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    Registrars Mueller speaks out on WLS (Warning: here be heresy)
    posted by Mueller on Tuesday August 27 2002, @12:27PM

    The hoo-hah over WLS continues to baffle and bemuse me. Is it not as obvious to everyone else as it is to me that 90% of what happens at ICANN is fighting over the crumbs of the artificial scarcity that ICANN itself perpetuates?

    Expiring .com names have premium value. Why? Because of the concentration of names and mindshare in .com. This is a function of the TLD cartel, ICANN's wholly artificial, and apparently indefinite, restriction on the number of TLD names and service providers in the registry market.

    The dominance of .com has given rise to the quintessence of the ICANN regime: the compulsory separation of registry and registrar functions in the gTLD market. If .com accounts for 75% of the entire global market for domain names, as it did not too long ago, then the only way to achieve some appearance of competition without adding TLDs is to open up the .com registry to multiple registrars. Rather than introducing competition where it is needed most - namely at the registry level - ICANN and DoC chose to redistribute the monopoly profits generated by .com to a special class of businesses called "registrars." But if .com is no longer dominant, if there are lots of TLDs and the market share is distributed among them more evenly, then what exactly is the rationale for a separate, protected registrar industry?

    To challenge the registry/registrar split is heresy. Well, it's time for some flaming heresy. The WLS controversy is one of the first indications of how problematic that separation is. It won't be the last.



    The WLS controversy has its origins in a simple market need. Many customers would like to have a secure, predictable method of queuing up for expiring domain names. If your company name is “BelchFire” and belchfire.com has been held for two years by a dislexic home user named Joe Blechfrie you have more than a passing interest in standing first in line when Joe lets the name expire. A third party service is desirable because of the uncertainty and potential for opportunism surrounding the market. The Belchfire Company does not know whether the registrant will renew the name or not. If it contacts the registrant and offers to buy it before it expires, the registrant has been tipped off that the name has value, and the registrant might exploit that to set the price very high. The waiting registrant thus cannot know whether it stands to win or lose by initiating a transaction directly with the registrant.

    An efficient, responsive domain name industry ought to be able to supply something in response to that demand. What happens now is that various competing pre-registration services sell a lottery ticket to customers and storm the registry with "add" commands when a name expires. In other words, they attempt to capture the name by brute force. This is stupid. It's especially stupid because the "add storms" that result are a pure example of a tragedy of the commons. Just as the absence of property rights or governance rules over portions of the ocean gave mechanized fishing boats an incentive to grab as many fish as fast as they could before someone else did, regardless of the ability of the fish population to replenish itself, so the present expiration system gives secondary market makers an incentive to inundate the registry regardless of its effect on the registry infrastructure.

    Basic economics would suggest holding an auction for the name upon its expiry. That, after all, is how market economies solve the problem of competition for the same resource. An auction would assure that the name went to whoever valued it the most. It would not give the name to someone based on random luck, or the exploitation of some technical quirk in the registrar-registry protocol.

    The problem is: who should serve as the auctioneer? In other words, who gets to sell the name and reap the substantial profits that reflect the gap between the value of the name in the primary and the secondary market? The registrant himself? We have already mentioned the information and opportunism problems. Aside from that, efficient auctions require organization and publicity, both of which cost money. Unless the incumbent registrant is an organized domain name brokerage, he will not be prepared to operate an auction. If the registrant uses the WHOIS record to advertise that the name is for sale, he runs afoul of the UDRP.

    The most efficient and direct entity to serve as the auctioneer is the registry itself. The registry knows when the name expires and has direct control over when it is released. A centralized auction that incorporates all prospective bidders is always more efficient at equilibrating supply and demand than a bunch of smaller, fragmented auctions. So why don't we let registries do this? There is really only one reason: competing registrars don't want the profits to flow to VeriSign.

    Certainly there should be powerful safeguards and forms of recourse to ensure that domain names are not mistakenly sold out from under unwitting registrants. But those problems can be solved relatively easily. The real problem here is that registrars and registries have a direct economic conflict of interest over the distribution of wealth. Registrars want the large margins of the secondary market to go to them, not the registry. They want a special set of regulatory procedures to be enacted to force the registry to throw expiring names into a common pool so that all the sharks get an equal chance to gnosh on it. That doesn’t help the consumers who are willing to pay premium prices for specific names. It imposes enormous externalities on the registry. And it doesn’t give new, competing registries any incentive to build up the value of names in their own namespaces. But it does keep the registrar trough full, and in this easy-entry business with thin margins, it’s worth fighting over.

    In order to advance this purely self-interested economic agenda, registrars wave the old, bloody flag of the NSI "monopoly." That's always good for rallying the troops; it has worked since 1995. But those charges are wearing thin as VeriSign's market share is whittled away, and no one should be taken in by them. What matters here is the public interest, not what hurts or helps VeriSign.

    What no one seems to have noticed in this policy food fight is that if the registry market were more balanced and competitive, it wouldn't matter much what WLS type of policies VeriSign adopted. For one thing, the secondary market value of .com names will decrease as the name space expands. For another, if VeriSign's wait list service excluded registrars from sufficient opportunities to profit from the secondary market, they could start their own damn registry and set up their own damn secondary markets, using whatever procedures they liked.

    In short, .com names will continue to have premium value as long as the number of TLDs, and competition among registries, is kept to a minimum. The prospect of allowing a registry to institute its own procedures to organize a secondary market for its names will seem "anti-competitive" as long as the registry market is dominated by one gTLD and one registry. The longer we stop the addition of new, open TLDs the longer .com will have that special status. Sure, it will take time for new TLDs to establish market presence and mindshare. But the longer we put that off, the more we heighten the political and distributional conflicts over .com.

    We’ve been through a similar situation in telecommunications. The AT&T breakup reengineered the telephone network to provide long distance competitors "equal access" to local origination and termination of calls. For several years afterwards, new long distance carriers could get a lot of mileage in FCC regulatory processes by waving the bloody flag of the old AT&T monopoly. This continued even after AT&T's market share plummeted to 50%. Finally the FCC wised up and deregulated the market as a whole, putting AT&T as well as its competitors on fairly equal terms. And as a more open and competitive telecom industry evolved, it became apparent that the regulatory requirement of a sharp distinction between "local" and "long distance" service was artificial and not sustainable. The deregulated industry evolved in ways that allowed the two to be integrated, such as for example in mobile services, where carriers offer bundles of local and long distance minutes. Can you imagine how much worse off we’d all be if the FCC had decided that wireless telephone services could not bundle local and long distance minutes because it was “unfair” to the long distance carriers because it deprived them of an equal shot at the minutes?

    When all is said and done, WLS is a pretty wimpy attempt to bring some economic rationality into the market for expiring domain names. It does not set up an full-fledged auction to discover and capture the real value of the expiring names. It simply sells "first dibs" for a flat $35. As far as I can tell, it punts on the question of what happens if there is more than one bidder willing to pay for the expiring name. Almost certainly, the wimpiness is a product of VeriSign knowing that it can't do much under the ICANN regime.

    For better or worse, the ICANN Board ignored its DNSO Task Force report, and approved the WLS service. The TF report reflected the views of registrars and Marilyn Cade, someone more interested in suppressing and regulating the market for domain names than in developing it. But, reflecting the endearingly amateur capabilities of this regulator, ICANN approved it with a proviso that completely defeats the purpose of WLS. ICANN has in its wisdom decided that the incumbent registrants of a domain name must be informed when a WLS bid is placed on their name. As one industry veteran (whose initials are rumored to be STFU) observed, the rational response to such notification would go something like this:

    "I have been notified that a WLS has been filed on this domain. Accordingly, I intend to renew this domain, in perpetuity, as the cost to me to do this is merely $6.95 a year. You just paid $35 for nothing. If you wish to purchase this domain from me, feel free to contact me, and I'd be happy to speak with you and consider your offer."

    As they said in Mao's China, Long live ICANN! Long live industry self-regulation! Strongly adhere to the principles of Postel-Sims-Cade thought!


     
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    Mueller speaks out on WLS (Warning: here be heresy) | Log in/Create an Account | Top | 21 comments | Search Discussion
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    Re: Mueller speaks out on WLS (Warning: here be he
    by fnord (groy2kNO@SPAMyahoo.com) on Tuesday August 27 2002, @10:08PM (#8739)
    User #2810 Info
    While I agree with adding numerous new TLDs. having to rely on a hypothetical or even real dyslexic Blechfrie to make your case seems rather wonky. Belchfire can register belchfire.biz, or if they're in the UK, belchfire.co.uk, or in the US, belchfire.us. Companies that have refused to be shaken down for *.com for a year or two don't have to worry about the squatter re-registering it, the extortion didn't work so they'll move on to greener pastures and let the name expire. Getting a WLS on the name, as you say, just tells them to hang onto it. Not getting a WLS means it will probably expire and not be picked up by anyone, no other squatter will try where the first one failed.

    But this is built on too many hypotheticals, there aren't a bunch of Belchfire's out there just lusting after their proper name, the WLS market is driven by those who want existing sites with existing traffic that they can then redirect (more accurately, misdirect) to pr0n and/or gambling sites. .com is already a wasteland of 404 errors and coming soon and for sale pages, institutionalizing a service that will ensure mousetrapping multiple popup sites where entirely unrelated sites used to exist will just further devalue .com. VeriSign doesn't care, they'd rather have more money now than less later, and ICANN seems to agree with that strategy. The long term effect will be that .com will be further devalued and other gTLDs and ccTLDs will become more trustworthy and thus more used. So even without more new gTLDs the worm is turning. -g

    [ Reply to This | Parent ]
    Re: Mueller speaks out on WLS (Warning: here be he
    by RFassett on Wednesday August 28 2002, @03:33AM (#8743)
    User #3226 Info | http://www.enum.info
    Whether one advocates, or does not advocate, new TLD's for whatever logical and seemingly justifiable reasons, the question to me is whether ICANN is acting a regulator to the market place by restricting entry.

    ICANN, the private entity, continues to claim it is not, is not intended to be, nor has the "will" to be a market regulator for DNS addressing. By restricting entry thus limiting the number of TLD registries - some say artificially but certainly without any clear documentation as to why as pointed out by the NTEPPTF itself - is ICANN not acting as a market regulator?

    Was ICANN's role intended to be one where it would "foster" competition that in spirit would seem to remove itself as a regulator? Has ICANN not completely twisted this around to where it becomes - by its owns actions - a market regulator? Is ICANN structurally - by design - incapable of playing the role of a global DNS regulator?

    By restricting entry, does ICANN not gain precious leverage with the few registries it has contracts with whereby it can then further influence regulatory measures upon the market place, notably the user community? No "mutually agreed" contract, no entry (see .pro delay).

    If ICANN sets up a system for entry, will it not lose this leverage, or certainly more likely to be challenged on its authority to impose market place regulatory measures in its registry contracts? If so, will ICANN not lose much of its ability to centrally regulate the market place, such as imposing sponsorships, price controls, and new product service offerings?

    Whether one agrees or disagrees with TLD expansion for whatever logical reasoning, the question is to me: Is ICANN acting as a market regulator by restricting entry? ICANN claims to have no desire to regulate the market place. After 4 years, one limted expansion round, the entangled registry contracts this produced, and no documented system for further entry, what do their actions say? Is ICANN acting as a market regulator? If one answers "yes", is it supposed to be, by its own definition, design, and structure? This, to me, is the issue, not the "opinion" of whether one thinks there should or should not be new TLD's for whatever justifiable reasons one believes.
    [ Reply to This | Parent ]
    Re: Mueller speaks out on WLS (Warning: here be he
    by PeterBarron (pebarron@hotmail.com) on Wednesday August 28 2002, @04:28AM (#8746)
    User #3240 Info | http://www.icannwatch.org/
    I believe .WEB would compete with .COM vigorously.

    ++Peter
    [ Reply to This | Parent ]
    Re: Mueller speaks out on WLS (Warning: here be he
    by Mueller ({mueller} {at} {syr.edu}) on Wednesday August 28 2002, @07:59AM (#8751)
    User #2901 Info | http://istweb.syr.edu/~mueller/
    I don't agree with the premise that new TLDs are "floundering." They are now growing at a pace of about 3% a month, and grew even while .com declined. After a little over one year, .info and .biz both have more registrations than .com had after three years following commercialization of DNS.

    It's true that results have not lived up to expectations, but the expectations were inflated and the applicants overextended themselves as a result. There are lots of small businesses that would love to have a million customers, each generating revenue of $5-6 per year, and the customer base growing at 30-35% annually, in a service that does not require heavy capital investment and has huge economies of scale. If you can't make a profit at that, there's something wrong with the way your business is managed.

    I agree that we need new TLDs that have the visibility and competitiveness of .com. I don't think we get there by limiting entry. In various markets (telecom is the one I am most familiar with) businesses and regulators often make the mistake of assuming that they can prop up the strength of existing competitors by limiting entry to a few, thereby assuring that the small numers will have major market shares and be "stronger" competitors. That doesn't work. The protected competitors tend to be weak and inefficient as a result. Neustar thought it was going to be the new NSI and spent far too much money on what should have been scaled as a small business.

    What actually happens is that you open entry, and many new competitors enter and try various strategies. Of course only a few survive, or grow to a major scale. But you never know who those few will be unless you open the gates completely.
    [ Reply to This | Parent ]
    It's not about whether you like VeriSign
    by Mueller ({mueller} {at} {syr.edu}) on Wednesday August 28 2002, @08:01AM (#8752)
    User #2901 Info | http://istweb.syr.edu/~mueller/
    It's about how you regulate registries, any registries. If VeriSign runs a poor ship they'll lose customers. I reject categorically the following syllogism:
    VeriSign sucks
    VeriSign wants something
    ergo,
    VeriSign should be denied, setting precedents
    for how the entire domain name registry business is regulated.
    [ Reply to This | Parent ]
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