ensure that VeriSign and ICANN are not allowed to go forward with it in its current form

[Robert Redl <robert@xxxxxxxxxxxxxx>]

Written by Bob Parsons, CEO of GoDaddy
Originally posted August 25, 2005





Here’s a quick and light .COM registry economics lesson.

This article will help you understand the enormity of the scam about
to be pulled off by VeriSign – the .COM registry operator.



First, there are four players involved here:



1. ICANN. This acronym stands for the Internet Corporation for
Assigned Names and Numbers. They approve registry and registrar deals.
The have the ability to approve or disapprove the pending .COM deal.


2. Registry. For each type of domain name (i.e. .COM, .NET, .ORG,
etc.) a registry exists and it’s operated by a company like VeriSign.
VeriSign operates .COM and .NET. The registry maintains the Internet
routing systems, domain availability lookups and basic records. They
have no end user (i.e. registrant) contact and deal only with
registrars and ICANN.


3. Registrars. These companies (GoDaddy.com is a registrar) act as a
go between with the various registries and the registrants. They
provide registrants with customer service and also other products that
enable the use of their domain names.


4. Registrants. That’s you. You’re the user of the domain name and
it’s your money that pays for all of the above. It’s really important
that you read this. Unless we get this turned around, you’re about to
be taken – again!





---The economics lesson starts here.---

It’s important to first realize that it costs VeriSign, the .COM
registry operator, next to nothing to add each new .COM name to the
registry, because unlike registrars, VeriSign:



• Does not have to provide customer service to registrants  - that’s
provided by registrars like GoDaddy.com.


• Is not under any competitive pressures whatsoever to reduce prices –
each registry has a monopoly until the registry contract is re-bid.


• Has everything handled by an automated process. The costs of
operating these automated processes (i.e. bandwidth, storage, etc.)
have been and are expected to continue to decline. Click on the link
here to see historical charts.





---Registry profits will soar because of explosive growth.---

To the above add the fact that the .COM registry will be the
beneficiary of explosive growth that is expected to occur in the
Internet. The .COM registry grew 33% in 2005. This growth is expected
to repeat in 2006 and continue into the future. While it will take
some investment to accommodate this growth, it will most certainly not
require price increases – particularly when it costs nothing to add
additional names to the registry. Prices in the domain business should
go down – they must not be allowed to go up – as VeriSign's Chairman
and CEO, Stratton Sclavos wants.





---VeriSign gets paid big bucks to run the registry.---

Today there are about 48 million .COM domain names. Using historical
and current growth rates we expect the .COM registry to exceed 60
million names at the end of 2006. At the current rate of $6.00 per
name (this is what all registrars are charged – registrars in turn
either discount or mark up this price to arrive at what the registrant
is charged) VeriSign will take in $360 million dollars to operate the
.COM registry this year.





---The profits VeriSign makes now on the registry are huge.---

The profits VeriSign realizes in running the registry are enormous.
This became evident when the .NET contract came up for bid. VeriSign
could not avoid the bidding process and was forced to cut the .annual
NET rate from $6.00 to $3.50. As part of this deal VeriSign also
agreed to collect 75 cents for each .NET registration year. This fee
is paid by registrars in addition to the $3.50 registry fee.





---There’s not much incremental cost to run the .COM registry.---

Now let’s think about the .COM registry. It literally takes the same
equipment that is used to operate the .NET registry. Because of
today’s super computer and super storage architectures, and by
VeriSign's own admission (after all its goals have always been super
scalability) they can do everything they want to do with the .COM
registry on the same framework that’s been put in place for the .NET
registry. This means that the incremental cost for VeriSign to operate
the .COM registry is quite manageable — the same equipment runs
both registries.





---VeriSign wants a perpetual, unsupervised monopoly!---

But if VeriSign has its way, and the proposed .COM registry contract
gets approved:

• VeriSign’s monopoly will be extended indefinitely. This means that
the .COM contract can only come up for bid if ICANN can prove that
VeriSign has failed to perform their obligations. Even then, VeriSign
will be given the opportunity to correct any problem before they would
lose the .COM registry. This means that the benefits the Internet
community realized when the .NET contract was put out for bid simply
won’t ever happen again.

• VeriSign will get to raise .COM prices by 7% during four of every
six upcoming years. So not only will costs not come down – THEY WILL
GO UP!





---OK. Here’s the punch line. Grab your wallet!---

If you think the numbers I've mentioned so far are big, hang on to
your hat. They get much bigger. Now factor in the following: The .COM
registry is expected to grow by 33% in 2006 alone. And we’re just
getting started. Let’s be conservative and presume that the .COM
growth slows to 25% for 2007. This means that the incremental revenue
in the .COM registry at $6.00 a name – revenue which essentially comes
with negligible cost to VeriSign – for 2007 should be in the
neighborhood of $90 million dollars. That increases VeriSign's annual
cash take from $360 to $450 million dollars.





---But what if $450 million dollars isn’t enough?---

But what do you do when $450 million dollars, with a huge profit
margin – after all most of your costs are paid for by the .NET
registry - is simply not enough? Well, if you are VeriSign you raise
your prices by 7%. You raise prices not because you have to. You raise
prices because you are a monopoly, and quite frankly, because you can.
So instead of taking in only $450 million dollars for 2007 you raise
prices on a product that incrementally costs you nothing and get an
additional 7% or $31.5 million dollars. So now instead of $450 million
in cash you instead get $481.5 million.





---Let’s do the math for 2008.---

Now let's do the math again for 2008. Figure a 25% growth rate in the
.COM registry – actually with more and more people getting websites
and the rest of the world joining the party, it could be more like 35%
— but we'll stick with 25%. And for good measure throw in a 7%
increase. I get a number of $644 million for 2008.





---ICANN does get a little cut - "Alms for the poor."---

In all fairness to VeriSign, I should mention that ICANN does get a
small cut of this. VeriSign did agree, starting in 2007, to send ICANN
a check each year starting at $6 million and increasing over the
following two years to $12 million per year.





--I admit VeriSign does a good job. ---

There’s no doubt about it, VeriSign does a good job in operating both
the .COM and .NET registries, and they will be the first to tell you
so. They’ll tell you that the systems they have in place result in the
smooth operation of the .COM and .NET domain name routing systems and
a stable internet.





---But VeriSign gets paid to do a good job.---

To quote Chris Rock, VeriSign saying it runs the .COM registry without
problems is like someone saying “I make my child-support payments on
time.” Mr. Rock then follows up by saying “What do you want a cookie?
You’re supposed to make your child-support payments on time!" In
similar fashion I think we can say: VeriSign is being paid hundreds of
millions of dollars to do a good job – VeriSign is supposed to be
doing a good job!





---VeriSign is not the only company who can run the .COM registry.---

VeriSign would like us to believe that if we allow the .COM contract
to be put up for bid that it could be a disaster for all mankind. A
few years back the .ORG registry was transferred away from VeriSign as
part of a deal that allowed VeriSign to delay re-bidding the .COM
registry. There were no significant problems. I would also add that
those companies that would bid on the .COM registry would be more
significant in scope and size, than the company that was selected to
run the .ORG registry. This was evident by the companies who bid on
the .NET registry.





---My problem with all of this.---

I personally don't have a problem with VeriSign making a fair profit -
but that's not what we're talking about here. I have a big problem
with VeriSign's windfall profits being accomplished outside of the
free enterprise system in which the rest of us all must compete. I
find it particularly outrageous that because of the special privilege
VeriSign wants to be granted, all of us who use the Internet may be
denied the economies and innovation that come along as a natural part
of our competitive environment.





---Go Daddy's efforts.---

I have been writing about this issue on this blog and talking about it
on RadioGoDaddy.



During the past week we have been very busy meeting with our elected
representatives. In a number of cases they have expressed interest in
the developments here and have indicated a willingness to be involved.
It’s important however that they continue to hear from more of their
constituents.



If you are a U.S. citizen and want to contact your Congressional
Representatives or Senators here's how to find their email addresses:



For the Senate:

www.senate.gov/general/contact_information/senators_cfm.cfm



For the House:

www.house.gov/writerep/



Here is a suggested form letter you might send to your elected representatives :



Dear _________:



I am very concerned about the recently revised .COM registry agreement
and proposed settlement between ICANN and VeriSign. This pending
agreement is anti-competitive and bad for consumers and the Internet
community as a whole. The proposed agreement provides VeriSign with
the ability to increase prices by 7% annually in four of the next six
years without cost justification. Furthermore, under the new
agreement, VeriSign's monopoly would run in perpetuity as the
agreement would automatically renew without the opportunity for
competitive bidding. This is an outrage. VeriSign and ICANN should not
be allowed to establish a perpetual monopoly without Congressional
oversight and the opportunity for input from the Internet community.



The proposed agreement harms the Internet community by allowing
unjustified price increases when fees for .COM domain names should be
decreasing, not increasing. Even VeriSign last year agreed to drop
fees by more than 40% for .NET domain names to win an extension of
that registry agreement. There is no reason VeriSign shouldn't be
implementing the same type of price decreases for .COM names, as well.



As your constituent, I would sincerely appreciate if you would look
into this agreement and ensure that VeriSign and ICANN are not allowed
to go forward with it in its current form. If the ICANN Board approves
this anticompetitive agreement, the next step is for the NTIA to
approve. I urge you to also bring our concerns to the attention of the
NTIA.



Sincerely,







You can comment on the deal.

You can also, whether you are a United States citizen or not, submit
your comments concerning the proposed .COM deal directly to the ICANN
Board of Directors at the following link:
http://ombudsman.icann.org/contact/



I’ll provide more information on this important issue as it becomes available.



http://www.bobparsons.com/EconomicsLesson.html