Registry-Registrar Cross Ownership: Framing the Issues

There has been much said and written recently about the issue of registry-registrar cross ownership with regard to New Top Level Domains (« New TLDs »). It is clear that there appears to be a fair amount of confusion about the issue and the positions espoused by various parties. To assist the ICANN community in understanding the issue—the points of agreement and debate—I offer the following overview on behalf of Network Solutions and Central Registry Solutions.

1. There is Consensus on Many Issues Related to the Relationship between Registries and Registrars with New TLDs

A. There is Agreement to Maintain Existing Safeguards Regarding Structural Separation and Non-Discriminatory Conduct.

There is widespread agreement that certain existing market safeguard protections should be continued for New TLDs. First, based on the GNSO consensus position, ICANN has proposed that registry operators (the entities that enter into the registry agreement with ICANN) must provide domain names through ICANN-accredited registrars and not act as registrars themselves. This structural separation requirement helps ensure that the provisions in the Registrar Accreditation Agreement—such as requiring accurate Whois information, disclosing information about the use of data, etc.—are included in all consumer agreements. A consensus of the community supports maintaining this structural separation requirement.

Second, registry operators must provide non-discriminatory access to all registry functions to all registrars. Indeed, registry operators must use the same registry-registrar agreements with all registrars, and may not favor or grant opportunities to one ICANN-accredited registrar over another in any way or manner. A consensus agrees that these existing safeguards have facilitated the competitive market’s proper functioning over the years, and should remain fundamental components of the New TLD initiative.

B. The Principle of Cross Ownership Is Generally Accepted.

There also appears to be community consensus with ICANN’s proposal to permit ICANN-accredited registrars or their affiliates to apply to be registry operators. ICANN’s current Draft Applicant Guidebook (« DAG ») provides that « [a]ffiliates of Registry Operator may be ICANN-accredited registrars . . . »¹ Even critics of other aspects of the ICANN registry-registrar proposal state that « [w]e have no problem with registrars or anyone else for that matter becoming registries or registry operators. »²

2. The Key Issue in Dispute Relates to Whether ICANN Should Restrict Registrars from Selling Domain Names of Affiliated Registries

The issue that has caused the most debate is whether ICANN should adopt rules that would restrict a registrar from offering the registration services of an affiliated registry (affiliated in the sense that the same shareholders own an interest in all or part of both entities). In other words, there appears to be consensus that a registrar-affiliate should be able to apply to be a registry operator of a TLD, but the dispute is over whether that registrar may also be accredited to sell the domain names of that affiliated registry operator. Thus far, there have been three approaches that have been offered by the community.

A. Some Argue that Registrars Should Not Be Permitted to Sell Any Names of an Affiliated Registry Operator.

On one side of the debate are predominantly « incumbent registry operators, » including Afilias (.info), NeuStar (.biz), Public Internet Registry (.org), that advocate that a registry operator’s corporate affiliates should not be permitted to offer any registration services for that particular TLD. They claim that a bright line rule is necessary because:

• There is historical precedent for this position and no basis to change the status quo;
• More analysis is needed of the potential harm to domain name registrants;
• There is risk of abusive practices; and
• It would create an environment that is ripe for « insider trading » opportunities using data that is commercially sensitive and available uniquely to the registry operator.

B. Others Argue that there Should be No Restrictions on Registrar Sales Absent Monopoly Power.

On the other side of the debate are those who question the need for any limitations on a registry selling names through an affiliated registrar. They argue that a free market is the norm in most other industries. Just as Sears may sell Craftsman tools and Rolls Royce may sell cars from its own dealers, they should be able to sell names of their affiliated registries. The advocates of this position, including eNom and others, state that absent monopoly power, consumers would benefit from the affiliation between registry operators and registrars. Go Daddy has asserted that « eliminating the arbitrary restrictions [on vertical relationships] would enhance the potential for successful competition. »³

Many of these advocates refute the incumbent registries’ allegations, making several compelling arguments:

• Those that are looking to restrict competition and ban registrars from selling certain names should have the burden of proving the likelihood of abusive practices;
• Historical precedent actually supports permitting affiliations between registries and registrars. Before 2005, all registry agreements explicitly permitted affiliations between registry operators and registrars that sold their names. Indeed, each of the incumbent registries (.biz, .info and .org) benefitted from these affiliations with registrars when they were launched.⁴ They argue that new entrants should have the same benefits of affiliations with registrars (i.e. guaranteed distribution of domain names) as the incumbent registries enjoyed. Additionally, even in the current market, there are registrars or their affiliates that serve as registry operators (e.g. .pro, .edu, .me) without any of the negative consequences. Therefore, not having this restriction actually would maintain historical precedent and the status quo;
• Incumbent registry operators fail to show any evidence that the affiliation, which existed in the past and does so currently, actually has caused any malicious or abusive conduct, discriminatory action, or risk to consumers;
• Any kind of malicious or abusive conduct or discrimination should be a violation of the registry agreements and be dealt with by aggressive ICANN compliance, as opposed to banning an entire segment of the marketplace from competing;
• Small registries would be harmed if affiliations were prohibited because they might not be able to convince existing registrars to sell their names and wouldn’t be permitted to accredit their own registrars;
• Economists commissioned by ICANN to date have opined that significant consumer benefits (price, quality and range of services) flow from vertical integration absent monopoly power;
• Thick registry data described by the incumbents already is publicly available and can be accessed by any party regardless of whether or not the TLD has cross ownership. Other sensitive registrar DNS traffic data and billing data are not available to registries; and
• Finally, registry operators are incented to have as many registrars sell as many names as possible. There is no incentive to favor an affiliated registrar with access to data or anything else for fear that no other registrar would sell names in that registry. As an example, most large registrars agreed to sell .me names notwithstanding Go Daddy’s interest in that registry operator. Obviously, these registrars did not see Go Daddy favoritism as a sufficient risk.

C. A Third Proposal Balances the Need for Registry Competition with Market Protections.

Others in the community, including Network Solutions,⁵ have offered a middle-ground position, which ICANN has adopted in principle in its proposed DAG. In this middle-ground position, registrars would be permitted to sell registration services of affiliated registry operators, but only up to a certain threshold—currently 100,000 names. Once the threshold is met, the affiliated registrar would no longer be permitted to accept new registrations, but would be permitted to manage its existing base.

This proposal recognizes several key arguments and market conditions in its effort to facilitate competition:

• New entrants should not be hobbled with restrictions aimed at registries with monopoly power when no evidence has been presented that harm to consumers will occur. Once a registry becomes large enough, however, its size may warrant additional study and safeguards—hence the threshold;
• As registrars have only limited space on their storefronts, the threshold exemption would permit a new TLD to get a foothold in the marketplace. Absent this exemption as stated above, some smaller or niche registries might not be able to convince any registrars from offering their names and would be prevented from forming their own registrars; and
• Some critics of this proposal worry that by having a threshold, the affiliated registrars would have an unfair advantage in selling the first and most valuable names. This concern is unfounded for two practical reasons. First, in most of the recent registry roll-outs, the registry operators have withheld the most valuable names from registrars entirely and sold them through auction or proposals. This effectively cuts out any registrar from benefitting from the most valuable names. Second, due to the non-discrimination rules, which must be strictly enforced, unaffiliated registrars would have the same rights to offer domain name services as would an affiliated registrar. Thus, the registry operator would not be permitted to favor an affiliated registrar in the distribution of the first 100,000 domain names.

3. The Other Key Dispute Relates to an Attempt to Restrict Back-End Registry Service Providers.

A. Should Registrars or their Affiliates That Provide Registry Operators with Services Be Restricted from Selling Names in Such TLDs?

An even more controversial argument offered by the incumbent registry operators focuses on back-end registry service providers, the entities that a registry operator may contract with to carry out certain technical functions of running a registry. They claim that registrars may not sell domain names of registries when the registrar itself or even an affiliate of the registrar provides the independent registry operator with back-end registry services. For example, they would argue that if the City of New York elected to apply to be the registry operator for the .nyc registry and selected Network Solutions or an affiliate to provide certain back-end registry services to the City, then ICANN should prohibit Network Solutions from selling .nyc names.

The incumbent registries have made a number of arguments to support this position:

• They assert that back-end registry service providers are « functionally equivalent » to registry operators, and any rule that impacts the registry operators must also impact its suppliers;
• Potential abuses can be perpetrated through both the registry operator and the back-end registry services provider;
• Regulatory agencies routinely apply existing policy to new forms of service providers and new technologies in the marketplace; and
• Back-end registry providers that do not have guaranteed distribution will not be able to compete effectively with back-end providers that do have guaranteed distribution.

B. Others Argue that Independent Suppliers Should Not Be Banned from Competing in the Distribution of a TLD.

To counter the arguments above, many in the community, including Network Solutions, assert that registry operators should be free to select whatever technical service provider they want for registry hardware, DNS resolution, telecommunications, etc. without preventing such a provider from also distributing domain names as a registrar. ICANN should not be in a position of restraining trade by banning a third party for distributing domain names. There is no reason, let alone any compelling reason, why a registrar or registrar affiliate—independent of a registry operator—should be denied from participating in the market to distribute that TLD.

Those that hold this position make the following supporting points:

• There should be a high burden on those who are looking to restrict the free market and competition through banning registrars from selling certain names.
• There is absolutely no historical precedent for ICANN telling a registry operator with whom it could do business or how the registry operator vendors conduct their businesses.
• The current marketplace shows that registrars and their affiliates have provided back-end registry services and sold names in those registries without any negative consequences (e.g. the CORE Internet Council of Registrars currently provides back-end services for .cat and .museum). Do the incumbent registries now actually believe that CORE members should be prohibited from selling names for .cat or .museum, or should the .coop back-end provider now be prohibited from selling names in that registry?
• Independent back-end providers are not « functionally equivalent » to registry operators simply because of a contractual relationship to perform technical functions on the latter’s behalf. They do not have the contract with ICANN and have no policymaking authority for the TLD. Registry operators, not their suppliers, are responsible for pricing and policy making decisions for the TLD. They would not want, nor permit, their suppliers to act in ways that are not compliant with their ICANN agreements and policies. It is hard to fathom that the incumbent registry operators actually believe that PIR is the functional equivalent of Afilias. It is also difficult to believe that incumbent registries think PIR would be incented to provide an unfair advantage to one of its registrars at the expense of the rest, or that PIR would stand for Afilias favoring a registrar, such as Go Daddy, that has a reported ownership interest in it. Similarly in the hypothetical example above, would the City of New York become the « functional equivalent » of Network Solutions simply because the City was the registry operator and it selected Network Solutions to provide it with certain technical services?
• Registry operators should be free to choose any service provider they wish and enter into a services contract with whomever they wish. There is vibrant competition for back-end service providers in New TLDs and each competitor offers something different to the consumers of such services—the registrar operators. A registry operator should be free to choose the back-end registry service provider that they believe best meets its technical needs and expectations for the new TLD. ICANN has no business constraining the supplier model and thereby limiting competition and restraining trade.
• In response to the argument that back-end providers with guaranteed distribution have an unfair advantage over the others in the market, it is clear that each back-end provider has different strengths and advantages, and different models have been succeeding in the marketplace. For example, in recently announcing its selection as back-end registry services provider for a proposed .green TLD, Neustar noted that its « registry is connected to over 250 domain name registrars worldwide. »⁶ Similarly, Minds and Machines has announced deals to compete for .eco, .roma, .gay, .basketball, and .radio without any affiliation with a registrar.
• Even if ICANN agreed with the incumbent registry operators that they cannot compete effectively with back-end providers with guaranteed distribution, the answer cannot be to harm competition by removing the superior product from the registry operator consumers out of « fairness » to incumbent providers. The point of New TLDs is to enhance competition, not to protect the interest of incumbent suppliers.
• Registrars or their affiliates that also provide technical services have no competitive advantage with regard to other registrars in the sale of domain names, and would have to operate on non-discriminatory terms with the rest of the market participants. Denying such providers from participating in the market is a form of « competitor profiling » that seeks to underscore hypothetical risks in order to ban an entire class of competitors from participating in the market.
• Finally, back-end providers would not be incented to discriminate against any registrar(s) because they would want to see as many registrars as possible distribute the names in the relevant extension. Of course, if any alleged abuses did occur, they would be addressed through ICANN Compliance and/or the appropriate national law and competition authorities—as noted in Peter Dengate Thrush’s recent letter to the ICANN Government Advisory Committee.⁷

4. Next Steps

ICANN has indicated that it intends to publish version 3 of the DAG in the coming days. The DAG hopefully will reflect the input it received from the economists it retained to study the registry-registrar relationship issues, as well as any input from another potential consultation on these issues (there already have been at least three). Moreover, the GNSO has called for ICANN to produce an issues report on these issues. All of this input on the registry-registrar issue should be taken into consideration, including the positions summarized here. On behalf of Network Solutions and Central Registry Solutions, we look forward to working with the community in better understanding these issues, resolving the issues as soon as practicable, and putting to rest any unwarranted fear mongering that has pervaded this debate of late.

author: Jon Nevett
source CircleID.com