority of .com registrants who are not domain name investors. It is not enough to excuse a fee increase by saying, "well, it's only a dollar or two more" that registrants are being charged, when that dollar or two more, across the entire class of .com registrants, adds up to billions of dollars in excessive fees.

3. Domain Name Investors Offer a Valuable Service by Providing Liquidity to an Illiquid Market

Domain names are notoriously illiquid investments. The holding period of domain names held by domain name investors can stretch into decades. Yet if an individual or a company wishes to immediately sell a domain name, it is the investor who steps up to provide a ready market and liquidity. If, for instance, a retiring couple who used a valuable generic domain name for their business and now wished to sell it since it was no longer needed has trouble finding an interested end-user buyer, domain name investors will often step in, bid against each other for the right to acquire the domain name, and thereby create a liquid market enabling the couple to quickly convert their domain name into cash. When Yahoo! wished to sell its contests.com domain name, it was put up for auction at a domain investor conference where the winning bidder paid $380,000.[20] Domain name investors allow domain name owners to readily obtain cash for domain names that they no longer need, or may otherwise wish to sell.

4. Domain Name Pricing and Availability Would be Little Different Even in the Imagined Absence of Domain Name Investors

Domain name investors do not set the market value of aftermarket domain names nor do they determine which domain names are desirable — the operation of a competitive marketplace does. Prices and desirability are dictated by the market. If the asking price is set too high, a buyer can choose from a variety of similar domain names available at a range of prices.[21] If a domain name is desirable, it would have been registered long ago even in the absence of domain name investment.

Verisign proposes an unrealistic scenario in which, in the imagined absence of domain name investment, valuable domain names such as Ice.com (bought for $3,500,000) or Super.com (bought for $1,200,000)[22] could be obtained at a standard registration cost of around $10 each. Even if professional domain name investors vanished, high-quality domain names would not be sitting unregistered and the owners of these domain names would seek the market value for them.

For instance, Procter & Gamble was one of the companies in the early days of the Internet with the foresight to register valuable generic dot-com domains, such as the kind favored by domain investors. When they went to sell some of their domain names, such as flu.com, beautiful.com and thirst.com, P&G;was surprised by the high value of those domains in the secondary market. P&G;did not offer those domains for sale at its cost, nor did anyone expect them to.[23] Similarly now that electrical engineer Marcelo Siero has decided to sell the domain name ee.com, which he registered 24 years ago, he is seeking a market price in the millions of dollars,[24] and who would fault him for that?

Twenty years into the evolution of the commercial Internet, and after over 100 million .com domain name registrations, there are almost no domain names of general value sitting unregistered. The net impact on .com domain name availability due to the presence of domain name investors is that domain name investors have registered millions of lower-quality, less desirable domain names that otherwise might have gone unregistered.[25]

5. Verisign Encourages Domain Investing and Has Benefited Greatly From It

Verisign, throughout its history, has encouraged people to invest in domain names and has been a primary sponsor at conferences focused on domain name investing. Verisign had good reason to do so, as domain name investors send tens of millions of dollars to Verisign annually from registering millions of domains that no one else has shown much interest in. The business most benefiting from these registrations is Verisign itself, which receives $7.85 per domain name per year while taking no risk, whereas the domain name investor often loses money on his or her investment.[26]

6. Verisign Sells Domains at Premium Prices

During the "land rush" for the Japanese[27] and Korean[28] versions of its .com domain names, Verisign unilaterally set initial prices on certain keyword domains at over $10,000 each.[29] For instance, Verisign set a premium price on the Japanese version of <blog.com>, which is ブログ.コム. This domain is currently available for first-time registration at a price of $15,000 from Name.com.[30] Our understanding is that while a portion of this price represents a retail mark-up charged by Name.com, the base price set by Verisign was over $10,000. Verisign's criticism of speculators for offering premium domain names at market prices, when Verisign engages in comparable sales, therefore appears to be extremely contradictory.

Conclusions

NTIA ostensibly made a regrettable political calculation that the profits of a single U.S. corporation outweighed the interests of millions of .com registrants across the globe including millions of Americans. The ICANN Board need not follow the lead of the Trump Administration's NTIA on this issue. Indeed, it would be a dereliction of the ICANN Board's responsibilities to the ICANN community to do so. Verisign was hired to do a job — run the .com registry. The ICANN Board can allow Verisign to effectively determine how much to pay itself for providing this service, or the Board can fulfill its responsibilities as the owner of the registry, by protecting the global community of registrants from unjustified fee increases.

[1] https://domainnamewire.com/2018/09/11/verisign-coperative-agreement/

[2] The wholesale price is the price that registrars pay.

[3] https://www.zdnet.com/article/icann-board-approves-settlement-price-hikes/

[4] See for example, https://www.internetcommerce.org/slashdotcompricing/; and also see http://www.dnjournal.com/articles/icann-verisign.htm

[5] https://www.theregister.co.uk/2018/11/02/dotcom_domains_pricing/

[6] See https://domainnamewire.com/2018/09/11/verisign-coperative-agreement/

[7] See; http://stopthepriceincreaseof.com/

[8] https://www.theregister.co.uk/2018/11/02/dotcom_domains_pricing/

[9] https://www.verisign.com/en_US/channel-resources/domain-registry-products/zone-file/index.xhtml?dmn=zone&loc=en_US

[10] https://www.thedomains.com/2012/08/07/afnic-awarded-new-contract-to-run-fr-registry-but-only-after-open-bidding-results-in-reduced-prices/

[11] http://domainincite.com/22393-shocker-after-15-years-afilias-kicks-neustar-out-of-australia

[12] "buying an exact .com domain makes finding your website much easier for customers and lends invaluable prestige to your company." (https://catchwordbranding.com/catchthis/naming-tips/your-websites-url-an-expensive-com-domain-name-or-these-creative-alternatives/)

[13] https://www.verisign.com/en_US/domain-names/com-domain-names/index.xhtml

[14] https://investor.verisign.com/static-files/37bfa1fd-7868-49ad-a060-fb6f25d5b3be

[15] For another perspective on the dubious rationale for lifting the fee freeze see: http://domainincite.com/23641-trump-gives-verisign-almost-1-billion-in-free-money

[16] See: https://www.verisign.com/en_US/domain-names/dnib/index.xhtml

[17] "The problem with not having the .com of your name is that it signals weakness… a marginal domain suggests you're a marginal company.", see: http://paulgraham.com/name.html.

[18] "McCartney told Jackson about how he had been purchasing other artists' catalogues (such as Buddy Holly's) as a business investment.", see: http://mentalfloss.com/article/85007/how-michael-jackson-bought-publishing-rights-beatles-catalogue

[19] See http://justtheword.com/

[20] https://domainnamewire.com/2009/06/17/yahoo-sells-contestscom-for-380000/

[21] "Finding the right URL can be daunting, but with a little time and effort you can absolutely find a domain that works for your brand — and your wallet!", see https://catchwordbranding.com/catchthis/naming-tips/your-websites-url-an-expensive-com-domain-name-or-these-creative-alternatives/

[22] Source DNJournal.com

[23] See https://www.nytimes.com/2000/06/28/technology/procter-gamble-plans-to-sell-domain-names.html

[24] https://globenewswire.com/news-release/2018/03/07/1417995/0/en/EE-com-Domain-Name-Announced-for-Sale-by-VIPBrokerage-com-DomainAssets-com.html

[25] "While buying up a ton of domains seems like a great way to make some extra money, the real world results show that it is very hard to make that process profitable."; see: https://moz.com/blog/is-buying-domain-names-profitable

[26] https://morganlinton.com/hand-registering-domains-today-is-a-fools-game/

[27] https://blog.verisign.com/domain-names/launch-of-verisigns-first-idn-new-gtld-コム/

[28] https://blog.verisign.com/domain-names/verisign-launches-new-gtlds-for-the-korean-market-닷컴-and-닷넷/

[29] https://domainnamewire.com/2016/06/15/domainers-say-verisign-bungled-first-idn-launch/#comment-2239419

[30] https://www.name.com/domain/search/xn--qckyd1c.xn--tckwe

By Zak Muscovitch, General Counsel, Internet Commerce Association
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Verisign should be happy to have a robust secondary market since it benefits from it Gerald M. Levine  –  Nov 15, 2018 5:21 PM PST

An excellent and thoughtful article, Zak. Risk-taking investors created a secondary market in domain names based on a belief there could be future demand by businesses and other investors. This believe drove the commodification and withholding of words, common expressions, and phrases as domain names, thereby creating a scarcity with obvious consequences to asset valuation. But, part of the risk of holding non producing assets is cost, which (ironically) benefits Verisign which shouldn't be complaining since the more held the greater the benefit). In any event, Zak, a great article

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