FYI
Amadeu
STATEMENT OF THE POLICY OVERSIGHT COMMITTEE
23 JULY 1998
The Economic Structure of Internet Generic Top-Level Domain Name Registries
Analysis and Recommendation
We considered proposed economic structures of generic Top-Level Domain (gTLD)
name registries. These
range from the for-profit, market-managed model, to the constrained
cost-recovery model. We develop
a model for selecting among these, beginning with widely-accepted assumptions
in the Internet (e.g., use
market mechanisms whenever practicable) and criteria for choosing economic
structure (stability,
economy, innovation, and flexibility). For-profit registries are found to be
not viable due to abuses which
follow from the monopoly each holds over their respective domain names.
Not-for-profit registries,
without additional constraints, are also rejected because they are similarly
able to abuse their monopoly
position. Recommendation is made for not-for-profit registries, with the
additional requirements of
cost-recovery, audit and public oversight, open access by any registrar, and
no claim to property rights
in gTLDs. Such constraints must be applied uniformly to all registries by the
new IANA.
0. Introduction
One of the most important issues concerning the central coordinating functions
of the global Internet is
the economic structure of gTLD names registries. This question is usually
characterized as: should
registries be for-profit or not-for-profit? Although establishing
not-for-profit registries enjoys
significant support, including positive comments by the US Government, support
by comments to the US
Government "Green Paper", and the consensus of the European Consultative
Meeting on Internet
Governance (http://www.ispo.cec.be/eif/dns/conclusions.html), discussion
continues. This paper describes
the significant considerations surrounding this question, suggests
perspectives from which the new IANA
institution should consider this issue, and recommends how the new IANA should
proceed with the
selection and further development of registry structure.
1. Working Assumptions
In Principle, Private, Competitive, For-Profit Structures are Best
As is commonly accepted in the Internet community, this paper takes as given
the general principle that
market mechanisms are the best means for managing Internet resources, where
practical. Arguments to
this end have been made elsewhere and there is no need to repeat them at
length at this time. In brief,
the advantages of private, for-profit entities include:
- driving down costs,
- rewarding and stimulating innovation, and
- simpler and less costly administration for the new IANA.
Some Structures Cannot Be Managed Strictly by the Market
In spite of the desirability and popularity of open, competitive market
mechanisms, it is not possible for
all Internet resources to be managed by the market. Some resources must be
administered centrally.
Just as the broadcast of RF signals on the same frequency in the same location
will result in interference,
there is an analogous necessity under the current design for the assignment of
unique IP addresses and
unique domain names to ensure that the Internet can function.
It is essential that the structure of the Domain-Name System (DNS) and the
allocation of blocks of IP
numbers be coordinated,. The requirement for some central administration is
long established in the
Internet and in other communication infrastructures. It is also recognized as
the principle responsibility
of the new IANA, which is endorsed by the US Government in the White Paper.
Each Top-Level Domain Name Will Be Allocated to a Single Registry
Ideally, each gTLD would be allocated across all, or at least multiple,
registries. However, this is not
presently possible due to a limitation in the state of the art for distributed
computer systems. Were it
possible for top-level domains to be multiply allocated, market mechanisms
would probably be viable
and registries could be competitive for-profit businesses. As an aside, there
is no significant technical
constraint on the number of gTLDs that could be managed by a single registry.
The Internet Continues to Evolve and Some Aspects are Not Yet Fully Understood
The nature of the Internet is still being revealed. The characteristics of
Internet property (for example,
with respect to domain names and IP numbers), associated rights, hoped-for new
technologies (such as
directory services), and Internet law, are far from understood. Similarly, the
appropriate dividing line
between free-market-manageable Internet resources (e.g., assets traditionally
managed by ISPs) and
common resources which require common administration (e.g., the allocation of
IP numbers) are still
being developed.
Sale of Second-Level Domain Names Will be Competitive
We take it as given that Registrars of Second-Level (and probably deeper
levels as well) Domain Names
can and will be competing enterprises which will have the option of being
for-profit. Market mechanisms
are fully capable of managing this part of the Internet's processes. Further
details of a structure and
relations among naming-related entities may be found in the "POC Open Letter
to the Internet Assigned
Numbers Authority" dated 12 June 1998, from the Policy Oversight Committee for
Generic Top-Level
Domain Names (http://www.gtld-mou.org/docs/ianaopenletter.htm). Under that
model, registries will be
owned and operated by registrars.
Our investigation leads us to ask where the registries should be located on
the range from for-profit to
not-for-profit. Not-for-profit structures include the IANA, the number
registries, and the DNS root
servers. For-profit structures include the registrars and ISPs. Hence, one can
view the question which is
the subject of this paper as: "to what extent do registries share requirements
with the New IANA, and to
what extent do they share characteristics and operating requirements with
registrars?" Once this
question is investigated, it is necessary to ask if either approach is
sufficient, or if additional
considerations must be addressed.
In Time there will Be Many Generic Top-Level Domain Names
Over the next few months there will be an increase in the number of generic
Top-Level Domain names
(gTLDs). More gTLDs are required to satisfy two requirements: a need for a
larger name space to permit
many different domain names with the same SLD (e.g., 'United'), and a need to
satisfy the very significant
demand for SLDs within the gTLD name space (now numbered in the millions of
SLDs).
2. Criteria for Choosing For- or Not-For-Profit Structure
Using the above assumptions as a starting point, the decision to choose
for-profit or not-for-profit
registries should be consistent with and find an appropriate balance among,
the following criteria.
Maintain and Enhance Stability
There are two types of stability: the actual technical and operational
reliability of the network and its
facilities, and the extent to which users believe that they can rely upon
them. Both must be preserved and
enhanced. Whatever structures are chosen must be well considered in terms of
both the near- and
long-term. Where possible, consideration should be given to the question of
how structures are likely to
evolve in the future so that stability can be maintained during this later
evolution.
Maintain the Internet's Cost Economy
One of the great values of the Internet is its profoundly economical nature.
Users have found that Internet
services often permit an order of magnitude reduction in costs for similar
non-net-based functions (e.g.,
E-mail vs postal mail). This differential creates a real and serious threat
that the Internet could become a
vehicle for the extraction of excessive 'rents' by many niche monopolies
rather than a driver of new cost
savings. Artificially high prices will not only reduce the economic efficiency
of Internet use, they will also
distort the way that it is used: users will migrate to lower-cost services
which may be technically
inferior, and threaten Internet infrastructure.
Encourage Innovation and Evolution
The Internet is in its infancy and there are many new technical developments
on the way. The new IANA
should ensure that the Internet is not frozen in its present state, and that
innovations can emerge and
provide new economic and social opportunities.
Preserve Options
The Internet will surely provide many future surprises, and the new IANA must
be capable of flexible
response to the challenges and opportunities that will present themselves. For
this reason, it is
imperative that the new IANA avoid structures now that are predestined to
limit flexible response in the
future. With the benefit of hindsight, it is now clear that enabling
for-profit, monopolistic control of
registration in the existing gTLDs was a mistake and it should not be
repeated. Where there is a choice
between structures that are fixed or flexible, there should be a bias toward
the flexible. Similarly, the
new IANA should implement structures in stages, in order to be able to
investigate the various problems
as they occur, and thus have the best chance of realizing solutions. In other
words, the new IANA should
initially act conservatively, so as to minimize later need to reverse
decisions. This is particularly
important for decisions that are known in advance to be essentially
irreversible.
3. Problems Associated with For-Profit Registries
One of the principal questions of the economic structure of registries
revolves largely upon whether they
are monopolies. That question in turn depends significantly upon the nature of
"switching costs" in domain
names.
A registry controls name assignments for a particular TLD. There is no
competition between registries
within a single TLD, because current technology does not permit it. Hence, if
a user is sufficiently unhappy
with the administration of the TLD's registry, the user has no choice but to
change to another TLD. In other
words, the user must change its domain name.
Switching costs are those costs associated with a user's or an organization's
move from a second-level
domain name (SLD) in one TLD to the same or a different SLD in another TLD. If
switching costs are
negligible, then the registry will have no special hold over the SLD holder.
(Note: The concept of
"switching costs" comes from economics, and is unrelated to the technology of
"packet switching.")
Scenario: Switching Costs at PackCo Incorporated
In order to investigate the problem of switching costs, we construct a
scenario regarding a fictitious
packaged goods company, "PackCo Inc". PackCo has the SLD "packco.goods", which
it has acquired from a
registry, RegInc., which is a for-profit company. It acts as both a registrar
and the sole registry for the
top-level domain name ".goods", as well as for a number of other top-level
domains. For an initial one or
two year period, PackCo is charged a fair price for its SLD - a price which is
reasonably close to RegInc's
registration-related costs. RegInc has set the initial price at this level in
order to attract many new
customers.
After a number of years, RegInc decides that PackCo is obtaining exceptional
value from its very popular
domain name and that RegInc can succeed at extracting a larger share of that
value by increasing the
price by a factor of 10. PackCo is not happy with this price increase , but is
unwilling to make a change: the
higher charge levied by RegInc is much smaller than the cost of changing to
another domain name.
Furthermore, there is another company, a vendor of backpacks, which holds the
domain names
"packco.sport" and "packco.recre", and yet another company which is an
international shipping company
that holds "packco.ship". Although PackCo is not really in the same business
as any of these other
companies, PackCo is concerned that changing gTLDs will result in name
confusion by their customers.
PackCo executives cannot guarantee that all of its customers will be informed
about the name change - it
has millions of anonymous customers. PackCo has an additional problem: it has
more than one domain
name; in fact, it has hundreds, each corresponding to the different packaged
goods it sells, each in turn
potentially subject to near-collisions with other companies' domain names. If
PackCo were to change all
of its domain names, it would represent a significant fraction of its annual
profits. PackCo is thus forced
to continue to use the original domain name even in the face of rising costs.
The problem is exacerbated by the conflict created between IANA - the ultimate
authority over gTLDs -
and a registry which claims intellectual property rights in its particular
gTLD. If IANA is forced to
consider conflicting intellectual property rights claims in its administration
of the name space, it will
face extremely costly, burdensome, and likely long-term litigation risks.
Analysis
Problem: The Human Element - The Persistence of Memory
The Domain Name system was developed expressly to solve an inherent problem
with IP numbers:
obscurity. Even sophisticated early Internet users found it awkward and
inefficient to maintain lists of IP
numbers of the machines they wished to connect to. The domain name system was
deliberately designed
to be simple and intuitive by being readily identified by, and memorable to,
users. It has been remarkably
successful at this.
The memories of possibly millions of users are the first source of resistance
to switching. Both an SLD
and a gTLD together are the basis for the company's reference, and the string
that is associated in the
mind of the user. Thus, there will be confusion if the SLD is removed from one
gTLD and assigned to
another. At first blush, this may not seem to be a complex problem, but to a
user trying to find a specific
name, possibly intersecting with other similar or even competing businesses,
it can be time-consuming
and difficult. Proprietors could face the threat of significant business
losses.
Changing a domain name is akin to changing a major brand name. It is very
well-understood in the business
community that changing a brand name can be exceptionally difficult,
expensive, and result in
long-lasting, even permanent damage to a company's market position. Users
unable to change to another
registry are said to be subject to "lock-in."
Problem: The Technical Element - The Persistence of Embedded Pointers
More significant than the persistence of human memory is the persistence of
computer-based pointers.
One well-known example is that of the Internet browser bookmark. Users have
grown accustomed to the
convenience of saving references to Web locations (Universal Resource
Locators, or URLs) in their
browsers. If users find that their references have begun to fail, they will
need to spend time and effort at
finding the new URLs for the sites and organizations that interest them. More
and more such transactions
are strictly machine-machine; there is no "human in the loop." In these cases,
all manner of highly efficient
transaction processing could be retarded while the new address is determined,
if at all.
Pointers embedded in documents will become invalid if their gTLDs change. The
reference earlier in this
document would break in such a situation. Documents are on servers of various
sizes and connectivity all
over the world. How are they to be updated? Authors regularly move on to other
projects and it is highly
unlikely that they, being mortals, would continue to update or correct
reference many years after the
original publication date.
Embedded pointers in search engines are yet another point of concern. Search
engines use automated
tools to collect pointers. If a pointer becomes invalid due to a change in a
gTLD, it is very difficult for the
search engine to know to remove the invalidated reference. Is a reference
invalid when it has been
unavailable for a specific time? Servers and networks go down, sometimes for
significant periods. As
more and more pointers become incorrect, users will find search engines less
and less useful due to the
proliferation of invalid references.
It will be extremely difficult, perhaps impossible, to develop automated,
software-based solutions to
these sorts of problems, and such proposals are at best speculative. They do
not exist today and it is
entirely inappropriate to make current operations depend upon their uncertain
development.
Problem: Monopolistic over the Long Term
It is clear that initially, there will be competition among domain names .
Before a position has been taken
in a given SLD/gTLD, a prospective name holder will have significant degrees
of freedom in choosing
among gTLDs. When additional gTLDs are made available, the preponderance of
such customers will drive
competitive behavior by registries: prices will be kept low, and services will
be maintained at reasonable
levels of quality. However, over time, as indicated by our scenario, once a
name is allocated, domain name
holders will tend to be locked in to their SLDs and their associated gTLDs.
Correspondingly, over time,
allocated domain names will generally increase in value. . This creates a real
and potentially strong
incentive for a for-profit registry operator to increase prices- they will
have control over their
customers.
It may be that for some time there will be relatively larger demand for
registration of new domain names
compared to the number already registered. In this case, there would be some
pressure to keep
long-term prices at a reasonable level. However, the number of new names to be
registered will
eventually diminish relative to those already installed, and the motivation to
keep prices low will
diminish significantly or disappear entirely.
Each registry thus holds a monopoly over the top-level domain names it
administers.
Problem: Rising Prices Delinked from Costs
The appearance of monopoly registries will cause prices to rise if the
registry organizations are
for-profit. There may be periods during which prices will reasonably track
costs, but this will not
continue reliably. It is unreasonable to expect for-profit organizations not
to migrate to value-based
pricing (as seen in our scenario) and thus begin to charge based on switching
cost, rather than based on
the cost of provision. . A for-profit company must seek to maximize profit.
The more control it has over
its customers, the more profit margin it can extract. Value-based pricing will
allow substantially higher
profit margins than will cost-based. This is a clear violation of the
criterion: "Maintain the Internet's Cost
Economy."
High switching costs are not the only problem. There are additional problems
associated with for-profit
registries.
Problem: Inappropriate Property Claims
The above scenario demonstrates that a registry might be able to establish
property rights over a
domain name. To preclude this, the new IANA must constrain registry operators
so that they will not be
able to make property claims over TLDs, which must be kept as public
resources. It is clear that allowing
intellectual property rights in a gTLD held by a registry is an invitation to
monopolistic abuse of
economic power. In addition, a registry should not be permitted to use as its
company name, the name of
the gTLD that it operates.
Problem: Additional Monopolistic Practices
It is in the nature of monopolies that they are able to impose constraints
upon users far beyond simple
overcharging. They could, for instance, require that name holders or
registrars sign up for a special level
of "gold service", thus providing "improved and guaranteed" performance. Users
and registrars could be
motivated to step up to such new services as they discover that the old
services and performance levels
are simply not sufficient to keep up with the changing loads and requirements
of the Internet. Registries
could let contracts expire, and thereafter require name holders to enter into
new, onerous agreements.
Such techniques cannot be easily predicted, especially given the changing
nature of the Internet (e.g., new
protocols). Hence, initial guaranteed-price contracts, and detailed contract
terms, will not reliably keep
name holders from being subject to creative techniques used by monopoly
registries to separate them
from their money. Imposing a corresponding regulatory burden on the new IANA
is equally problematic;
the specific techniques are far from understood at this time, and even if some
of them were, management
of new and changing techniques would likely impose a very expensive, slow, and time-consuming
cat-and-mouse game on the IANA. Enforcement is equally problematic, and
especially so due to many
possible jurisdictions and legal systems. Legal and other costs incurred by
monopoly registries in this
area would surely be passed on to their customers. Registries would surely
argue that these are a regular
part of their operating expenses.
Problem: A Proliferation of Claimants "Rights" in gTLDs
Even before the creation of additional gTLDs, there are numerous claimants to
"rights" in particular
gTLDs, some of whom are operating so-called DNS "root servers" that are
recognized by a tiny minority
of the servers comprising the Internet. There are claimants to the entire
alphabet, there are claimants to
every word in the English dictionary, there are claimants to sexually oriented
TLDs - the list goes on and
on. If the rights of any single one of these claimants is recognized, what is
to prevent other claimants
with plausible intellectual property rights in the same or similar names from
filing law suits to press
their claims? What is to prevent an enormous number of claimants from making
claims that they are each
entitled to operate one or more for-profit registries? It would of course be
possible to establish a global
lottery offering a pre-determined (by IANA) number of gTLDs to the universe of
would-be registries who
meet some minimum standards This is surely the worst possible way to provide
for a registry system
that is stable, efficient and operating in the best interests of the Internet
as a whole.
Problem: Irreversibility
Should the new IANA choose to permit for-profit registries, it will be taking
a substantial risk. If
for-profit registries are permitted, and are shown to have a negative impact
on the Internet or cost
economics, it will be quite difficult to convert them into not-for-profit
registries. On the other hand, it is
far easier to convert not-for-profit registries into for-profit. Our
criterion, "Preserve Options", is best
supported by choosing not-for-profit registries.
Past Experience
Past experience in the Internet with Networks Solutions Incorporated (NSI)
demonstrates many of the
above problems, including registration fees far beyond cost-recovery (as
evidenced by their unusually
high profitability) and inappropriate property claims over ".com". This proof
by demonstration shows that
similar problems could readily occur in other TLDs, if similarly structured.
The above analysis demonstrates that domain name registries are inherently
monopolistic. For-profit
market mechanisms are thus inappropriate; they will not work. Past discussion
that has referred to one of
the choices of registry structure as being 'competitive' is inaccurate. They
are in fact anti-competitive.
Competing domain name registries are not possible until the state of the art
in distributed systems
changes.
If for-profit structure will not work, will not-for-profit structure? We
consider that question in the next
section.
4. Not-For-Profit gTLD Registries
Not-for-profit registries are superior to for-profit registries simply because
they are not necessarily
driven to make profits. However, being relieved from this requirement does not
mean that they are in and
of themselves an appropriate structure. There are five potential problems with
not-for-profit registries.
We analyze each and consider if additional mechanisms can make them
appropriate for gTLD domain name
registries.
Registries Must Be Cost-Recovering with Public Review
A cost-recovery model is not on its own sufficient to preclude abuse.
Not-for-profit organizations may
provide unusually high staff salaries or perks, or accumulate assets unrelated
to the operation of a
registry. Other abuses could occur by maintaining a large bank account in
common with an owning
registrar - which in turn could act as a hidden source of profits for the
registrar. It will be necessary to
ensure that no such "hidden profits" are permitted by requiring that
registries operate in a manner
consistent with other, similar not-for-profit organizations, and that they
consist of a single financial
"envelope". This can best be accomplished by having public review of registry
financial practices and
management, with the assistance of an internationally recognized public
accounting firm.
Registries Must Allow Registration or Reregistration by Any Registrar
We assume at the beginning of this paper that registrars will be competitive.
In order promote effective
competition among registrars, each will require open access to any registry
both for initial registration
and for re-registration. Similarly, to avoid the problem of lock-in between
users and registrars,
registrants must be able to freely move their domain names to any other
registrar (domain/registrar
portability).
Domain Names Must Be Public Assets
As demonstrated above, for-profit registries could claim inappropriate
property rights in gTLDs;
not-for-profit registries could possibly make similar claims. In order to
preclude this, there must be no
property rights in any top-level domain. This must include a requirement that
a registry not be permitted
to use any gTLD as part of a brand or company name (e.g., no "ORG.COM Registry
Incorporated").
Registries Must Be Motivated to Innovate
Under our model the registries will be financially distinct entities without a
profit motive. Even though
the existence of multiple registries will encourage a basic tone of
competition among them, they could
conceivably lack motivation to foster innovation and could have difficulty
raising capital. However, these
problems are precluded if the owners of the registries are the registrars (as
cited in the "Open Letter"),
which will generally be businesses operating for-profit. This will enable them
to raise capital and will
provide the motivation to drive innovation within the registries. Whether
registries may be owned by
organizations other than registries is a item for consideration by the IANA
and depends in part upon
satisfying this criterion.
Constraints on Registries Must Be Applied Uniformly
The new IANA, as a corporation subject to the laws of the jurisdiction in
which it is located, must
uniformly apply the above constraints on registries to avoid violation of
anti-trust laws.
This concludes our development of an appropriate economic structure for
registries: not-for-profit
organizations with the additional constraints of cost recovery with public
review, open registration,
public-asset domain names, motivation for innovations, and uniform application
of constraints by the new
IANA.
5. Criteria Reviewed and Summary
The implementation of a not-for-profit, cost recovery registry system will
meet the four criteria set
forth above:
Maintain Internet Cost Economy
Not-for-profit registry prices will track actual costs. Overhead costs, which
will be transferred
ultimately to registrants, will be kept at industry-standard levels through
the auditing and public review
process.
Maintain Stability
Not-for-profit registries will be long-standing stable structures. They should
not subject their users to
concerns about possible monopoly pricing and registry long-term business
stability.
Encourage Innovation and Evolution
Use of not-for profit registries will be motivated to innovate under at least
one model, as described
above. Additional models are open to specification by the new IANA.
Flexible Response by the New IANA
The new IANA will be able to observe the behavior of registries, registrars,
users, and associated
technical developments. If it is desired to make changes to the system, it
will be easier to go from
not-for-profit to for-profit than the other way around.
Summary
We have observed that for-profit-Registries cannot appropriately limit the
negative consequences of
the monopoly control over of gTLDs. We have demonstrated that not-for-profit
registries, with
additional control mechanisms (public oversight, etc.), are an effective way
do so. Economy, stability, and
innovation will be well-supported by not-for-profit registries. Finally, as
experience is gained, and new
developments occur, the new IANA will have the option of shedding part of its
regulatory burden by
moving part or all of the registry process to open, competitive market
mechanisms.
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