Upcoming Verisign Price Increase Reminder of ICANN’s failure

Verisign’s price increase on .Com and .Net domains effective January 15th is a reminder of one of ICANN’s major failings. What is so galling about the Verisign price increases permitted by ICANN is that they add further unjustified costs to the Internet on top of the large, and excessive, prices that Verisign is already charging.

Hundreds of millions of dollars each year in excess profits are flowing to Verisign because several years ago ICANN failed to protect the interests of the Internet community and instead caved to pressure from Verisign. Verisign and ICANN settled a dispute between themselves by agreeing to raid the wallets of consumers and businesses worldwide for their mutual benefit and self-enrichment.

The dispute began in 2003 when Verisign rolled out its SiteFinder service which gave Verisign control over all the typo traffic going to misspelled or non-existent domains. After a huge public outcry, ICANN requested that Verisign roll back the service. Verisign refused. ICANN then ordered Verisign to roll back the SiteFinder service. Verisign responded by filing a lawsuit claiming that ICANN had overstepped its bounds by not acting as merely a technical coordinating organization and instead acting as the “de facto regulator of the domain name system”.

At the time, ICANN’s position was precarious. Many governments were unhappy that a US based organization was in charge of overseeing core functions of the Internet. ICANN’s role was also not clearly defined. Was it merely a technical group, as it often insisted? Or did it have the powers and responsibilities of a regulator? It did not help ICANN’s position that the most powerful and important registry, Verisign, was rebelling at ICANN’s efforts to assert its authority and moving forward with a lawsuit that could severely constrain ICANN’s role. Fighting Verisign’s lawsuit was costing so much that ICANN couldn’t hire the staff it needed and it was impeding ICANN’s ability to carry out its functions.

So ICANN and Verisign retreated to a back room to work out a settlement out of public view. What they come up with was that Verisign would drop the lawsuit, would pay ICANN millions of dollars, would support higher fees for ICANN from each domain registration, and in return Verisign would be granted a perpetual monopoly to the .com registry with regular price increases.

ICANN converted Verisign from an antagonist into an ally. ICANN solidified its support and would have a much larger budget. Verisign secured its rights to a monopoly worth billions of dollars. It was a win for ICANN and a win for Verisign. ICANN and Verisign agreed to join forces and leverage the control that together they had over the domain space to forge a deal that would enrich each of them on the backs of everyone else. The deal resulted in hundreds of millions of dollars per year in excess fees to ICANN and Verisign.

In a maneuver worthy of a Judo master, Verisign used ICANN’s effort to rein it in against ICANN. Verisign used its lawsuit against ICANN as leverage to obtain a perpetual monopoly on the .com registry that allowed windfall monopoly profits from the start, as well as further price increases, because hundreds of millions of dollars in annual excess profits wasn’t sufficient. As Ross Rader of Tucows put it:

VeriSign successfully leveraged the litigation into a complete renegotiation of its contract with ICANN staff who seemingly played right along to avoid further litigation.

This sweetheart deal came under attack. It resulted in an unusually close 9-5 vote by the ICANN board. But ICANN approved the deal.

ICANN’s approval of the settlement agreement with Verisign is a clear example of Regulatory Capture. As described by Wikipedia, it is when an “agency created to act in the public interest instead advances the commercial or special interests that dominate the industry or sector it is charged with regulating.” In this case, ICANN, instead of putting limits on Verisign’s control of the dot-com name space for the benefit of the Internet community at large, advanced a settlement that allowed Verisign to reap monopoly profits at everyone else’s expense.

Verisign and ICANN celebrate their success by throwing lavish parties at the ICANN conferences held around the world in spots such as Sao Paulo, Lisbon and San Francisco largely paid for by Verisign’s sponsorship. Milton Mueller at the Lisbon conference:

I just returned from ICANN’s “gala dinner,” lavish affairs that have become an institutionalized part of its meetings. My perspective on this was best encapsulated by a remark made by John Berryhill, a domain name lawyer, at the Marrakesh, Morocco meeting. As we finished a huge meal and moved on to see dozens of Berber horsemen shooting rifles, setting off fireworks and rustling camels he deadpanned, “Yeah. This is the proper way to run a computer addressing system.”

And former ICANN board member Karl Auerbach’s perspective:

[W]ould you think it a fair exchange if you gave someone $15 and they said, here I’m repaying you with this nice shiny one cent piece?” Well, that’s roughly the same ratio of the benefit that ICANN confers unto Verisign every year and the amount of Verisign’s “sponsorship” amount, i.e. about 1500:1.

Basically, the munificence of this event reminds me less of words like “dignified” and more of words like “ostentatious”. Perhaps “corrupt”; certainly “for sale”. We of the internet community are paying for all of this… I do find ICANN’s expenditures to be entirely out of line with its mission and its status as a non-profit, tax exempt, public-benefit organization.

Former Saving and Loan regulator William K. Black’s quote about the causes of the financial crisis also applies here, “The defining characteristic of crony capitalism is the ability of favored elites to loot with impunity and the failure of regulators to do their jobs.”

As John Kenneth Galbraith stated in his book, The Great Crash 1929:

Regulatory bodies, like the people who comprise them, have a marked life cycle. In youth, they are vigorous, aggressive, evangelistic, and even intolerant. Later they mellow and in old age – after a matter of 10 or 15 years – they become, with some exceptions, either an arm of the industry they are regulating or senile.

Perhaps due to its role at the heart of the Internet, ICANN has acted in this manner with Internet speed, in a few short years becoming a seeming appendage of the industry it is supposed to be overseeing for the public benefit.

ICANN, though, does not necessarily see its mission as acting for the public benefit. It has many stakeholders, and the public at large is just one of many. This was made clear in 2006 exchange between then ICANN chairman Vint Cerf and attorney Bret Fausett.

Bret Fausett: …Whether you are right or I am right about the merits of .com, I think we ought to use what I am hearing in the hallways to make it better. Because frankly, if we can’t figure out how to represent the public interest better, there are other organizations that start to look like they might be able to do that.

Vint Cerf: Just keep in mind that a multistakeholder organizations have more than just public interest to represent. Is that a fair observation, Bret?

Bret Fausett: I think in an organization like ICANN, public interest is the overriding interest that should be represented.

Vint Cerf: We should talk about that because I have a different model.

Bret Fausett: Then I think that your different model and my model of the public interest being paramount might be exactly at the source of the tensions that we are feeling.

Vint Cerf: See you over a pinot noir.

The very structure of ICANN leads it to favor registrars and registries over the interests of the public. ICANN is structured so that these groups have more influence and power within ICANN than the public, so it should not be surprising that ICANN would be more attentive to the desires of these groups than to the public interest.

The Coalition for ICANN transparency (CFIT), a group with its origins in the domain industry, sued to prevent the Verisign settlement saying that it was collusion between ICANN and Versign and violated antitrust and unfair competition laws. But earlier this year the case was settled for free. The reason the suit was in effect dropped hasn’t been made public. Verisign is now a multi-billion dollar behemoth. It turned ICANN’s lawsuit to its advantage. It would have been a long-shot for a small group of domainers to prevail against it.

One of the questions about Verisign’s control of dot-com is whether it is really a monopoly. The argument is that dot-com is just one of dozens of extensions and if someone doesn’t like the price of a dot-com domain they can pick a different extension instead. This argument says that Verizon’s control of dot-com isn’t a monopoly but that Verisign is just one of many competing providers of domain names.

This view ignores the historical background that has given dot-com a unique position in the marketplace. By the time Verisign took control of the .com registry, it was already the dominant extension, was used by most of the commercial internet, was supported by huge sums of money spent on advertising by companies using dot-com websites that reinforced that dot-com was synonymous with the Internet in the minds of many consumers, and most consumers’ interactions with the Internet occurred on dot-com addresses.

I don’t know how good an analogy this is, but it seems similar to the Electric utility claiming that it isn’t a monopoly because consumers don’t have to use electricity to light their houses, they could use candles or whale oil instead. Yes, there are alternatives to dot-com but those alternatives are qualitatively different in that no other extension offers the same benefits as dot-com.

Verisign’s monopoly on dot-com doesn’t just give it hundreds of millions of dollars in windfall profits each year, it also gives it a competitive edge to extend its dominance to other extensions. Verisign uses these monopoly profits to build a very robust infrastructure. It can then use that investment to subsidize its costs in running other registries.

This advantage was key when in 2005 Verisign had to compete for the renewal of the rights to run the .net registry. One of the key factors in evaluating the competing bids was “the ability to run a secure and stable registry”. Because the revenue from the dot-com monopoly has allowed Verisign to build a very robust infrastructure, no other competing registry could outscore Verisign on this point. ICANN used an outside firm, Telcordia, to evaluate the bids. Telcordia was owned by the same parent company as Verisign for several years. Telcordia picked Verisign to run .net.

Awarding .net to Verisign was met with a barrage of criticism and prompted observers to remark that “The bias for Verisign written into the .net process by ICANN is remarkable.”

Another remarkable outcome of the .net bid is that Verisign’s winning bid to run the .net registry was $3.50 per registration, far lower than the registration fees they charge for the much larger .com registry. This would seem to confirm many people’s belief that the actual cost to run the .com registry is less than $3 per domain, with some believing the .com registry could be profitably and securely run for $1 or less per domain registration.

With similar fixed costs to run a registry, and with a much larger base of registered domains to defray the costs, the .com registry should be far cheaper on a per domain basis than the .net registry. As Bob Parsons of GoDaddy said at the time, “it costs VeriSign… next to nothing to add each new .COM name to the registry.” Every new .com registration is pure profit.

This demonstrates one or both of two points: a) Verisign’s profit margins are enormous on .com registrations, and b) Verisign can use its profits and the infrastructure investments it made to run .com to subsidize its costs of running other registries.

I just spoke with someone who made the very good point that Verisign is well positioned to win the contracts to operate the majority of the new gTLD registries that will be coming online in the next few years. Verisign can leverage the robust registry infrastructure paid for by the .com monopoly to extend its reach to become the dominant operator of the new gTLDs. Without the windfall profits from dot-com, it is hard for other registries to put in place a similar infrastructure to support a brand new gTLD.

Verisign seems well positioned to be able to use the competitive advantages from its monopoly position in dot-com to shut out competition in the new gTLDs and become even more dominant.