The new gTLD program and the introduction of 1200+ new domain name registries has significantly altered the marketplace dynamics. New domain name registries must navigate an environment that is, to an extent, stacked against them.

For example, most registrars discourage direct communication between their customers and the registry operators. However, many new registries address specific markets and must maintain contact with future and existing registrants to accomplish their objectives.

In addition, there is now a thriving and rapidly evolving Registry Service Provider (RSP) market that Registry Operators must navigate to procure economical and reliable service.

There is also regulation. Registry Operators are required to have each innovation pre-approved by ICANN in a process that is costly, reveals trade secrets, and stifles innovation.

These new entities must also absorb a $2 tax on every domain (through the Continuing Operations Instrument) before the name is sold.

Others in the eco-system, registrars, RSPs and registrants, face no such restrictions. For example, while registry operators must make their inventory available to all registrars, there is no reciprocal requirement for registrars to carry that inventory.

The challenges confronting these new TLDs are far different than those that faced the original seven gTLDs. Those challenges threaten the capacity of many TLDs to thrive. This requires an assessment and adjustment in the regulatory environment so that the marketplace can continue to provide increased competition and choice for the internet-using public.

This paper recommends creation of some improvements and a general de-regulation of the marketplace to encourage innovation and promote its overall health:

• making certain aspects of the “level-playing field” requirement reciprocal between registry operators and registrars,
• elimination of restrictions on all types of vertical integration,
• automatic accreditation of registry operators as registrars,
• abolition of all or most of the RSEP process,
• creation of a flexible ICANN fee structure

ICANN, or a combination of Registry Operators, should fund a brief, thorough study of the current marketplace because of the changes that have occurred from the original marketplace for which current regulations were developed.

Background

In the beginning, there was Network Solutions. NetSol operated the only open gTLDs (.com, .net and .org) and the only registrar. When NewCo (or ICANN) was created, it was charged with creating competition and choice for consumers. Even in those early days, it was recognized that creating competition in the registrar space was relatively easy and creation of more domain name registries would have to wait for the creation of ICANN.

The creation of registry-registrar marketplace was done with some care in order to facilitate nascent registrars’ engagement with the marketplace. Registry operators were tightly regulated (with a ruleset collectively called the “level-playing field). Registry operators were banned from selling directly to registrants; vertical integration was banned. Registry wholesale prices were fixed by contract. Registries had to make their names available to all registrars equally.

All of these restrictions did not really matter because there was only one domain name registry. Soon there was a few more as .org was transferred to ISOC; then .biz, .info, and a few others were delegated. They all had price controls and incorporated the same restrictions to support the registrar marketplace.

Some innovation was tried. The .museum registry inserted a wildcard into their zone in order to help users find their museum members. That was disallowed. The .museum registry also tried to reach out and sell directly to museums because registrars had little knowledge of museum culture, products, or services. That was also challenged.

For the most part however, the dynamics of the registry-registrar relations remained unchanged for several years and the arrangement was mutually beneficial.

The DNS Operating Environment 1998-2012

The new environment created by the new gTLD program resulted in many changes to the registry-registrar dynamic and the market forces exerted on the nascent registries. No thought was given to providing a nurturing environment as was done with the gTLD registrars at the time of their formation. As the market has evolved, registries have barriers to success that were unanticipated in 2012 but can now be rectified. The beneficiary will be the internet user.

The DNS Operating Environment 2012 and forward

The Level Playing Field

Registries must make their domain inventory available to all registrars that will comply with registry operator’s registration rules. Not so the other way around. Registrars often decline to onboard smaller (i.e., single TLD) registries. This is even the case where “vanilla” registries have no special registration restrictions.

If a combination of large registrars (each operating legally and independently) decline to onboard the same, small registry operator, that registry is effectively cut off from its market. This is not a rare occurrence. When applying for a domain name registry, the smaller (single-TLD) applicants no doubt counted on access to their market through the larger registrars. That is the promise of the registry-registrar separation model.

The evolution of the registrar marketplace and the concentration of power in the top-tier registrars has created a difficult situation for many new registry operators.

Now that the registrar marketplace and players are well established, it is reasonable that, to be an ICANN-accredited registrar, all registrars should support the market in certain minimal ways. (Just as an environment was created to foster the creation of competition among registrars 20 years ago.) If say, a registry operator is offering domains with no registration or operational restrictions, offering domains at pricing delivered to the registrar through EPP, and agrees to other market-sense rules such as a limited number of price changes, then every ICANN-accredited registrar should be required to carry that TLD.

There is evidence of certain other onerous burdens that might be on the horizon. Registry operators might be asked to guarantee a certain sales volume or revenue level before the registrar will carry it. A registrar might charge many multiples for the wholesale price, seeking to discourage its customers from buying names in specific TLDs in order to discourage certain business models.

Registry Service Providers

Transfer between RSPs

Evolution of the Registry Service Provider market is another area where new registries have been put on the back foot. In the past, registry operators were generally vertically integrated, providing their own “back-end service.” In the 2012 new gTLD round, the general rule was that a registry operator procured these backend service from an existing RSP. Seasoned RSPs offered often-onerous, long-term contracts. New registry operators were locked into fees that quickly became higher than market rates and diminished the chances of business success.

There is a transfer policy for registrants to switch registrars easily but no similar policy for registry operators who might switch RSPs as a means to increase competition, stability, choice or innovation. RSP-registry operator contracts should, as a matter of policy, be lightweight, with the ability to transfer to another RSP with relatively brief notice and no penalty.

Vertical Integration

Vertical integration of registry operator and registrar is tightly controlled where a vertically integrated registry operator-registrar combination must put up organizational and operational barriers between the two entities. No such restrictions exist for combinations of RSPs and registry operators. Transfer costs and revenue identification can be handled in any way the RSP / registry operator sees fit. RSP-registry operator combinations can realise significant economies of sale by combining staffs and infrastructure.

In a typical environment, a supplier generally wants to see its customer succeed. However, an integrated RSP-registry operator is in competition with other registry operators that rely on the RSP for services—a potential for conflict. That is the policy reason that, in some cases, vertical integration is restricted.

While it might require more study, my thinking is that there should be no restrictions on vertical integration either for registry operator-registrar combinations or RSP-registry operator combinations. Instead, allow registry operators to move freely among the RSP providers so they cannot be “punished” by any one RSP that might be re-evaluating its market position and business model.

Registry Operator – Registrant Relationship

Registrars prefer, and sometimes demand, that the registry operator has no direct contact with the registrant. This is so registrars can provide a controlled, repeatable environment for their customers. This was not an issue in the early days of the registrar marketplace. Verisign, the registry operator, has few areas of unique expertise it could share with its registrants because .com names are, well, generic. In the initial construction of the market, that was the role of the registrar: to provide knowledge, expertise and services to the registrant so that the registrant found the value in the uptake of the domain name.

Therefore, when the marketplace was created, there was justification for the separation between registry and registrar and to limit registrant contact to between it and the registrar. There was really no value added for Verisign to maintain contact with the registrant; it was of more benefit to the registrant to limit her contacts to the only the registrar.

The first instance of a departure from this practice was .museum described above. Registrars had neither the inclination to sell .museum names (given the registration restrictions) nor to allow .museum to sell domains directly to museums. Death.

Now there are many such registries that need to reach its registrants directly. My favorite example is, of course, .ART—where domains can be bundled with museum memberships or art classes. More importantly, the .ART domain registry might want to reach registrants post-registration with offers that not only extend domain registrations but also better connect art community members to one another. The same applies to .realtor, .med and many others. Most registrars seek to prohibit this communication though, and the new registries are left to decide between death by lack of access to the channel or death by being cut off from communicating with their target audience.

This is a difficult situation to resolve. Large registrars will reserve the right to dump registry operators who “interfere” with their registrar-client relationship. It is difficult or impossible to write a set of rules to govern this. On the other hand, registry operators are left with a choice they did not anticipate: lose access to a considerable amount of the market, or lose access to the client base they pledged to serve.

As described above, the best approach is to remove restrictions on vertical integration. Registry operators should be granted automatic registrar accreditations to provide one path to their customers. Existing registrars will still command the field but niche registry operators, whose mission calls for it to be directly in contact with its registrants, can pursue its market directly. This is no different than the vast majority of mature supplier-customer journeys. Registrars needed this protection against vertical integration at the outset, but the marketplace has matured and nascent registry operators should be allowed to use well-established registrar channels to reach their customers or to reach out to them directly.

As time goes by and some registry operators become adept at direct sales, registrars will have the incentive to form individual compromises with registry operators regarding registrant communications and the market will become even more efficient at reaching their customers. The deregulated marketplace will solve the issue of the level playing field requirements and unworkable regulation of vertical integration.

Innovation

Innovation among registry operators is constrained in more than one way.

RSEP

The RSEP process causes registries to publicize details of their innovation weeks, months or years before they are permitted to implement the innovation. This delay results in increased costs, public disclosure of trade secrets, and the elimination of a first-movers advantage—discouraging innovation.

Compare the situation with that of registrars. Among other changes in the marketplace, registrars implemented drop catching, domain tasting and registration agreements giving the registrar the first right of refusal when the domain expires. In each case registrars implemented these models without ICANN review.

ICANN review of registry business and technical initiatives was instituted because of the dominance of one market player, .com, and the effect its business moves can have in the market place. With over one thousand new registry operators in open competition, ICANN should no longer be on the critical path to innovation.

At a minimum, RSEPs no longer need to be public and no longer require a competition review (except in the case of a player with market power). New services increase competition, not bar them.

RSPs are free to deploy new platforms for delivering their services. They are free to offer IDN support or not. They are free to offer any new services or impose any contractual obligations to try to capture their market so long as they maintain use of the EPP. Registrars can offer any service or product not specifically prohibited by their contract. Only registry operators are barred from innovation.

An economic study could weigh the costs and benefits of the RSEP process but I no longer see a useful purpose to a public RSEP or one that evaluates effects on the competition.

Fees

The registry and registrar fee structures are also a bar to innovation. There are proposed models where domains registered in the thousands or more can support business infrastructure, inventory or cataloguing. Each domain on its own would generate little or no value, certainly less than the $0.43 fee imposed on each. The DNS is a stable, well-established place to store information (cf. block chain) but many of these uses are effectively prohibited by the fee structure.

There are work-arounds involving the use of third-level names and establishing sister organizations to “get around” the fee requirement. But this discourages efficient use of the DNS, company resources, and contractual compliance efforts. A fee structure should be developed to encourage innovation and provide appropriate revenue to ICANN.

Coup de grâce

While some of these proposals seem like changes as compared to the status quo, they are not. Look at the original set of domain name registries: .com / .net / .org / .edu / .gov / .mil / .int

The .com, .net., and .org domain name registries sold domains through many registrars. For these open registries, the prohibition on vertical integration worked. They paid a fixed annual fee regardless of the number of registrations so innovation was not constrained by a per-registration fee.

The other four registry operators sold to niche markets and sold to their registrants directly. They paid no fees to ICANN so that they could better serve their markets. For this set of registry operators, the ban on vertical integration was not contemplated. These operators of restricted or closed domain name registries are generally not affected by the same policies that affect open registries.

In the current environment, we now have our .com-like and our .edu-like registries and everything in between. The new environment includes over 1200 new registry operators with a broad spectrum of business models. It makes no sense to force .bank to use ICANN accredited registrars when the communications, online tools, security requirements and other aspects are all negotiated between the registry operator and banks (both individually and collectively).

The same might be true for .realtor or .law, which sells only to licensed practitioners but to whom the registrar channel is probably of great benefit. Then there are the registry operators with a portfolio of domain name registries. For these open models, the registrar channel is the sole path to reach their customers.

When born, the registrar marketplace included certain protections for registrars so that the registrars had the opportunity to build stable businesses. Now it is time to offer the new domain name registries some of those same protections by offering a reciprocal “level playing field,” generally deregulating the marketplace, and finding a fee structure that promotes innovation.