Melbourne IT submission on vertical integration

["Ashe-lee Jegathesan" <Ashe-lee.Jegathesan@xxxxxxxxxxxxxxxxxx>]

Summary of Melbourne IT recommendations:
==========================================

(1) clearly identify three industry roles: gTLD manager, gTLD registry
operator, and gTLD registrar

-- a gTLD manager contracts with ICANN to manage a gTLD.  The gTLD
manager does not own the TLD, but is licensed to use the TLD for a fixed
period of time.  The licence can be renewed for further terms provided
the conditions of the contract with ICANN continue to be met.

-- a gTLD registry operator operates three key components of the gTLD
infrastructure: shared registration system (SRS), gTLD DNS nameservers,
gTLD WHOIS servers.   The core role is that of an infrastructure
manager.   

-- a gTLD registrar is responsible for creating, changing and cancelling
records in the gTLD registry.    The core role is that of a records
manager.   A gTLD registrar has a contract with the registrants of
domain names within a gTLD to perform registrar services.   The gTLD
registrar has a contract with the gTLD registry operator that governs
their roles and responsibilities.


(2) A gTLD must use ICANN accredited registrars to perform the role of
records management.  This is current ICANN policy for new gTLDs.   An
ICANN accredited registrar that meets the policy requirements of a gTLD,
must be able to operate within that gTLD under the same contractual
conditions as other gTLD registrars.    Examples of current policy
restricted gTLDs include - .travel, and .aero.


(3) Continue to maintain structural separation between the role of gTLD
registry operator and gTLD registrar.   Within a gTLD, competition
occurs between multiple gTLD registrars, with respect to records
management services.   The gTLD registry operator performs a monopoly
function with respect to the specific gTLD.   There is only one gTLD
registry operator per gTLD.


(4) A gTLD manager can own and perform the function of gTLD registry
operator for the gTLD being managed.   Examples (VeriSign for com/net,
Afilias for .info, and Neustar for .biz).


(5) A gTLD manager or gTLD registry operator (or their parent company),
may own up to 15% of an ICANN accredited gTLD registrar.     This allows
some flexibility - as some registrars are publicly listed, or have
complex ownership structures.    If a gTLD manager or gTLD registry
operator wished to own more than 15% of an ICANN accredited gTLD
registrar, separate ICANN Board approval would be required, and
additional contractual provisions to avoid anti-competitive behaviour.


(6) A gTLD accredited registrar (or their parent company), may own up to
15% of a gTLD manager or gTLD registry operator.     This allows some
flexibility as some registrars wish to have some equity position with
respect to a gTLD to share in its success, but should not have a
controlling interest in the gTLD.   A current example is Afilias that
has some ownership by gTLD registrars, but none have a controlling
interest, and nor is it entirely owned by registrars.    If a gTLD
accredited registrar wished to own more than 15% of a gTLD manager or
gTLD registry, this would require separate ICANN Board approval, and
additional contractual provisions to avoid anti-competitive behaviour.

(7) Neither a gTLD manager or gTLD registry operator, may use any of the
registration data collected as part of managing/operating the gTLD, for
the purposes of marketing registrar services for any other gTLD.

(8) A gTLD manager can own and perform the function of gTLD registrar
for a small gTLD that has less than 100,000 total registrations.   This
allows smaller gTLDs to be able to leverage vertical integration to
establish an initial market for the gTLD and also demonstrate best
practice registration processes for that gTLD.  Once a gTLD has more
than 100,000 total registration, the wholly owned gTLD registrar may not
create additional records, but can continue to manage the records it has
under management for that gTLD. The gTLD manager must still allow other
ICANN accredited gTLD registrars to provide registrar services for that
gTLD, and must not discriminate with respect to which names are
available for each registrar to register.   

(9) Where a gTLD manager owns a gTLD registrar, that registrar may not
perform the role of ICANN accredited registrar for any other gTLD.



II  Areas of competition within the industry
============================================

(a) Competition between gTLD managers:  There is some level of
competition between gTLDs at the time a registrant makes a decision to
register a domain name.   For example a business may decide to register
in .com or .biz, or a Government department may decide to register in
.gov or .info to provide information.     A registrant may make a
decision based on factors such as price, trust, and utility of that
gTLD.   

(b) Once a registrant chooses a particular gTLD for a registration and
begins to actively use the domain name, the switching costs are very
high to move to another gTLD.    A registrant may switch registrars to
get different levels of service, but will not usually switch gTLDs.  

(c) Over time, most registrations within a particular gTLD will be from
existing registrants, and only a small percentage of new registrants
will be added every year.   Thus a gTLD manager will have market power
with respect to most of their registrations in the longer term.   A
doubling of price for existing registrants that are actively using their
names at that point in time, would not have an appreciable impact on the
number of registrations.

(d) Competition amongst registry operators.   There is active
competition amongst registry operators.  A gTLD manager can contract
with a particular registry operator, but can also change registry
operators or even bring the services back in-house.   Several registry
operators today provide services across multiple TLDs (e.g VeriSign
com/net/tv/name/jobs, Afilias info/org/mobi, Neustar biz/us).   In the
new gTLD environment additional companies will enter the market as
registry operators, and gTLD managers will gain the benefits from a wide
range of choices.

(e) Competition amongst registrars.   There is very active competition
amongst registrars for the major gTLDs such as com/net/org/biz/info.
Registrants can choose from a range of business models, and registrars
often bundle services such as email and hosting with domain name
registration.  The registry/registrar separation model is now the
dominant model used across both gTLDs and major ccTLDs.  Many ICANN
accredited gTLD registrars, are also registrars across many ccTLDs (e.g
Melbourne IT, Tucows, eNom, NSI, GoDaddy are all significant ccTLD
registrars as well as gTLD registrars).

Melbourne IT believes that the market power that a gTLD manager can
exert through their operation of a major gTLD (with more than 100,000
registrations), would allow them to have an unfair advantage as a gTLD
registrar in other gTLDs.  The gTLD manager could cross-subsidize the
operations of a gTLD registrar to gain customers in other gTLD spaces,
and attempt to up sell their own gTLD to those customers (which in turn
would give them an unfair advantage over other gTLD managers).   Thus
Melbourne IT supports the separation of gTLD managers and registry
operators from registrars, and also notes that a small gTLD Manager that
owns a registrar for its gTLD  should not provide registrar services for
other gTLDs.


III  Regarding CRA International Report
======================================

The CRA International report supported a relaxation of the vertical
separation requirements where the competitive concerns are not strong.
Melbourne IT agrees that supporting some level of integration for small
TLDs allows innovation in the creation of new gTLDs, and allows a gTLD
manager to have some control over the whole process of launching and
marketing a new gTLD to new registrants.   

In the early start up phases of a new gTLD, the gTLD manager is
primarily competing with other gTLD managers.   Once a gTLD gets
established with more than 100,000 registrations, then the bulk of the
registrants will be locked-into that new gTLD and the gTLD manager will
have market power with respect to those registrations.   Thus the
benefits of a separated registry-registrar model begin to take effect.

The CRA report also described single-registrant TLDs.   Melbourne IT
expects that such TLDs will emerge in the gTLD round.  The registration
policy for such as TLD could be that  all registrations in the gTLD must
be licensed to the gTLD manager.   For a small such TLD it would make
sense that the gTLD manager could also own and operate a registrar
function.   However it would be necessary to ensure that a
single-registrant TLD is not circumvented by ensuing all the
registrations are in the name of the gTLD manager, but that the gTLD
manager then rents out websites etc associated with those domain names -
which in effect could be third party registrations.   Thus the simple
100,000 rule suggested by Melbourne IT both supports the case for single
registrant TLDs, but also has protection mechanisms for single
registrant TLDs that seek to provide domain services to third parties on
a large scale.   These third parties are likely to be affected by market
power issues in the same way as open gTLDs, once those third parties
rely on having access to website real-estate associated with particular
domain names.


IV Regarding Salop and Wright paper on vertical separation
==========================================================

The economists also note that vertical integration can facilitate
innovation, but note that in some circumstances vertical integration can
harm competition through higher prices, lower quality levels, too little
product variety, or less innovation.

The Salop and Wright paper discusses an option where ICANN establishes
rules for when a gTLD registry or gTLD registrar can obtain additional
ownership interest.   

Melbourne IT recommends that an allowance of 15% be made for a gTLD
manager or gTLD registry operator to own a proportion of a gTLD
registrar, or vice-versa.   This means that ICANN would not be burdened
with having to approve minor changes in ownership.  

Melbourne IT also supports vertical integration for small gTLDs with
less than 100,000 registrations, provided that the gTLD registrar owned
by the gTLD manager is not able to offer registrar services for other
gTLDs.

Where a gTLD manager, gTLD registry operator, or registrar seeks a
greater than 15% ownership structure, Melbourne IT believes that the
parties would need to show:

- the benefits to registrants of the new ownership structure, and show
that these benefits would not be available through the current
competitive registrar model

- that the gTLD manager does not have more than 100,000 registrations

- that the gTLD registrar does not have more than 40% of the total
registrations in any gTLD with more than 100,000 names