Deeply, deeply flawed report and analysis

[George Kirikos <gkirikos@xxxxxxxxx>]

Hello,

The reports and analysis by Dr. Dennis Carlton at:

http://www.icann.org/en/announcements/announcement-04mar09-en.htm

are deeply, deeply flawed. I will prepare a long rebuttal to it in the coming 
weeks, but wanted to go on the record early as to its weaknesses. The analysis 
appears to be based on a very limited review of the market for domain names, 
and utilizes little actual data. It fails to even consider how nuanced the 
market for domain names has become, and how registry operators can exploit 
those nuances, including tiered-pricing.

In paragraph 11 of:

http://www.icann.org/en/topics/new-gtlds/prelim-report-consumer-welfare-04mar09-en.pdf

Dr. Carlton writes:

"Switching costs faced by registrants may create incentives for registries and 
registrars to act opportunistically by raising prices. However, ex ante 
competition to attract new registrants, as well as harm to the reputation of 
the registry and/or registrar limits their ability to engage in such conduct."

This is naive, and simply does not capture the real nature of the market for 
domain names and the ability to find substitutions. Here are some examples of 
*real* domain name transactions, to provide a reality check:


1) Fund.com -- USD $10 million

http://www.fund.com/aboutus/investors/faq.aspx#7

2) DataRecovery.com -- USD $1.7 million

http://www.pr.com/press-release/74545

3) Kredit.de -- 892,500 Euros: (in German)

http://www.sedo.com/presse/presse.php?tracked=&partnerid=&id=249&language=d

4) Vibrators.com -- USD $1 million:

http://www.priveco.com/whydidthbuyd.html

5) YP.com -- USD $3.85 million:

http://biz.yahoo.com/e/081229/live10-k.html

6) Erotica.com -- USD $850,000

http://www.thedomains.com/2009/01/19/eroticacom-sold-for-850000/

7) Fly.com -- USD $1.76 million

http://biz.yahoo.com/prnews/090130/ny64932.html?.v=1

8) Toys.com -- USD $5.1 million

http://news.bbc.co.uk/2/hi/technology/7923433.stm

These transactions were all relatively recent, too. If profit-maximizing 
monopoly registry operators had no price restrictions in place, they would not, 
as is implicit in Dr. Carlton's analysis, charge the same price for each domain 
name. That would not be profit-maximizing. Instead, they would price each 
domain differentially, based on its implicit "value" in the marketplace (price 
discrimination based on different "grades" of domain names, and their brand 
equity/goodwill). So, the renewal cost of Toys.com would be much higher than 
that for xyztoys.com, to give a simple example. The renewal fees of Sex.com, 
Hotels.com, Google.com, Yahoo.com, Microsoft.com would be much higher than that 
of an inferior domain name such as CompassLexecon.com (the domain name of the 
firm that produced the deeeply flawed report).

This is not some theoretical example, as this happens in reality in the dot-TV 
namespace which is operated by VeriSign (who also happens to manage .com). For 
example, at the time of this post, business.tv is priced by the registry at 
$500,000 per year.

http://www.enomcentral.com/domains/tv_names_browse.asp
http://www.webcitation.org/5f26XytBW

real.tv is priced at $150,000 per year, and so on. Dot-TV is widely considered 
inferior and less desirable to dot-com. If price controls did not exist in the 
dot-com registry, it is not a huge leap to realize that the renewal fees for 
currently registered quality domain names would skyrocket and this would *not* 
be affected by so-called "competition" to attract new registrants or 
reputational effects. Monopolists spend little time worrying about their 
reputation. Ask VeriSign and ICANN about SiteFinder, if you have any doubts.

If switching costs are truly "low", I offer to purchase the CompassLexecon.com 
(a very inferior domain name, but that of the report author's company) for 
$2000 (offer good until the end of the comment period plus 30 days, to permit 
the author to accept our offer). Note that even with simple assumptions of 
inflation and interest rates, a rejection of our offer of $2000 implies that 
they'd be willing to pay renewal costs of $100+ per year (far higher than the 
$7/yr VeriSign currently charges at wholesale, or under $10/yr they can pay at 
retail), i.e. what is the annuity value of their switching costs, if they were 
"only" $2000.  A rejection of our offer indicates that switching costs for even 
such an inferior domain name, out of 80 million dot-coms and unlimited 
alternate domains in .info, or other gTLDs) are higher than $2,000. 

Perhaps the author of this report can then document what the actual costs would 
be on their firm of switching to a different domain for even such a low value 
domain name in most people's eyes.  That would be the tip of the iceberg, 
though, compared to the switching costs of a Hotels.com, Games.com (owned by 
AOL, after a large acquisition), or owners of millions of domain names. 

If they reject our proposal to buy their domain name for $2,000, I'd like the 
author of the report to create a counter-offer price open for acceptance for an 
equal amount of time as my offer ---- if they price it too low, they bear the 
risk of me and friends of mine accepting their offer, in order to put their 
feet to the fire, so to speak, and face the "switching costs" that they 
perceive as only a theoretical possibility. Let me make it more real for them, 
by allowing them to name their price, after putting some thought into it.

I suspect the author of the report will refuse to name a price for their 
company domain name, rather than reveal to all the truly high value they place 
on it (one that would illustrate the enormous switching costs involved that 
they've severely misanalyzed in their report).

If ICANN truly believes switching costs are low, I offer to acquire the 
ICANN.com/net/org domain names, and all associated trademark registrations for 
$10,000, under the same time frame as above (end of this comment period plus 30 
days). If ICANN truly believes switching costs are low, they will accept my 
offer. Or, as before, they can name their counterprice --- and be sure not to 
price it too low, or I just might accept it. Most folks would not consider 
"ICANN.com/net/org" to be desirable domain names, either.

The switching costs are not in the ballpark of a person switching their home 
address, or even switching their telephone number. For many individuals and 
businesses, their domain name *is* their internet identity. It would be 
costlier than switching even their personal name (e.g. asking the recognizable 
"Tom Cruise" who has invested in his personal "brand" to switch to the name 
"John Smith" and start over from scratch wouldn't even begin to measure the 
cost of asking Amazon.com to switch to something like NewCo.web), and would 
destroy years of goodwill investment. It would represent bankruptcy for many.

Has the author of this report even provided one piece of survey data from 
companies asking what they place the value of their own domain names, to 
ascertain switching costs? No.

Has the author of this report discussed the possibility of tiered pricing? No. 
[You can bet that those salivating at the prospect of running new gTLDs, or 
would benefit if price caps are removed from existing gtLDs, are well aware of 
that possibility.]

Does the author of this report appear to even be aware of the "equal treatment" 
clause of the current gTLD contracts, which would provide existing gTLDs like 
dot-com the ability to have price controls lifted if new gTLD receive that 
right? No. Indeed, the author makes the flawed assumption of the opposite in 
paragraph 20 of:

http://www.icann.org/en/topics/new-gtlds/prelim-report-registry-price-caps-04mar09-en.pdf

suggesting that

"The fact that major TLDs are currently subject to price caps further
constrains the ability of new gTLD registry operators to charge non-competitive 
prices......While the appropriateness of these price caps may be debatable, the 
existence of the caps limits the prices that new gTLDs can charge by capping 
the price that the major registry operators can charge."

In other words, the author seems completely unaware of the fact that 
eliminating price controls for new gTLDs triggers the equal treatment clause in 
the "major TLDs," which eliminates price caps for these *existing* gTLDs. This 
is not some theoretical example, either. Neustar is on public record stating:

http://www.icann.org/en/topics/new-gtlds/agv1-analysis-public-comments-18feb09-en.pdf
  (page 123)

"Any material changes for the newer, no-price capped TLDs regarding vertical 
separation and equal access in general must be applied to NeuStar – this is 
required under the .biz Registry Agreement and ICANN's Bylaws. Price caps are 
appropriate for larger TLDs that have a much higher percentage of the market 
and are not appropriate for gTLDs that do not have any real market power."

And the author implicitly seems to be aware that unlimited price increases for 
renewals is a tactic that could be employed by registry operators, note o 
paragraph 9 of:

http://www.icann.org/en/topics/new-gtlds/prelim-report-registry-price-caps-04mar09-en.pdf

"For example, some new gTLD operators might offer significantly lower initial 
prices without restricting their ability to increase prices in the future 
(whereas the existence of price caps likely would inhibit the introduction of 
extremely low initial prices). Some consumers may prefer to trade off a lower 
initial price for a potential future price increase."

I believe I can speak for most domain registrants in .com that this is not a 
fair tradeoff! It's asking the registry to "tax" them after they've achieved 
success, and tax them they will, more than you and I would want to know!

There are so many other points that are simply wrong in this report, that I'll 
have to leave to a longer future comment. But, I did want to mention:

a) the significant costs of domain name abuse (e.g. cybersquatting, 
counterfeiting, defensive registrations) are dismissed without any quantitative 
analysis. These are real costs that are simply not analyzed. I'm tempted to 
typosquat on the author's company's domain name as an experiment, so they can 
see firsthand what the cost is (is it worth them to spend the legal costs to 
fund a UDRP or lawsuit), but I'll leave that as a "thought experiment" for them 
to perhaps think through instead, for now. I find it ironic that a firm that 
owns the relatively worthless and undesirable "CompassLexecon.com" domain name 
would have defensively registered both CompassLexecon.net AND 
CompassLexecon.org. Defensive registrations are very real, even for worthless 
undesirable domains (to most people) like CompassLexecon.com.

b) we actually found a so-called "expert" who appears against competitive 
tenders for government procurement! See footnote 7 on page 6 of

http://www.icann.org/en/topics/new-gtlds/prelim-report-consumer-welfare-04mar09-en.pdf

"The DOJ suggestion, however, does not address how ICANN should evaluate 
bidders that offer a low price by offering low quality service and those that 
offer higher quality/higher price services."

Hmmmm, registry operations are essentially a commodity. Whether Afilias or 
Neustar or VeriSign offer .com,  .info or .biz or .store or .snafu or .junk, it 
is trivial for them to change a few lines of interface code to run a new TLD. 
It's like asking the publisher of the New York City White Pages directory 
whether they are able to publish the Atlanta City White Pages directory. It's a 
book with telephone numbers! All that's different is the cover and the 
contents/numbers inside. It's like Toyota offering blue cars vs. red cars, all 
from the same assembly line, or Taco Bell adding a new franchise location in 
New York vs. Boston vs. Cleveland vs. Miami using the same "business formula."

In the domain name space, just like any other procurement contract for Army 
Boots, laserprinting toner, paper, staplers, etc., one simply sets standards of 
performance (which are so low in the ICANN contracts that there is almost no 
risk of any entity failing to meet them) for name additions, deletions, DNS 
resolution, and other quality of service metrics. These are the same kinds of 
procurement contracts that exist for the management of the telephone database, 
for example (and if one goes to www.sms800.com and reads the Tariff Documents, 
under competitive tenders toll-free number costs are 13.13 CENTS per month, far 
below that in the monopolist and oligopolistic domain name registration 
business).

I believe the authors lost all credibility when they actually seemed to support 
ICANN using highest-bid auctions with the proceeds going to ICANN, instead of a 
lowest price auction benefiting consumers as the DOJ suggested, by criticizing 
the DOJ's thoughtful recommendations which have proven themselves in most 
procurements. From one economist to another, they should simply know better. 
Indeed, even Neustar won the .us registry contract via a tender process:

http://www.ntia.doc.gov/ntiahome/press/2007/Neustar_101907.html

I challenged Neustar to declare whether NTIA's process for .us was superior or 
inferior to that of ICANN's proposed ascending price mechanism:

http://gnso.icann.org/mailing-lists/archives/ga-200709/msg02660.html
http://gnso.icann.org/mailing-lists/archives/ga-200709/msg02693.html

It's been several weeks, and they've failed to respond. It is very clear that 
the NTIA process, or that of the DOJ with a lowest bid mechanism, maximizes 
consumer welfare, instead of lining ICANN's pockets. Of course, it was ICANN, 
and not consumers, who paid for this "expert report."

In conclusion, this one-sided report could have been written by VeriSign or 
ICANN itself, given its deeply flawed analysis and conclusions, and should be 
disregarded by the community, and more importantly the NTIA/DOJ (who were spot 
on in their original analysis). I'll have far more detailed analysis of this 
report in the coming weeks, going through it paragraph by paragraph.

Sincerely,

George Kirikos
http://www.leap.com/