Re: [ga] Draft Resolution

[DPF <david@farrar.com>]

On Sat, 17 Mar 2001 09:44:26 -0800, Kent Crispin wrote:
>On Sat, Mar 17, 2001 at 06:20:07PM +1300, DPF wrote:

>> - The granting of a presumptive right to be the *.com registry to
>> Verisign.  By lowering the necessary performance standard to retain
>> *.com *which makes up 65% of all domain names in the world), this
>> removes a huge pressure on the registry to keep prices as low as
>> possible and to have the best possible relationship with Registrars
>
>"huge"? I doubt that very seriously.  While people complain about the
>lack of effectiveness of TLD vs TLD competition, the effectiveness of
>serial competition is equally questionable, at least as things are 
>currently constructed.  [+] (see note on "serial competition", below)

Firstly thanks Kent for providing your views, even if of course we do
not agree on many of them.

I've thought about this some more and I have to say I am more
convinced than ever that "huge"is indeed appropriate.  By 2007 the
registry side of *.com alone could well exceed US$1 billion - an
amount which could see several quite large companies decide to put in
exceedingly competitive bids for.  Verisign as an intelligent company
is not going to ignore this possibility and rely on lawsuits to keep
the registry (uncertain and expensive) but with no registrar business
will be especially keen to keep the registry by performing to a
standard (minimal complaints from registrars, lower prices etc) that
is untouchable.

>> - Allowing Verisign to retain its registrar business puts in place
>> perverse anti-competitive incentives regardless of organisational
>> firewalls. 
>
>Whether the incentives are "perverse" is surely an extreme value
>judgement.  

It is a value judgement, which is of course what an opinion is all
about.  I don't think it is extreme.  It is common sense that if you
own one of your customers but not all the others there is an incentive
to look after the one you own (especially if you have a presumptive
right to keep the registry).

>Clearly incentives exist -- they always exist, but the
>mechanism of organizational firewalls is deemed sufficient in many
>anti-trust circumstances, and if you are going to claim that they are 
>not sufficient in this one, you should document it.

On the contrary the onus is on Verisign to document that they are
sufficient.  Plus at present they *may* be sufficient because the
contract is for Verisign to only have a registrar business until 18
May.  Once that is no longer the case then the incentives change and
what was sufficient may be no longer.  I believe the increased risk is
enough to want to avoid it.  Verisign may be the nicest guys in the
world (yet managements change) but why put in place a regime which
will place anti-competitive incentives in front of them, especially
when one already has an agreement to get rid of them.

>> - Verisign would be in a position where it could purchase other
>> Registrars thus once again gaining over 50% or even 75% of the
>> registrar market in *.com, as well as the registry.
>
>Big "So what".  Any large company can do this; it is independent of the 
>issue of the registrar/registry split.  See the below discussion on the 
>"zero wholesale cost" argument.

The argument used by the ICANN staff is that they are now below 50% of
the registrar market.  The point is they can easily change that
overnight if they are allowed to by the proposed changes.  And having
the registry also does give them an advantage.

>> - The possibility of a change to the status of *.org registration
>
>1) There is a possibility of that, regardless.  In any case, the registry 
>operator is bound to abide by "consensus policies".

Well according to ICANN staff/website we only have one - the UDRP.
Absolutely everything else is a contractual matter it seems.  There
have obviously been discussions between Verisign and ICANN staff on
this issue and it is obvious that if the proposed changes are agreed
to it is far more likely that the status of *.org will change.

>2) Given the complexity of the process we have seen in getting new gTLD 
>operators in place, it is inconceivable that a new operator/policy for 
>.org would be put in place without a long-drawn out public process.

Really - I would say it is conceivable that the staff will announce a
draft contract with a new registry and give people only a few weeks to
comment on it and claim that it is a contractual matter which does not
need DNSO approval.  Just as they have done this time.

>> - Granting the ability to Verisign to increase registry prices with
>> only 30 days notice
>
>But there are price caps, as I recall.  Price caps are the only thing
>that matters, in fact, because if some other company wins the rebid,
>they win a monopoly for 4 years (or whatever the term might be) in any
>case, and can immediately reset the prices. (* "serial competition", below)

What are the price caps?  The Registrars can't seem to find them.  

>> - The ambiguity over what the $200 million to be invested in registry
>> development would actually be, and the lack of any clear process to
>> audit this.  
>
>Reasonable point.

We agree on something - I think I will pour myself a whiskey to
celebrate :-)

>> - The non-transparent process used to negotiate these agreements which
>> are then presented as not negotiable to the ICANN Board and DNSO
>
>If a negotiating partner insists on secrecy, one is put in an awkward
>position.  In any case, what does this have to do with the merits of the
>proposals?

One insists upon being able to inform your Board in confidence of the
negotiations and to gain from them a negotiating framework.  If
Verisign do not agree to this then one implements existing ICANN
policy.

And the process does interact with the merits.  The fact that we do
not know all the answers to our questions is a reflection of the
process used.  The fact that we are unable to suggest even minor
improvements to the proposals is an impediment.  If one could then one
might be able to endorse the proposals in principle as long as some
minor changes are made.

>> - The detrimental effects on registrars who have become registrars and
>> invested money on the basis of the existing contract (which mandates
>> the Verisign registry must divest the registrar business)
>
>Reasonable point.  Certainly, if I were starting a registrar, this 
>would have been something I would considered.

Possibly one of the strongest from the Registrar point of view.

>> - The unfair advantage the Verisign Registrar would gain by being able
>> to sell domains with a zero wholesale cost, thus potentially forcing
>> out many smaller competitors
>
>It pains me to say this, since some of my good friends are in the
>registrar business, but the "zero wholesale cost" argument is bogus.  
>See discussion [++] below.

I disagree but will respond fully down below.

>> - The total lack of outside analysis on whether the proposed changes
>> will be beneficial to the Internet community
>
>A valid concern.  Not clear how that could have been done, though.  This
>was an exploratory private negotiation, at the behest of NSI, and NSI
>played the deadlines in the way it thought was most advantageous.  In 
>retrospect, that may have been a mistake on their part.

Indeed.  If NSI won't agree to ICANN having time to get expert outside
opinion on the benefits (or otherwise) to the Internet community, then
they increase their chance of rejection.  

>William Walsh has pressed me to come up with what advantages I see with
>the new proposals.  There is no mystery: The advantages have actually
>all been stated: splitting off of .net and .org, cleaner contracts,
>various monetary committments, and so on.  These are clear and obvious
>advantages.  

And I agree with these.  There are good points to the contracts.
However in my opinion the bad points far outweigh these.  The
combination of the presumptive right to *.com and keeping the
registrar business could lead to a return to the bad old days.

>The argument has actually mostly revolved around the significance of the
>*disadvantages*, and they are in fact, very difficult to evaluate.  

Yes to some degree they are.  And unless one can be assured about them
the safer course is the status quo.  There we know exactly what we are
getting warts and all.

>If, on the other hand, you believe that competition between gTLDs is not
>going to be effective, and that .com will forever be the only important
>player, then it is very important to constrain the power of that
>registry as much as possible.  Of course, it would be nice if we could
>have both, but that option isn't available.

There will be some serial competition - especially amongst large
businesses who will want all suffixes.  But I think *.com will remain
the king amongst princes so to speak for a long long time.  Not just
the head start they have but also even the media talk about dot coms.

As I have said before I would be far less worried about this proposal
if the new gTLDs had been up and operating even six months or so.
That may give us some idea.

>The question is: 6 years from now, will we see .com as a much reduced
>player, with .org, .biz, .net, .info, and a bunch of other new domains
>getting most of the new registrations, or will .com remain the elephant
>in the land of mice?

Until we have some facts on which to decide this, we should play it
safe and keep the status quo.  The harm from getting it wrong may be
large.

>If the latter, then NSI will have won, regardless, and under either
>scenario will fight incredibly hard to keep .com.  

However they will be the registry only getting $6 per name only.  If
we allow them to stay Registrar only and they get an additional $29
per name and by 2007 this may be an additional $1.5 billion of annual
revenues on current market share.  That is a huge gift to a company.

>Anyone who has been
>involved in this for any length of time knows just how effective they
>can be, and personally, I think that the threat of a rebid is a pipe
>dream.  The current contract gives them *plenty* of ammunition.

I think under the current contract Verisign would be fools to rely on
legal action to keep the registry in 2007.  They would rely on great
performance and low prices which is what we want. It is all a matter
of incentives and the status quo will give Verisign good incentives to
perform well as a registry while the proposals will give them
anti-competitive incentives 

>In sum, I believe that the course we are on *requires* that we make 
>registry competition work.  If we don't, we have lost everything.

We lose IMO far more if *.com remains dominant and Verisign is a
Registrar as well as registry and also has a presumptive right to
keeping the registry.

>[+] Note on "Serial competition": The basic problem is that, as things are
>currently, a reasonable rebid cycle would be on the order of 4 years or
>more (since the switching costs involved the change of registry operator
>are sgnificant -- significant for the registry operator, significant for
>the Internet comunity).  

How are they significant for the Internet community?  All you have to
do is update Root Server A with the new delegation for *.com.  No need
for the interface to change.

>No matter who wins the rebid, they will be
>given a monopoly for the term, and a lot of monopoly advantage can be
>exploited in 4 years.  That is, there is no reason to expect that the 
>winner of the bid will be any better than NSI.

This is not about whether NSI are now good or bad guys.  It is about
allowing any company to be a registry and registrar in *.com is a bad
idea, especially combined with a presumptive right to keep *.com for
ever.

>The only way that serial competition can be made to work is if the
>switching costs are quite low.  I described such a model in "Position
>Paper D" in the report of WG C
>(http://www.dnso.org/dnso/notes/19991023.NCwgc-report.html), and I
>encourage everyone to read it, since it is a beautiful proposal. 

You are so modest :-)

I've had a read.  It certainly has some merits but I imagine was seen
as too radical a departure from the status quo.

>[++] The "Zero wholesale cost" argument is bogus, because it neglects
>the other side of the equation: "zero wholesale profit".  To see this,
>suppose that the NSI registrar, in a fit of monopolistic greed for
>market share, decided to leverage it's supposed "zero wholesale cost" to
>the max, and to give away registrations for free.  In such a case, every
>registration by the NSI registrar would be $6 lost in fees that would
>have been collected from any other registrar.  This is a real loss for
>the registry. 

I agree it is not economic sense for Verisign to have its registrar
give away registrations for zero dollars.  However let's look at what
happens if Verisign the Registrar decides to sell registrations for
say $6.

First of all no other registrar would be able to sell at that price
because it would give them a zero margin to pay their staff and costs.
They would go bankrupt if they tried to see at zero dollars.

Now Verisign the Registrar would lose money on the $6 sale fees but
Verisign the Registry would make money ($6 less costs) and if the
combined costs of Registry and Registrar are less than $6 then
Verisign overall makes money, increases market share and bankrupts the
competition.

>It is perhaps unfortunate, but the fact is that *any* large company
>enjoys precisely the same advantage that Verisign does, and the
>inescapable conclusion is that small registrars are not going to make it
>in the long run, regardless.  This is completely independent of any
>issue of registry/registrar split.  

Disagree.  As shown above allowing any company to keep both the
registry and a registrar will allow it to set retail prices at a level
where they are the only company which can make money.

DPF
--
david@farrar.com
ICQ 29964527
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