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Co-authored by Zak Muscovitch and Nat Cohen. Click here to read Part I of this post.
In conjunction with Part I, the main arguments of notable commenters are summarized below.
Many of the commenters are aligned in their positions as indicated on the following chart:
Mr. Arif Ali, a lawyer with Dechert who is very familiar with ICANN governance and has represented numerous parties in ICANN related matters, wrote an extraordinarily detailed and comprehensive critique of the LOI and of Amendment 3.
Mr. Ali noted that two of ICANN’s most important obligations are to operate for the benefit of the Internet community as a whole and to enable competition and open entry in Internet-related markets, and that the proposed price hikes do not support these obligations and instead strengthen Verisign’s dominance of the DNS at the expense of other market participants.
Verisign has been described as “having a virtual monopoly on Internet domain names” that gives it “unrivaled power” and that its “exclusive contract with ICANN gives the company a significant barrier to entry for other competitors”.
Verisign’s “market power is so significant that the United States Department of Commerce (“DOC”) specifically imposed a price cap on the price of .COM registrations to protect the public interest through its Cooperative Agreement with Verisign”.
Instead of restricting Verisign’s influence over the DNS, ICANN’s proposed Amendment and LOI will only help Verisign cement and expand its monopoly
Amendment 35 merely permits Verisign and ICANN to agree to amend Section 7.3(d)(i) (Maximum Price) but nowhere does Amendment 35 require ICANN and Verisign to increase the prices for .COM registry services, let alone raise them to the maximum amount permitted by Amendment 35.
Any price increase is unnecessary and entirely unwarranted. Nothing about the nature or circumstances of Verisign’s .COM registry services necessitates a yearly price increase. Rather, Verisign’s revenue continues to increase on a yearly basis, and its operating margin exceeds 60%—among the highest of any S&P;500 company. By contrast, Verisign’s yearly costs and expenses have decreased over the past decade. At bottom, there has been no change to the DNS, generally, or the circumstances surrounding Verisign’s management of the .COM gTLD, specifically, that would warrant a price increase, let alone annual price increases instituted at Verisign’s unilateral discretion.
The evergreen price increases authorized by the Amendment will have long-lasting and devastating consequences for the Internet community. Hundreds of millions of domain name registrants will suffer. Domestic and international businesses, non-profit and charitable organizations, religious institutions, humanitarian groups, and individual persons alike will pay more (and then more and then even more) for their .COM domain names, year after year, while Verisign’s profits surge. Even worse, perpetual price increases like those permitted in the Amendment risk creating a cost-prohibitive barrier to the .COM gTLD, eliminating access to the world’s most important gTLD to those who cannot afford to pay the price of admission.
The Internet community has rightly been concerned about the nature of ICANN’s relationship with Verisign for years now. Because Verisign’s domination of this critical resource will renew automatically for the foreseeable future, Verisign’s actions should be subject to heightened scrutiny. Instead, the proposed Amendment and accompanying LOI perversely grant Verisign more power with less oversight. The only rational explanation for this inexplicable proposal is that ICANN’s and Verisign’s relationship is far too familiar, and has resulted in an arrangement where ICANN and Verisign profit themselves at the expense of the public. ICANN’s responsibility is to the Internet community and public as a whole, not to Verisign.
ICANN’s tolerance of Verisign’s efforts to increase its profits from the .COM domain extends to Verisign’s clear efforts to circumvent and even re-write ICANN policies and procedures - further confirming the hand-in-glove nature of their relationship.
Mr. Ali urges ICANN to reject both the Amendment and LOI as they are presently drafted. In order to act for the public benefit and protect competition in the DNS, ICANN must not further strengthen Verisign’s position as the .COM registry.
The ICA, which is the author of this report and which represents domain name investors, domain name registrants, secondary marketplaces and related service providers, questioned the legitimacy of the public comment process and ICANN’s ability to represent the public interest as a result of the fact that ICANN made “exactly zero” changes to the .org Registry Agreement despite overwhelming opposition and condemnation from stakeholders during the corresponding public comment period.
The ICA echoed the view of the Business Constituency which has repeatedly implored ICANN to see community input before reaching any proposed agreement, as otherwise, ICANN’s position is already firmly entrenched and its direction already established, thereby putting the cart before the horse.
The ICA took issue with how ICANN repeatedly and apparently reflexively, repeats the mantra, that “ICANN is not a price regulator”, as if it makes any sense. ICANN has been setting prices of years and negotiates prices every time it enters into a contract. ICANN as the steward of the .COM Registry, is of course entitled to determine what its service provider, Verisign, can charge in respect of a public resource that ICANN is supposed to manage in the public interest.
The Antitrust Division of the U.S. Department of Justice specifically determined in 2008 that Verisign possesses significant market power as the operator of the .COM Registry because many registrants do not perceive .com and other gTLDs and ccTLDS to be substitutes. This market power means that Verisign is not constrained by competitive forces from raising prices on its captive base of .COM registrants especially given the prohibitive switching costs for registrants. As there is no genuinely adequate substitute TLD for .COM, Verisign is the only source for new registrants wishing to enjoy the distinct benefits of branding on a .COM domain name
If there was ever any hope that the new gTLDs would present effective competition to .COM that prices would naturally be constrained by market forces, the results are in and it didn’t happen.
The ICA posits the question, ‘if ICANN is not a price regulator, then who is?’ The Department of Commerce does not set prices for the .COM Registry. Rather, it leaves it up to ICANN. And if neither the DOC nor ICANN sets prices, then who gets to set prices? Verisign, the service provider with market power? That is an absurd situation which if allowed to occur, would surely cause untold damage to the public interest.
Setting prices is a policy matter when it comes to the .COM Registry. If ICANN intended to adopt such a radical policy of permitting Verisign to set its own prices, that is a matter for stakeholders to determine, and there has never been any such policy development nor agreement amongst stakeholders.
The ICA also disputed ICANN’s claim that the Proposed Amendment “fulfills commitments that ICANN and Verisign made in 2016 when they previously amended the .COM RA”, and pointed out that ICANN never committed to raising the Maximum Price that Verisign was permitted to charge for .com registrations.
Amendment 35 to the Cooperative Agreement merely states that “the yearly price for the registration and renewal of domain names in the .com registry may be changed” [emphasis added], and that “ICANN may agree to amend” the Maximum Price [emphasis added].
NTIA’s Statement on Amendment 35 expressly stated that Amendment 35, under the heading of “Pricing Flexibility”, merely “permits Verisign to pursue with ICANN an up to 7 percent increase in the prices of .com domain names” [emphasis added].
It is therefore clear from the .COM Registry Agreement, Amendment 35, and NTIA’s Statement, that NTIA did not require or impose a 7% increase in price and that it remains up to ICANN whether to agree to give Verisign any increase at all, or if an increase is to be granted, whether it should be within the maximum of 7% instead of at the maximum.
Since Amendment 35 requires no increase in price whatsoever, and at most provides “flexibility” of up to a maximum 7% annual increase in 4 out of 6 years, it would be consistent with Amendment 35 if no changes at all were made to the .COM Registry Agreement. At most, all that ICANN is required to do pursuant to its .COM Registry Agreement obligations is to consider whether allowing Verisign to charge more, is justifiable.
The ICA stated that it is an extraordinarily serious concern that ICANN would apparently assume that it “has no choice” but to give Verisign permission to raise its prices, when there is no such legal obligation.
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. Even conservatively assuming that in six years’ time there are only 140 million .com domain name registrants, that increase of $2.44 per year, per domain name, would result in $341,000,000 more revenue for Verisign per year.
Without any price increase and as things already stand now, Verisign, has a market capitalization of nearly $25 billion dollars and had net income in 2017 of US $457 million on revenue of $1.14 billion. Verisign enjoys an incredible operating margin of around 60%.
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. Afilias runs the much smaller .org registry, with its 10 million domain names under management for approximately $1.80 per domain name per year.
Accordingly, by any reasonable estimation, Verisign is not suffering for lack of revenue nor is it deserving of increased revenue. The current rate of $7.85 is already far in excess of market and there is no justification for increasing prices.
Greg Rafert, Ph.D. submitted an Economic Analysis based on his training as an economist, his review of the available evidence, and experience with ICANN and the TLD marketplace.
The conclusion is that “there is no economic rationale for Verisign to increase prices for .COM and that increased prices will very likely harm consumers”.
The rationale of “heightened competition” has been provided as a reason for increasing .COM pricing, however this would typically lower, not increase prices. Moreover, Verisign has not provided a rational as to why increased competition would require it to increase prices for .COM.
Verisign’s gross profit and operating margins have grown significantly over time and are currently high relative to other firms, which suggests that changes in Verisign’s costs are not driving Verisign’s interest in increasing prices for .COM.
An increase in the price of .COM registrations will harm consumers worldwide, as consumers are unlikely to switch to other, less expensive TLDs due to the high costs associated with switching from a .COM domain.
While Verisign may argue that it will use increased revenues from .COM price increases to further improve the security and stability of the internet, thus benefiting consumers, this is unlikely. In particular, even though Verisign’s net income has continued to grow, reaching approximately $612 million in 2019, Verisign’s R&D;and capital expenditures have remained constant.
The argument that .COM is facing increased competition from new gTLDs and ccTLDs is not supported by the available evidence. .COM enjoys a dominant position in the TLD marketplace, which will allow Verisign to continue increasing prices (if permitted to do so), thus harming consumers.
The proposed wholesale price increases in .COM that will negatively impact current and future registrants of .COM.
While the new gTLD registries are facing a significantly new world of competition, this is not true for legacy gTLDs, particularly .COM. From an end user’s perspective, Verisign’s .COM does not have natural competitors to constrain retail pricing within the market.
There is no effective competition to assist in establishing what is a reasonable price for .COM. Before ICANN agrees to price increases for .COM, ICANN should conduct an independent economic study of the domain name market and the effectiveness of competition on legacy gTLD pricing levels. The study should be conducted and considered prior to the first increased pricing year. Further, such a study should also take into consideration whether competition can effectively constrain prices should it ever be considered to remove price caps on .COM. Performing such a study is consistent with ICANN’s obligations under its Bylaws and is consistent with the September 2018 recommendations of the Competition, Consumer Choice, and Consumer Trust Review Team (CCT-RT).
As the burden for an increase on .COM ultimately falls on the registrant, it is incumbent on ICANN to ensure that any decisions made are based on relevant data and that any price increases have been duly considered with the entire community’s best interests in mind.
Namecheap, the third largest registrar with over 10 million domain names under management, demands that ICANN actually use the public comments to modify the Proposed Amendment 3 to align with the overwhelming and unified opinion of the ICANN community. Incorporating feedback from the vast majority of the ICANN community is essential for maintaining the integrity of ICANN’s multi-stakeholder model. Failure to do so will show that ICANN org will use the multi-stakeholder model when it fits ICANN staff’s whimsy, but not when a broad cross-section of the community is universally aligned against ICANN staff’s unilateral decisions that will significantly harm the community.
Under the Proposed Amendment 3, within 10 years, .com domains could cost approximately 70% more than the current wholesale price of $7.85 - and this cycle will continue in perpetuity. The .com registry is well established, so due to gained efficiencies, the cost of .com domain names should remain static or go down
It is not clear how much registrars will pass these price increases along to consumers, but it is likely that most of this increase will be paid for by domain name registrants.
The changes to the .com agreement will have a much bigger impact on the Internet due to the dominance of Verisign and the .com TLD. There are 359.8 million total domain names, of which 144 million are .com—representing 40% of all domain names. With 161.8 million country specific TLDs (ccTLDs), there are 198 million generic TLDs (gTLDs). That means that .com is 73% of gTLD domain names. Verisign also operates the .net TLD (13.4 million domains). Verisign is the dominant force in domain names- responsible for setting the wholesale price for 79% of all gTLD domain names.
Since 2012, the wholesale cost for a .com domain name was capped at $7.85 for consumer protection. During that time, the number of .com domains increased from 106.2 million to 144 million (an increase of 35%). During this same period, Verisign’s net income rose from $320 million in 2012 to $612 million in 2019 (an increase of 91%). It is estimated that the cost for Verisign to operate the .com TLD is approximately $1.00 to $3.00 per domain name,6 with the remaining wholesale price representing a significant profit for Verisign’s no-bid contract with ICANN. Consumers would be better protected if ICANN allowed the .com (and other pre-2013 TLD) contacts to proceed to competitive bidding to ensure consumers (rather than corporations) are protected. Absent allowing other entities to bid on the contract to operate the .com TLD, ICANN must ensure that strong consumer safeguards are in place if this monopoly is allowed to continue.
ICANN and Verisign agreed in 2016 to keep the wholesale price capped at $7.85 through 2024.7 It is not clear why ICANN is allowing this early amendment, which only benefits a multibillion dollar company and its shareholders, to the detriment of Internet users (including the 144 million .com domain name registrants).
ICANN has previously conducted marketplace studies, and it is imperative that such a substantial change to the DNS should only proceed after the completion of an independent and unbiased market analysis based upon evidence and community feedback (following ICANN’s established multi-stakeholder model).
The Head of Domains at WordPress and Automattic, an ICANN accredited registrar, “took issue with the process by which this amendment has been negotiated and several changes proposed”.
Verisign operates from a position of extraordinary privilege with the presumptive renewal of its highly lucrative contract to operate both .COM and .NET TLDs. TLDs which represent three-quarters of all gTLD registrations. This proposed amendment for the .COM contract, having been negotiated without the prior consultation of the wider ICANN community, represents a significant blind spot of the ICANN organization to uphold the multi-stakeholder model.
The .COM TLD has benefited from a nearly three-decade head start on the
majority of its gTLD competition. During that time the company has enjoyed
the benefits of Moore’s Law, and yet still sought wholesale price increases
for its services. It is deeply flawed to believe that competition will restrain wholesale prices. There is no competition for this specific wholesale product as there might be with a physical good. Verisign has to compete with no one, however, Registrars must compete on the razor’s edge of what Registrants are willing to pay. Consider that Verisign has taken every price increase opportunity afforded it.
Beyond objecting to the removal of price caps while Verisign maintains
presumptive renewal rights it is alarming to allow the ability to raise prices for “extraordinary purposes” including the implementation of Consensus Policies, etc. This is simply unacceptable. This is part of the business of running a registry and technology company.
The proposed amendment would remove the stay on price caps through
2024 which ICANN and Verisign committed to in 2016. What good are such obligations if they are simply reverted at their request? This erodes what is left of the trust the community has in the ICANN organization.
The $20MM USD payment Verisign is questionable at best, and far worse in less
charitable optics when considering the shortfall of the ICANN budget. There
is a complete lack of accountability behind this payment and without oversight, there is no guarantee it will be used for anything other than general ICANN operations.
ICANN is urged to heed the community commentary regarding this proposed
amendment. The Internet community cannot afford the continued discounting
of our collective concerns as it has become the norm each time a public
comment period is opened.
TurnCommerce which operates the registrar, Namebright and which is associated with Huge Domains, noted that “the mere fact that Amendment 35 allows Verisign to raise .com registration prices does not create an obligation on the part of ICANN to agree to any price increase”.
ICANN’s proposed acquiescence to Verisign’s demands for a price increase to the maximum extent allowed by the U.S. Government only proves that ICANN has failed in its duty to represent the interests of its stakeholders and ensure robust competition in the management of Internet names and addresses. It is ICANN’s duty to regulate and supervise the operation of the .com Registry, including the prices that the registry operator may charge, and to carry out those duties in the public interest. Amendment 3 is a breach of these duties.
The root problem is Verisign’s perpetual, no-bid contract to operate the .com registry. If ICANN is to meet its obligations, it must abandon this anticompetitive arrangement and require competitive bidding.
ICANN has attempted to justify this anticompetitive arrangement on the basis that a change in registry operators could be disruptive, and that a registry operator without a presumptive right to renew would have fewer incentives to invest in the TLD. However the U.S. Department of Justice, Antitrust Division has forcefully rejected these arguments:
“Opponents of competitive bidding on renewals have contended that ICANN needs to grant perpetual registry contracts in order to motivate registry operators to invest in their registries. However, incumbent registry operators have an incentive to make investments in order to maintain their competitive advantage in a rebid situation. Thus, the effect of innovation of potential termination of a registry agreement is at worst inconclusive. Further, experience demonstrates that any concern about the risk of transferring a new gTLD registry after a rebid is misplaced. Management and operation of many gTLDs and ccTLDs have been successfully transferred without imposing undue burdens on the DNS stability or security. For example, VeriSign successfully transferred the .org registry to the Public Interest Registry in January 2003.”
Every time that a registry operator has faced competition for a registry contract, lower prices have resulted. In 2005, for example, Verisign faced competitive bidding for the .net registry agreement. To ensure it maintained its position as the .net registry operator, Verisign was forced to submit a bid that was 30% lower than its then-current registration price under the prior contract.
ICANN and Verisign already negotiated the price of .com registrations through 2024, and there is no good reason why ICANN should agree to a price change more than four years early. The only explanation for ICANN’s agreement is the $20 million kickback it will receive for violating its duty to its stakeholders in a secret, backroom deal it negotiated with Verisign.
LOFF inter alia noted that it was a major policy blunder for ICANN to have agreed in the past to presumptive renewal, a decision that has had a multi-billion dollar negative impact upon registrants compared to a situation where there are regular competitive tenders. Mr. Kirikos also noted that the U.S. government has argued for competitive tenders for both initial agreements and for renewals of agreements, referencing the advice that the Department of Justice provided the Department of Commerce and ICANN in 2008 which was apparently ignored by ICANN.9
FPI opposed Amendment 3, and stated that since ICANN is the body in charge of overseeing registry operators such as Verisign, is in a position to approve or not approve the requested change to the Registry Agreement.
There is a pattern of complicity between protected organizations charged with running the Internet infrastructure and fostering the public interest, wherein operators take advantage of monopoly pricing power and lifting price caps to the detriment of the public and intellectual property owners.
The $20 million payment which ICANN negotiated for itself has an appearance of impropriety and is wrong.
The investigation by the California Attorney General was a result of ICANN the .org registry operator price control relief.
A former senior employee of Verisign with direct responsibility for its policy programs including .com and .net, stated that ICANN is unavoidably conflicted in matters involving its contracted parties. The recently announced investigation by California’s Attorney General into the proposed sale of Public Interest Registry along with the lucrative concession rights to operate the .ORG registry should be seen as a sign that others are becoming aware of ICANN’s conflicts.
The proposed Amendment further fans the flames by creating the widespread perception that ICANN has engaged in a quid pro quo by trading approval of .COM price increases for $20 million—a stain of self-dealing that no amount of security, stability, and resiliency (SSR) whitewashing can remove.
A federal court could find that the presumptive right of renewal to be inherently anti-competitive and incompatible with industry self-regulation of the DNS. California’s Attorney General may expand his inquiry and come to the same conclusion. This presumptive renewal and the resulting sense of entitlement causes significant harm.
ICANN has been neutered as a credible regulator and sold the public interest down the river.
The .fr registry and a CCNSO member and a technical backend registry for various new gTLDs “took no particular position on wholesale pricing on .com”, however reminded ICANN of the dominant position of .com and urged ICANN to refer to the best experts of anti-trust and competition to ensure that there are no anti-competitive effects on the market. AFNIC also objected inter alia, to “giving special responsibility and status to Verisign in the policy development process rather than treating it as one member of the ICANN community.
Mark Monitor, a registrar and advocate for .com domain name owners, inter alia “recognized the very high threshold for the removal of price caps in .com”, and was pleased that there is no proposed change to that threshold.
Mark Monitor, while recognizing that higher priced domains could serve as a deterrent to bad faith actors, nevertheless “demanded caution and restraint on price increases in such a high-volume TLD, noting that even a modest increase multiplied across the volume of domains that [its] clients own would represent a significant expense”.
INTA submitted public comments on other important issues raised in the Proposed Amendment but did not comment on the proposed price increase.
AEI16 commented that while it is appropriate to question how wholesale price increases impact consumers, it is also important that ICANN consider other factors affecting the real cost of TLDs including “registrar pricing” and the “unregulated secondary market”. AEI’s conclusion is that “there is not enough empirical information available” about domain name pricing and recommended that ICANN “remedy this problem by conducting or commissioning a thorough study of TLD pricing”.
Verisign, which is of course the beneficiary of the proposed price increases, submitted an unsigned comment just before the Public Comment period closed. Its comment chiefly complained about the Public Comment Period itself and expressed dissatisfaction with the results of the Public Comment period which went against its interests in raising the price that it is permitted to charge. It also leveled various accusations against those it believed responsible for the public comments.
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