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Username: stanbrook
Date/Time: Wed, March 28, 2001 at 11:42 AM GMT
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Subject: Stanbrook Technology Law Group's comments on the VeriSign proposals



The proposed revision to the NSI / ICANN agreement will, according to the VeriSign and the ICANN Management, "dramatically restructure the relationship between ICANN and VeriSign in a number of positive ways." 

That it will dramatically restructure the relationship is not challenged, that the outcome will be positive for the internet community is challenged most strenuously. 

At first glance it seems strange that so fundamental a change is being contemplated so soon after the original agreement was signed.  It is particularly surprising since the main objective of the original agreement was to embark on a process that would both bring competition to the Registry/Registrar market and ensure the structural change that would sustain it. 

VeriSign and the ICANN Management argue that already the market has changed so dramatically that it is possible to contemplate the drastic changes that they propose.   They allege that "the introduction of competition in the Registrar business has been much more successful and more rapidly successful than anyone anticipated" and that "VeriSign's once-dominant market position has been severely eroded".  This proposition, crucial as it is to the rational for the proposed change, is unsupported by any substantive economic or legal

VeriSign and the ICANN management have merely pointed to the existence of 180 competitor Registrars, 90 of whom are apparently already operating under the co-operative shared Registry SRS system and  the fall in the price of a one-year domain name registration by "competing" Registrars - interestingly NSI Registrar appears to be excluded. The fact that many of the VeriSign names were the early domain names to be registered means that Verisign has a significant ongoing competitive advantage.  It benefits from the inertia that many registrants will have to moving Registries and from the tortuous process imposed to move away from the NSI Registrar.  Having attempted this process once, a company is unlikely to want to repeat the headache to achieve a saving of less than a hundred dollars per year per domain in relation to other domain names.

Six days after the proposal for the variation was posted, a further note was posted by the ICANN management which set out statistics showing NSI/Verisign's declining share of registrations. In that note the issue is presented to the internet community in this way: "the attractiveness of the present proposal to the internet community therefore depends in part on whether the increased opportunities for Registry-level competition outweigh any benefits of continuing the Registrar-sale condition in promoting Registrar-level competition". 

ICANN are regularly accused of posting unrealistically short  timescales in their consultation process and Melbourne was no exception.  Most of the internet community were taken aback by the radical nature of the proposed changes.  Certainly none of them had time to consider these issues properly before the ICANN meeting in Melbourne. The result was that the only people who could speak confidently about the issue were those that were involved in the negotiations.  The rest, particularly those for whom English was not a primary language, were left scrambling to catch up.  Not surprisingly, many constituencies felt that the whole proposal was being pushed through with indecent haste. For those like the Registrar constituency, supposedly the main beneficiary of the proposal, the haste seemed very indecent indeed.

Whilst one expected that VeriSign had its own motives for pushing the new agreement through, members of the internet community in Melbourne were surprised at the aggressive manner in which ICANN General Counsel Louis Touton tried to push constituencies to a hasty conclusion. At the Names Council, Louis demanded to know whether the Constituency wanted to have its opinion taken into account.

On the Monday, the ICANN board had its public meeting and a number of disgruntled members of the internet community gave vent to their exasperation.  For the management of ICANN due process was clearly not a very cherished ideal.  As board member Mr. Mueller-Maguhn said "I thought it was normal for the Board to make the decision, then the lawyer would work out how to implement the decision. Here it seems like the reverse."

Looking back on the issues raised in Melbourne, and with the benefit of some reflection, one cannot help but think that this whole initiative was contrived by VeriSign to hoodwink ICANN and the Internet community. At first blush, this proposal might appear to have some merits from an anti-trust point of view.  But any serious analysis would confirm that VeriSign remained very dominant and that the current structure of the market leaves little hope for the emergence of a deep-rooted competitive environment.  The statistics presented by VeriSign and the ICANN management are very superficial.  In the case of the evidence of domain name registrations they were apparently heavily influenced by the number of names that were deleted.  We know that there are large numbers of names remaining on the NSI Registry that have either expired or have never been paid for.  We also know that deletions are made to suit the exigencies of VeriSign's commercial policy.  In these circumstances, very little weight can be given to the figures provided by VeriSign and ICANN Management in their note of 6 March. Nor should too much attention be paid to the figures for VeriSign's share of total registration.  Whilst the trend is undoubtedly encouraging, the danger is that these statistics may be a superficial indicator that bears little relationship to the underlying structural competitive advantage held by VeriSign. 

Even as a superficial indicator VeriSign, as a Registrar, retains more than 52% of all registration in the .com, .net, .org Registries, with the next largest competing Registrar having less than 12%.  Indeed, although the ICANN Management / VeriSign note refers to a 180 Registrars, 90 of whom are already operating under the SRS, there are in reality only 3 that have obtained more than 5% market share.  The largest of these has less than 12%. The state of competition therefore at the Registrar-level remains very frail indeed.  

However there are two overriding factors that play a significant role in tightening VeriSign's grip on the Registrar's market. In the first place it controls over 3 million names on its Registry that were registered in earlier years, sometimes in the period of its monopoly.
These names have a curious status in that many of them were applied for by individuals but not paid for and, in some cases, paid for but not renewed.  No ordinary Registrar could have afforded to keep these names on the Registry because they would have to pay the annual fee.  However, VeriSign / NSI Registrar can do this because whether they pay the Registry or not makes little difference to their parent shareholders because it is a neutral transaction in the parent pocket.  In saying this, I am disregarding the marginal cost of making the necessary Registry entry which by all accounts is trivial. The result is that VeriSign appears to be doing what many would describe as warehousing on a huge scale.  Under RFC 1591, Registries are required to process all domain Registrars' requests in a non-discriminatory fashion, and without bias to any particular customer or network provider.  Where they fail to do so, the early drafters of these Internet rules considered it appropriate that the Registry's continued appointment could be challenged. It would seem, therefore, that VeriSign is susceptible to a challenge under RFC 1591.

The fact that the Registry charges are immaterial to VeriSign as a parent of both Registry and Registrar puts other Registrars at a significant disadvantage in that whereas they would delete their unpaid domain names and the names would then go back into circulation to be bid for on a first come first served basis, in the case of VeriSign the effect of selling the domain name means that they will almost certainly be retained to the account of the NSI Registrar. Significantly following the row that accompanied the suggestion that VeriSign would auction its unpaid names, VeriSign purchased GreatDomains and put a first tranche of what is believed to be a quarter of a million names on the GreatDomains site for sale. 

The lack of separation between the NSI Registry and the NSI Registrar gives rise to at least one further significant competitive advantage. VeriSign, through its NSI Registrar, is always at an advantage when taking over additional names.  This is because it will not have to pay the transfer fee. A recent illustration of this would be the purchase by VeriSign of GreatDomains.  There are other examples where VeriSign has approached domain name holders with an offer to undercut their existing Registrar fees if the names are transferred in bulk to VeriSign/NSI Registrar.  VeriSign is able to do this without much concern over the transfer costs. Those fees are merely paid from one pocket to another (the actual costs for transfer are again relatively insignificant).

In these circumstances, VeriSign can sensibly adopt a policy that maintains its price premium, and enables Registrars to get into the market giving some semblance of change in the competitive environment.  Provided none of these new potential competitors gets too big, there is no serious risk to VeriSign's ascendancy in the market, particularly since as VeriSign had predicted, consolidation is around the corner.  At this point, VeriSign has an unassailable
built-in structural advantage over all other Registrars.  It also owns the Registry that holds 80% of all domain names.  VeriSign can determine where it strikes and which companies it acquires and in doing so, it has the significant advantage that it need have regard only to the actual costs involved in performing a transfer at the Registry and does not need to concern itself overmuch with the much larger standard fees that are charged by the Registry. 

One of the answers, I assume of last resort, that was being peddled around by VeriSign / ICANN Management last week was that even if VeriSign were forced to give up the .com Registrar, it could always buy it back.  I think not.  So flagrant disregard for the spirit of the 1999 Agreement, should by any normal rule of nature involve a strong response from the Department of Commerce. Its failure to respond would send shockwaves through the internet community, particularly the international members.  Even if the spirit of the agreement should turn out not to be of any concern to a company that claimed that it wanted to earn the trust of the internet community, the prospect that the owner of the largest Registry should purchase the dominant Registrar would inevitably result in absolute prohibitions from a number of anti-trust authorities around the world, including the EU - even in the unlikely event that the Department of Commerce were to consider that there were some reasons for not intervening. 

Only last week the European Parliament in a near unanimous motion, or one could say in ICANN-speak with an overwhelming consensus, called for an EU representative to be charged with negotiating matters with the ICANN.  The Parliamentary concern was to find a way to guarantee the independence of the ICANN from the US. 

So in conclusion, the emergence of the 7 new gTLDs provides in theory more Registry-level competition, however, for the moment this remains in the realms of conjecture or hypothesis.  Interestingly, VeriSign has found its way into at least one of the consortiums behind these gTLDs.  The most impressive as a potential competitor to .com is that of the Afilias consortium with its .info domain name.  It will not surprise anyone to know that VeriSign is firmly embedded in that consortium. 

There is no anti-trust authority that would be prepared to sign off on the justification offered for this new proposal. If no anti-trust authority would be willing to do this, then the internet community should not do so either. 

Clive Stanbrook Q.C. & Nick Lockett
Stanbrook Technology Law Group
Stanbrook & Hooper, Brussels


Link: Stanbrook & Hooper website

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