The Coalition for Internet Transparency (CFIT) filed an anti-trust suit against VeriSign for their monopoly control of the .COM registry and the expiring market of .COM domains. The claims were many including excessive financial pressure lobbying and lawsuits to force ICANN into renewing the VeriSign .COM agreement under very self-serving terms. ICANN inevitably was paid millions of dollars to settle the suit. However, the saga continues once again. The Ninth Circuit appeals court brought the case back to life [pdf].

In the light of continuous and relentless discussions and proposals by the Vertical Integration working group [Vertical Integration between Domain Name Registrars and Registries], one question is in the back of everyone’s mind. Could the decision on Vertical Integration backfire on ICANN and invite similar suits in the domain name space?

After close observance of months of talks, proposals and continuous disagreements in the Vertical Integration group one thing is clear: There will never be consensus. The solution will be a middle-of-the-road and will continue to protect the interests of the big registries and registrars.

I have made some comments at the Public Forum in Brussels about Vertical Integration and ICANN Chairman Peter Dengate Thrush made it clear that there was a working group already looking into the issues and that my concerns should be addressed there. However, my attempts to participate in the working group had been in vain and was rejected on the basis that my comments came too late to be considered and that “the learning curve would be huge,” despite being one of the most vocal supporters for new-entrant Vertical Integration. Would have been nice to have known beforehand how to participate in these discussions on creating “proposals,” since I was one of the few who commented in latest Vertical Integration public comments period.

This was akin to my rejection into the Business Constituency, where I was rejected on the basis of “conflicts of interest” because I could be a “potential” new registry. That did not stop the Business Constituency from admitting dotSport and dotBerlin though. I would be interested in talking further about issues still plaguing ICANN, where a few insiders get their way in determining policy and real conflicts of interests, but I will leave that for a future article.

What I find striking about all the Vertical Integration discussions is that I did not see any new entrants or newcomers giving feedback. This is problematic and guarantees that there would never be any resolution and a “one-size-fits-all” approach (status quo) would be adopted, benefiting the “big players.”

Most notable were VeriSign’s comments stating that the status quo “served the community well and facilitates a wide variety of product offerings, responsive customer service, and competitive pricing.” Isn’t VeriSign the same company that charges me $1000 per year for renewal of seo.tv? You can claim this is a ccTLD, but do not be fooled. This is a classic example of VeriSign saying what benefits them not the consumer or the community. I have dropped some “premium” .tv domains from Enom/VeriSign because the annual fee was ridiculously high i.e in the 4-figure of dollars per year. Give VeriSign a chance and they will “serve the community well” right? VeriSign controls over 50% of the domain market so the community has certainly served them well.

This proves one point that most people at ICANN do not understand in regards to registry abuse: the market will play itself out and abusers will be minimal if any. Why should everyone suffer because of a few bad apples? Vertical Separation is an excuse that makes no sense today, claiming it results in higher prices and the unavailability of great domain names. If the price is too expensive, consumers will find other alternatives. My example is as real as it gets.

This also proves another point. In the absence of competition, the big players will “gobble up” all the meaningful and barely-surviving registries and take advantage of their oligopolistic position. VeriSign runs .com, .net, .tv, while Afilias runs .org, .info, .mobi. They are not in the business of creating additional value to consumers. They just want to sell domains and charge small registries monies to run their backend operations. Nothing else. They are involved in selling as many domains as possible i.e the volume business. This is where the registrar relationships in regards to distribution and marketing are important. Registrars benefit because they are given equal access to sell these unrestricted “plots of land.”

It is interesting to illustrate that many new registries have adopted the short-term, “get-rich quick” domainer-centric approach. This is mostly to blame for the lack of availability of great domains to the general public. This has nothing to do with vertical separation. Is it registry abuse? Not really. I point to the auctions performed by .mobi, .asia and .me. These all went to the highest bidder. Is it good for society and in the public interest? Probably not, but it is what the market bears and it has nothing to do with Vertical Separation. I would argue that it is the Vertical Separation that prevents new registries from innovating beyond the traditional domain business and competing in other industries.

Proposals by Vertical Integration Working Group:

Here are some of the proposals discussed by the Vertical Integration working group. Everyone knows that the final outcome is rigged, since if there is no consensus the status quo remains (unless of course exclusions are made besides the Fortune-500 .brand scenario). If you have gone through the 50 pages of comments, you will see that there is zero possibility of consensus given the multiple proposals made by various ICANN interest groups. Here are the basic ideas behind them:

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“A Registry must be free to go about its business and Registrar must be free to go about its own business. It is not for ICANN to stipulate conditions that restrain the survival and growth of the Registries, Registrars and back-end service providers.”

My only issue with this one is that big registries and big registrars can exercise their market power to their advantage and financially weed out most TLD competitors. For example, the GMO registry is flexing its muscles with .shop. What are the chances a small competitor can outbid them or compete seriously against them? Small at best. Can you imagine VeriSign to be given this power?

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“It prohibits cross ownership between registry and registrar as originally set forth in the ICANN Board Nairobi resolution, but allows up to 100% cross ownership and even full vertical integration under the rules of a waiver/exemption process.”

The exception rule to vertically integrate makes the most sense of all proposals. The real question is whether this rule will apply to only .brands. The challenge lies in determining who qualifies to be an exception. My vote goes for new entrants that have zero stake in existing registries and registrars and who can clearly showcase an “extraordinary innovation, is in the public interest, where social benefits outweigh any social disadvantages, and reduces search costs.” This is a case-by-case scenario and verifiable not by mere “promises” but actual innovations that can be showcased with evidence not just written promises.

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“.brand gTLDs can vertically integrate, where the string is an identical match to the registry’s trademark/service mark, which we will heretofore refer to as “.brands.”“

This one is a no brainer. Possibly the only one the community will agree to since it involves mostly Fortune-500 companies. Who will say no to them anyhow?

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“Preserves the status-quo and separation of registries and registrars”

A path with no future and zero innovation is not a path that should be forced upon to new entrants.

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“For the first 18 months of the New TLD program, ICANN only may approve a greater than 15% for single-registrant (.brand), community (30,000 registrations maximum) and orphaned TLDs (30,000 registrations maximum). After the first 18 months, ICANN may amend the criteria for its approval of a greater interest only with consensus approval of the community.”

Why should seemingly-randomly selected numbers be adopted if their primary purpose is to limit the growth and undermine the success of new entrants? It seems that once minimal success is reached (30k registrations), then new entrants are patted on the back and told to relinquish any future growth they were anticipating because they need to “spread the wealth” to other registrars because it is the right thing to do to preserve registrars’ existence. Why should registrars be given equal access to piggy back other people’s work? If a restricted community does not want domainers or the general public to register their domains, what benefit would registrars bring to the table? Equal access is one thing, but expecting to be compensated without bringing something of value to the table is unfair. Why wouldn’t those “middleman” monies go to the respective communities you are serving instead?

VeriSign Statement About Vertical Integration:

I found VeriSign’s statement about Vertical Integration very interesting:

“In exceptional cases where a new gTLD is targeted at a narrow community, or the applicant is a single-registrant, single user (SRSU) or .brand, or the TLD is unable to gain support and distribution from existing registrars, a limited exception could enhance competition, guarantee distribution, and serve the public interest. Similarly, allowing a registry to also be a registrar, provided it does not externally distribute its own TLD, may also stimulate innovation and enhance competition.”

There is no explanation by VeriSign why a registry can not externally distribute its own TLD. It is merely a statement with no hard evidence to back it up. Also there is no indication what a “limited exception” is to Vertical Integration. Just the word “limited” implies controlled and pre-determined. Why doesn’t ICANN split up the .COM contract using the “equal access of registrars” methodology and apply it to registries as well? Isn’t this an example of a limited control exception too?

I am afraid if the situation pans out the way that the working group is envisioning, there will be problems with anti-trust repercussions. Just the mere fact that ICANN has forwarded the issue of Vertical Integration to the GNSO makes them responsible to come up with something that caters the year 2010 not 1995. The fact that the GNSO is chaired by Chuck Gomez, a prominent VeriSign executive, is in itself a conflict of interest or guarantees strong influence in the best interests of VeriSign. Yes, there might be others in the decision-making process but let us not be fooled. If VeriSign can hold the .COM contract worth millions of dollars, I am sure their influence is strong enough to assure the status quo remains. Not reaching consensus is the big player’s goal and the plan is working smoothly thus far.

Adding Exceptions to Vertical Integration:

The only way the Vertical Integration can work is using exceptions. These are case-by-case scenarios. Making up numbers, such as the 30,000 registration cap or 15% cross-ownership is arbitrary and without any economic foundation, when compared to the numbers that VeriSign, Afilias or GoGaddy have. Each new TLD can be a case-by-case scenario if they choose to be specialized and restricted. By adopting a number and forcing a new registry to be “penalized” if they are successful at attaining a higher registration count is outright anti-competitive and has no weight given that different new entrants will have different models that require flexibility, fairness and equal treatment. Competition and innovation can not be a reality if we are fooled by the misconception surrounding Vertical Separation, which is a protectionist policy not a policy that spurs innovation and competition. The status quo is protectionist. Some new entrants require full integration to spur innovation and greater social benefits.

For example, .music will be core to its mission and its music community in allowing only restricted members of sponsored organizations to register their names. Premium names such as “rock.music” will be a registrant-generated portal to benefit the music community registrants, where members of that specific genre (or city, country, language, keyword etc) are featured in those “valued” domains under the platform we have built over the last 5 years. Adding a random number such as the 30,000 maximum registration cap is unfair since it will count towards the premium domains we have reserved for the best benefit of out community. As a non-profit organization we chose not to auction domains out and use them to create social benefits, lower search costs and benefit the music community. Why should .music be penalized if it is working in the best benefit of their music constituents and ultimately the public interest? Why should there be caps or issues with ownership? How under the model I have described will there be abuse of data?

More importantly, if we will be including bundling and value-added services that stretch beyond the domain space, why should the issue of Vertical Integration be of concern? A successful new TLD will be one that can compete in industries other than the domain industry. The excuse for separation has always been abuse of registry data resulting into high prices and unavailability of premium domains. I just presented a situation where all the premium domains are used and self-generated by the music community registrants collectively for free for their benefit and the public’s benefit as well. Using the platform is free too. The only cost will be registering the artist’s domain name. Music industry public interest: yes. Public interest: yes. Low prices: yes. Free premium domain inclusion: yes. Value-added services and bundling: yes. Non-for-profit: yes. Multi-stakeholder governance: yes.

As a new entrant for .music, our goal is to increase innovation and competition beyond the domain space. The real focus should not be coming up with arbitrary numbers or cap limitations. We will not be competing on the domain name itself as a value proposition, so our main competition will be in the music space and in the music discovery / search business. Numbers are like statistics. You can mold them in any manner that fits the end goal of your organization. This is what many at ICANN are doing. Ownership percentages have minimal bearing. As a new entrant I have no issue with VeriSign or Godaddy having monopoly power just as long as I can be given the flexibility and the opportunity to compete across different industries.

If Vertical Separation is a true myth, then the real focus should be making a difference that really matters to prevent predictable or known abuse issues and coming up with a mechanism to deal with any abuses. These will be limited cases if any because abusing end users is not a sound business model, especially with so many new TLDs coming out. As the most recent economic report indicates, even a monopoly can create value by introducing new services/products. The absence of services/products makes the public worse off, so eliminating even the worst case scenario could be against the public interest.

As a non-for profit I would like to request that exceptions be made for new TLDs which are a member based, specialized, and are a restricted community that work in the public interest with neutral multi-stakeholder governance with fair representation. I would like to point out that in the case of .music, our public interest is the best interest of the music community. We leave the fans/users public interest to be fulfilled by the music community and the musicians themselves. This difference in the definition of “public interest” is important to understand. The music community’s best interest is to be compensated for their creative works/copyrights. The fans/users best interest is to get free music and to pay as minimally as possible (or get music for free). This is where the issue of public issue is quite volatile because there is a conflict of interest. In the end, both public interests are fulfilled because users receive the better services/products at more competitive prices or even free.

Just as long as registrars are given equal opportunity to participate, access and opt-in to restricted new TLDs with strict policies then this can be a benefit, only if they have something valuable to add to the table. While our .music TLD can be synonymous to .museum or .aero or .pro in regards to qualifications/membership/restrictions to be a member, the main distinction is we are going one step further to connect the dots between “home (TLD),” “discovery” and “content.” This is where vertical integration will bring social benefits to .music registrants, lower search costs for the public, as well as provide society alternatives not only in the domain space (vs. .COM, .NET, .ccTLD) but in the music industry (vs. Apple) and search industry (Google/Microsoft).

I think adding exceptions to the existing status-quo is the only solution. The large registries and registrars are too far ahead of any new entrant. Even with vertical integration, there is no chance anyone can create registries as big as .COM, .NET, .ORG, .INFO in volume. In the absence of much competition, .TV never reached the one million registration mark. Same applies to .ME. The .MOBI was borderline on 1 million and was recently bought up by Afilias, which also pretty much owns .ORG.

Vertical Integration: Social Benefits and Reduction of Search Costs:

I think it is fair to agree that whatever would lower search costs as well as would make the public better off are social benefits. While some may view some social benefits as social detriments, it is important to acknowledge that it is the cumulative effect of social benefits that is of importance. The latest economic report takes the worst case scenario - a monopoly - and points out that if social benefits outweigh social costs, then society would be better off overall. Innovations and services introduced by a monopolist would make society better because in their absence there would be zero benefits. This is an extreme example to illustrate that society is better off with the monopolist as without the monopolist.

In the case of new entrants, we have a completely different scenario because new, innovative models that provide valuable services and reduce search costs beyond the novelty new gTLD domain name bring more social benefits. I can equate this to the policy that the US Government has to award Green Cards to “Persons with Extraordinary Ability” (exceptions). These are case by case scenarios and the “persons” have the burden of proof to plead their case. I equate new gTLDs as “normal persons” and extraordinary new TLDs as “persons with extraordinary ability” that provide more cumulative social benefits on aggregate, provide lower search costs than normal as well as compete beyond the domain space using new, innovative technology or platforms that bring life to new services/products for society.
Exceptions for Vertical Integration

Here are some bullet points I would like to add for case-by-case scenarios:

• Cumulative social benefits greatly outweigh social losses on aggregate
• New gTLDs with “Extraordinary Ability” beyond the traditional new gTLD, which introduce transformative innovation in the space, which is qualified and substantiated.
• Services/products (not the TLD name alone) provide competition beyond the traditional domain space e.g Digital Music (vs Apple which controls 80% of the market) or Search/Discovery (vs Google which controls 75% of the market)
• Where the registrar set-up is customized and requires a more complex structure with other technology to service specialized community needs, which registrars will not provide.
• Where traditional marketing distribution of registrars is not needed and a separate marketing campaign is required targeting specialized communities. In the case of .music, we have no interest in domainers registering domains and will only target members of our community organizations. Hence, we will not be leveraging existing, traditional registrar channels, because our gTLD is restricted and highly specialized.
• Where registration threshold is detrimental and costly to new entrants if premium domains are used and leveraged by all gTLD registrants for their best interest. e.g. All .music premium domains will be used to benefit the community according to their tagging selection and which genre/sub-genre/language/city/country/ they select to be in. To bring this social benefit to both the music community and to music fans (new products & services/reducing search costs via direct navigation), we have to incur significant costs which include payments to our registry backend provider, to ICANN, to the server provider and the CDN (content delivery network) for bandwidth costs which will be very high since it is media based. In addition, we have incurred development costs over the last 6 years to provide the technology and platform. Caps such as 100k might be beneficial for some scenarios and not for others depending what counts as a registration or not and what costs are incurred to bring social benefits to registrants.
• Where society gains by lowering search costs through technology that aids in discovery and search
• Where society gains by preventing confusion and trademark concerns e.g Bands like Eagles, Prince, Queen, Kiss do not have their .com. By providing all international music brands with platinum sales their .music address, both music fans and the artist wins since trusted direct navigation “artist.music” can be used to find their favorite artists directly, also lowering search costs and increasing monies paid to artists, since users do not have to use “middlemen” Google, iTunes or 3rd party sites to find them.

These bullet points are real life examples. The 2 main costs that the Economic Report has is about trademark issues and user confusion. If those are alleviated while bringing an added benefit, it is without a doubt a social benefit, even if there is a small associated cost to it.

Conclusion

As the VeriSign lawsuit has shown, it is critical that ICANN does not shoot new entrants on the foot and cripple them from innovating and competing both in the domain industry and other industries if their model is suited for that function. Falling prey to the antiquated concept of Vertical Separation will create anti-trust problems. New entrants already have all odds stacked up against them. Keeping the status quo only makes the matters worse. The irony of the whole matter is that there is zero possibility that any new entrant can reach the levels of registrations of .COM, even with full vertical integration. Even reaching 1 million registrations (or the equivalent of just over 1% of .COM registrations), would be regarded as a miracle.

Adding exceptions for Vertical Integration is the only way forward given that there will never be consensus by the ICANN community. It seems that the trademark brand owners (.brands), wishing to completely integrate, will be on the top of this exception list. I expect this to be granted because of the influence big brand holders have in ICANN policy-making. However, what happens to the smaller players and new entrants?

My perspective is a simple one. If you are a new player who has never been a registry or a registrar, you should be given the green light to be allowed to vertically integrate with no limitations to growth. If you are an existing player in the domain industry, then restrictions can apply. If you are a significant player with huge market power, then the status quo remains.

Simplicity is king. The question that ICANN policy makers should ask themselves every day is the following: “Do our decisions improve the chances of new TLD entrants being successful?” The issue of high prices and low supply of premium domains is a market issue. It will play itself out. We can not be scared of the future and use registry abuse “scare tactics” to make sure a limited few fatten up their wallets. Their wallets will be fattened since new entrants will pay them for providing the backend registry services. Most big registrars wallets will be fattened up as well since most new TLDs would want distribution on their network (and for premium positioning in their “shelf space”). It does seem a bit self-serving and greedy from the major players to squeeze as much as they can from new entrants because they can. If new TLDs fail, who do you think will gobble them up at near-rock bottom prices? The big registries. There lies the tragedy of what we might expect in the future.

The assumption is that new entrants have a “huge” learning curve to participate and have their voice heard. The truth is we see things as they are and we can not be fooled. We understand more than many give us credit for. We understand that our voices do not really matter as much as others because the influence and power lies somewhere else. This is politics and self-interest at its glory. Now it all lays in the hands of the real “insider” ICANN policy makers. The success of ICANN and the new gTLD program lays in your hands.