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Why Vertical Integration Is Good for the Domain Name Industry

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Johnny Du

ICANN's decision a little over a week ago to permit the vertical integration of registries and registrars in the new top-level domain program, which now appears in the Applicant Guidebook published over the weekend, was as welcome as it was surprising. This bold, principled stance will fundamentally modernize the domain name industry and create competitive benefits that will be felt by consumers and under-served communities for years to come.

When ICANN was formed in 1998, one of its original mandates was to increase competition in the global market for generic Top-Level Domains (gTLDs). At the time, the forced division of registry and registrar functions seemed like an excellent way to achieve this goal. ICANN essentially enabled the creation of a domain registrar market that has, over the last decade, lead directly to lower consumer costs, greater innovation in products and services, and untold billions in new economic value.

Would .com and the other gTLDs be as successful as they are today without the innovative marketing campaigns of GoDaddy, the novel channel strategies employed by the likes of eNom and Tucows, or the fierce industry-wide competition on pricing and service that we've seen over the last 10 years? Almost certainly not. For all its flaws, ICANN's strategy to create competition in the registrar market was a very successful experiment. But it was of its time.

As the ICANN Board this month has now rightly recognized, there is no reason to believe that contractual rules put in place a decade ago to create competition in an existing marketplace make desirable policies when new marketplaces are created. Indeed, the reverse is true. For ICANN to carrying legacy cross-ownership restrictions — originally designed to break up a 1990s monopoly — over into the new gTLD process would very likely have had the opposite effect, simply reinforcing entrenched, dominant market positions. Some gTLDs introduced over the last ten years have struggled to gain the same kind of mind-share as .com, but the vertical integration (VI) decision means that the next wave of registries will be able to launch from a stronger starting position.

After the ICANN Board votes to approve vertical integration in the Applicant Guidebook (AGB), hopefully in Colombia on December 10, it will not be too many months before the industry will start to experience the same degree of innovation and competition as it did when the first registrars started coming online in 1999. Permitting VI will enable whole new classes of organization to apply for gTLDs and whole new classes of gTLD products. Creative new services and disruptive new business models, infeasible under the old regime, are surely even now fomenting in minds of entrepreneurs worldwide. The VI decision has reduced some of the risk associated with applying for a new gTLD, increasing the chances of the program creating many more successful new businesses.

Experience shows us that level playing fields and low barriers to entry are invaluable in spurring innovation, adding end-user value and creating wealth. Consider the short history of the web. Would it be as powerful an entrepreneurial tool as it is today if, for example, every internet user was trapped inside AOL's original "walled garden", with all the obstacles for start-up businesses that would have entailed? Of course not. The low barriers to entry for web-based businesses have allowed companies such as Google and Facebook to emerge from suburban garages and college dorms to become the dominant players of the online world. End users benefit and commerce thrives when it is made easy for new services to quickly launch. By enabling VI, while ensuring that existing registrars still have an important place at the table, ICANN is commendably embracing the open values of the internet.

One of the first innovations enabled by the lowering of the VI barrier is easy to guess. Without VI, ".brand" initiatives would have been fatally unworkable. Under the old rules, a company running a .brand registry in which it was also the sole permitted registrant could still have been obligated to register its domains, likely for a fee, via a registrar. You don't need to be intimately familiar with the technicalities of running a registry database to realize that such a situation would have been overly burdensome and complex, and of value only to the registrar in question.

Perhaps more significantly, many smaller, niche gTLDs that may have quickly fallen by the wayside due to lack of registrar support will now be able to more effectively market their domains. Think specifically of small geographical, cultural and linguistic TLDs. How many existing registrars offer services in the Galician language? Zulu? Basque? These registries will now be able to sell to end users "directly" via affiliated registrars, rather than needing to fight for shelf space on third-party registrars' web sites. Vertical integration means that low-volume, culturally significant gTLDs will not be subject to the same commercial pressures as their more profitable mass-market counterparts. Under-represented communities, including those using IDNs, will now be able to more easily thrive and grow online.

While the new market environment will force companies to be creative, and there will be challenges, there's no reason why new gTLD registries and pure-play registrars cannot continue to co-exist profitably. In the retail world, Apple creates great products and sells them directly through its branded stores; meanwhile Best Buy succeeds selling products from Apple and other suppliers. The same will be true in the domain name industry, and the new Applicant Guidebook continues to ensure that accredited registrars will be treated fairly and on a non-discriminatory basis.

ICANN's decision should be warmly welcomed by the industry. Whilst surprising, it was brave, timely, and a reassuring signal that ICANN is maturing as an organization. There will be challenges, certainly, and some companies may have to work harder than others in order to compete. Overall, however, we will see that throwing off the shackles of the legacy environment will lead to a more inclusive global domain name system and a better deal for consumers, while creating economic opportunities for all those willing to seize them.

By Johnny Du, VP, StableTone Ltd

Related topics: Domain Names, Registry Services, ICANN, Top-Level Domains



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