Perfect Information: Involving Registrants in the Expiring Domain Names Market

By Ross Rader
Ross Rader

This proposal outlines the creation of a new market for the efficient disposal of domain names that are about to expire and how Registrants are best included as an integral part of this process. This document does not make any proposals regarding the existing primary or secondary markets for domain names.

Further, this proposal is not intended to criticise, condemn or make any declarations about the appropriateness of any particular primary or secondary market business models. As an underlying principle, this document assumes that the market itself is in a far better position to make judgments of this nature.

This proposal first describes the current state of the market and then recommends a fundamental structural change that will allow the market to function in a healthier, productive and more efficient manner.

Like the internet, the domain name market continues to evolve and is not in its final state. The current state lends more to the imbalance of information in the market than to any compelling business forces. Specifically, Registrants have little knowledge of the value of the domain names they let expire. A market that permits registrants access to that information would result in them benefiting from typical supply and demand forces with which particants in other, more efficient markets, benefit.

Furthermore, this arrangement create tensions in the market that would incent all parties to engage in rational, sustainable and efficient behaviors over the long term - a feature that does not exist under current arrangements.

Names in the Expiry Process...

There is an extremely active trade in domain names that have been previously registered and are allowed to expire by the Registrant. These names are bought and sold by a small group of businesses who take advantage of two elements of value. The first is the latent traffic that all "expired" domain names possess. This is website traffic that continue to come to the domain name, either through historical inbound links or errant navigation (misspellings or semantics) that can be used to create "clicks" on contextual links that are aggregated and sold to Overture, Google and other cost-per-click ("CPC") marketplaces. The second element is the potential value of the domain name on the secondary market.

Estimates indicate that 2-5% of expiring names have a value reasonably in excess of what it would cost to renew it. Anecdotal evidence indicates that at least one name per month, often more, sells for over $10,000.

Importantly, these uses are other than what were viewed as "expected use" for a domain name (such as in connection with a website or email) when the industry structure was initially set forth.

Supply dynamics...

Approximately four larger suppliers and a number of smaller ones service this market. Let's call them Expiry Service Providers or "ESPs". Their role is twofold. First, they aggregate demand via auctions and similar mechanisms. Second, they regularly flood the registry with a continuous barrage of registrations requests over the shortest period of time possible just as desirable domain names become available for re-registration. The results of these auctions determine the intensity of the registration requests dedicated to each name.

The volume of registration requests an ESP can dedicate to a particular transaction is limited by the level of resources that each registry provides to individual registrars. Each registry provides each registrar with a specific level of access to the registry resources. Each registrar is afforded the same level of access with no differentiation made on the basis of transaction volume, sales revenue, resource usage or other factor. In ICANN-speak, this arrangement is called "equivalent access to registry resources".

ESPs work around equivalent access limitations by aggregating the resources of multiple accreditations (which are borrowed or otherwise accumulated through a multitude of different schemes). The more registrar accreditations an ESP has access to, the more resources it can bring to bear on the registry.

This behavior was institutionalized in 2001 with the creation of the first gTLD registry "batch" pool. Registration requests for "about to expire" domain names (then call "add-storms") had become fierce enough to negatively effect the regular course of business for normal registry and registrar operations. The solution was to implement a batch pool of processing resources as a temporary fix to the service degradation and resource contention problems caused by the add-storm within the registry's primary production environment. This allowed those wishing to re-register expiring domain names to do so without effecting the normal course of business of registrars engaged in regular registration and administrative activities.

Accumulating, maximizing and optimizing access to the batch pool quickly became an arms race. ESPs began paying for use of a registrar's regulated access to the batch pool as a normal cost of business. This started with registrar's that were inactive and quickly moved to include registrars of all types. Monthly fees paid for use of an accreditation or "cred" peaked earlier in 2004 in the range of $20,000/month.

As the value of a cred grew, the number of registrar accreditation applications to ICANN grew exponentially. It was widely reported at the recent ICANN meeting in Kuala Lumpur that one party had recently submitted and received approval for a rumored 100-plus accreditations that have since been devoted to the war on the batch pool. ESPs have also gone to the significant expense of locating specialized data centers in Virginia to minimize network latency by being as "internet-close" as possible to the registry as possible in an attempt to optimize their request efficiency to yet another degree.

It is important to note that all of this activity exists simply to deal with imperfect information and regulatory limitations; "first-come-first-serve" registrations, equivalent access to registry resources and mandatory flat pricing of domain name registrations at the registry level. These are all functions of an evolving market and yesterday's rules relating to today's problems.

Demand dynamics...

Best estimates indicate that this is a $4m/month market and that significant growth will continue for the foreseeable future. A few large players have secured the lion's share of the market, but this does not seem to have deterred the hundreds of smaller players who continue compete in this space.

There area number of secular drivers that will ensure the growth of this market for the foreseeable future; growth in CPC rates, the economics within CPC itself and an increase in the number of participants in this market. The market will also benefit from the growth in Internet usage in general.

The Problems...

First the good news. There is real value in the aggregation of demand that has taken place. There have been efficiencies created in information, in aggregating traffic and in monetizing it. Most importantly, a floor has been set on the value of a domain name.

But there are significant problems with this state of affairs.

First, these arrangements threaten to fundamentally, and inappropriately change the concept of what it means to be a "registrar" in the ICANN context. Accreditations are now being put to a uses almost diametrically opposed to those accounted for at the onset of competition. This has implications in terms of regulating registry access, in terms of fees, costs and budget contribution and also in terms of policy development at the GNSO level (who does the registrar constituency actually represent?).

The extent of the distortions to the concept of "registrar" are best illustrated simply by noting that it is currently much more profitable to simply "rent" an accreditation to an ESP than to actually operate a business selling domain names to the public.

Second, the registry is subject to significant and costly load that it must devote considerable time and investment to sustaining. Unable to recover even basic costs, the registry must continue to make increased allocations for no additional benefit. The issue of whether the registry "should" or "should not" provide such services or whether they are well compensated for doing so is besides the point. The real issue is that the registry is expending much in the way of time, money and people to a market other than that it was originally contemplated that they would serve.

Third, and most importantly, the market exists because registrants are being kept in the dark. This can be demonstrated conclusively with one simple question; "Would any current registrant with perfect knowledge that the value of their expiring domain name was in excess of $50 let the name expire for nothing? At $30?" It may be reasonably argued at what level this line should be drawn, but certainly not that it should be drawn.

The market evolved...

The current market exists for the benefit of three groups. ESPs, registrars renting access to the batch pool and acquirers of large pools of names. This is an unsustainable situation. Better information or more efficient market alignment would inevitably work to the detriment of these three groups and to the benefit of registrants.

The most helpful analog is the online auction phenomenon. Before online auctions there were whole classes of goods that gathered dust in various closets, garages and attics. With the advent and adoption of new auction technology, efficiencies were realized and entire markets opened up. The market for expired names currently operates as if some small group of people had access to those goods and sold them solely to another small group. The price that the buyers pay is less than what might otherwise be generated and the money all goes to those with access to the goods. Put another way, this is regulatory arbitrage.

This is not intended as an aspersion. To the contrary, this underscores the creativity and level of innovation that occurs when monopolies are opened to competition. However, in the interests of continued innovation and increased competition, the market must evolve in order to remain viable. It must become a marketplace open to all.

It should also be reiterated that the current situation is part of a natural market evolution, not some failure on the part of ICANN or the registry. Markets always evolve in unforeseen ways and we cannot expect those charged with administering those markets to know the unknowable.

When inefficiencies exist in a market there are two responses. They can be exploited in the short term, usually for significant economic benefit. The alternative is to introduce efficiencies that tend to be of lower absolute economic benefit but have much greater longevity. The market for expiring domain names is now at a stage where it is ready for the second, healthier, response.

In sum, both ICANN and Verisign registry are currently forced to spend significant, unsustainable resources in terms of people, time and money dealing with the current inefficiencies. This is all for the benefit of a small group that exists primarily because of imperfect information available to current registrants.

Essentially the demand side of the ESP market has evolved to create a useful efficiency. The supply side, however, remains woefully inefficient. This must change. The catalyst that will allow the market to move towards greater efficiency and a healthier market is to increase the flow of information to current registrants and accommodate the corresponding effect of increasing the flow of benefits to them.

Elliot Noss & Ross Wm. Rader, August 31, 2004. This post originally appeared at "Random Bytes"

Creative Commons License
This work is licensed under a CreativeCommons License.


By Ross Rader, Director of Innovation & Research. Visit the blog maintained by Ross Rader here.

Related topics: DNS, Domain Names, ICANN, New TLDs

Comments

Re: Perfect Information: Involving Registrants in the Expiring Domain Names Market Roger Williams  –  Sep 05, 2004 9:20 AM PDT

Your unclear and vague 'solution' already exists. There are at least two sites that provide an appraisal and auction service:
sedo.com
afternic.com

They also provide an escrow service to mediate the change of ownership process.

Re: Perfect Information: Involving Registrants in the Expiring Domain Names Market Ross Rader  –  Sep 06, 2004 1:03 PM PDT

Yes - but current auction models only work for those registrants that keep their registration from expiring into the "drop market". i.e. they keep paying the renewal fees until someone decides to purchase the name.

Re: Perfect Information: Involving Registrants in the Expiring Domain Names Market Gordon Martin  –  Sep 06, 2004 10:02 PM PDT

In short what your saying is that the markets are evolving.  Businesses that service them are evolving and innovation is alive and well. I fail to see your reasoning that this is somehow "bad" and must be changed.

"As an underlying principle, this document assumes that the market itself is in a far better position to make judgments of this nature."

I agree and you should have quit right there.

"Monthly fees paid for use of an accreditation or "cred" peaked earlier in 2004 in the range of $20,000/month."

Try in the $30,000 range.

"Third, and most importantly, the market exists because registrants are being kept in the dark. This can be demonstrated conclusively with one simple question; "Would any current registrant with perfect knowledge that the value of their expiring domain name was in excess of $50 let the name expire for nothing? At $30?"

Yes they would.  I and others do it all the time.  fact is at that price they are not substainable and don't derive sufficient revenue to continue.  Drop it and someone else may be able to make a more efficient use of it.  I can also tell you of circumstances where I have offered $800 on a 8k asking price only to have it refused and the domain DROPPED a few months later.  You also presume the previous registrant has some devine right to continue "ownership" forever.  Fact is we lease domains and mistakes happen.  You forget to renew, you die, bankruptcies etc etc.  Reasonable safeguards exist to cover these but once those are extinguished the market is free for anyone and open to anyone.  And should be.

"In sum, both ICANN and Verisign registry are currently forced to spend significant, unsustainable resources in terms of people, time and money"

What money does ICANN spend on this market??  In fact it's revenue is driven by the # of registrars and that has increased exponentially.  If anything this has contributed hugely to Icann and it's wasteful "tour the world" ways.

Verisign renewed its last contract with all this demand in mind.  Obviously it was priced into their contract and by their own admission didn't impact them hugely.  What you suggest would in fact relieve them only of "costs" associated with their contract that they already agreed to.  Increasing their profit.

Re: Perfect Information: Involving Registrants in the Expiring Domain Names Market GamerGoal  –  Sep 07, 2004 5:47 AM PDT

Mr.Rader,

Aren't you just rewording "WLS" differently?

Re: Perfect Information: Involving Registrants in the Expiring Domain Names Market Roger Williams  –  Sep 07, 2004 9:07 AM PDT

So then what you are suggesting is that people use Tucows' brand new auction service:
http://biz.yahoo.com/prnews/040907/nytu194_1.html

Nice PR work. =)

Re: Perfect Information: Involving Registrants in the Expiring Domain Names Market Ross Rader  –  Sep 07, 2004 2:25 PM PDT

Gordon -

"I fail to see your reasoning that this is somehow "bad" and must be changed."

Hmmm. Not sure that this was the point that I was trying to get across. Let me try again - there are imperfections in the market that we should recognize and move past. Lack of disclosure is just the most obvious - flat rate pricing, first-come first-served allocation and equivalent access are also an issue. What's "bad" isn't the competitive activity in the market place, but the drivers that fuel the market place.

You also presume the previous registrant has some devine right to continue "ownership" forever. Fact is we lease domains and mistakes happen. You forget to renew, you die, bankruptcies etc etc. Reasonable safeguards exist to cover these but once those are extinguished the market is free for anyone and open to anyone. And should be.

Nope - not making that presumption at all. In fact, all that the Perfect Information proposal states is that a registrant should have line of sight to the value of their domain name were they to let it out for auction. Once possessed of that information they can choose to keep it, auction it or let it expire.

What money does ICANN spend on this market?? In fact it's revenue is driven by the # of registrars and that has increased exponentially.

ICANN is forced to accredit registrars that are being created solely for the purpose of competing in the batch pool cred race. This has a huge cost associated that would be avoided in a more rational market. Cred players don't contribute much of anything along the way net of accreditation fee's - which if you are familiar with the current budget, trend to $0 if the current arms race continues.

Verisign renewed its last contract with all this demand in mind. Obviously it was priced into their contract and by their own admission didn't impact them hugely. What you suggest would in fact relieve them only of "costs" associated with their contract that they already agreed to. Increasing their profit.

So because its good for Verisign, it should be avoided? I'd also remind you that its good for registrars, registrants, ESPs and ICANN. Should we forgo a more efficient arrangement because Verisign might see increased margins? I'm not sure this makes sense on any level.

Re: Perfect Information: Involving Registrants in the Expiring Domain Names Market Ross Rader  –  Sep 07, 2004 2:29 PM PDT

Roger -

So then what you are suggesting is that people use Tucows' brand new auction service:
http://biz.yahoo.com/prnews/040907/nytu194_1.html

Nice PR work. =)

No, not at all. In fact, the opposite. I address this in more detail on my weblog (the entire post is here) but to summarize, the Perfect Information proposal (PIP) is a global view of the way things ought to be. The Tucows specific auction service that we announced today is just a localized version with quite a few shortcomings. In fact, we see anything that comes out of PIP as competitive to our own localized implementation…

Now of course, I say that knowing full well that the timing of these two documents was completely coordinated - but please don't mistake them for being "the same thing"…

Re: Perfect Information: Involving Registrants in the Expiring Domain Names Market Ross Rader  –  Sep 07, 2004 2:31 PM PDT

Gamergoal -

Aren't you just rewording "WLS" differently?

Not at all. WLS is a second generation view of how things ought to have been done two or three years ago - and it deals exclusively with domain names that have already expired. The Perfect Information proposal exclusively talks about the opportunity as it relates to domain names that will likely, but haven't yet, expired. Entirely different from WLS and much more synchronous with the way the market operates today.