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General Counsel's Second Analysis of VGRS's Request for Amendment to Registry Agreement
22 August 2002


General Counsel's Second Analysis of VeriSign Global Registry Services' Request for Amendment to Registry Agreement


To the Board:

Background

This is a follow-up to my 17 April 2002 report on the request of VeriSign Global Registry Services (VGRS) to amend the registry agreements for the .com and .net top-level domains to accommodate its desire to provide, during a one-year trial period, a Wait Listing Service (WLS). At its meeting on 22 April 2002, the Board adopted the following resolutions:

Resolved [02.53] that the Board requests the Names Council to coordinate within the DNSO a comprehensive review of issues concerning the deletion of domain names and possible solutions for those issues and to submit to the Board, no later than 10 June 2002, a status report on that review, with the status report to include any recommendations (with supporting materials) concerning VeriSign's request to modify the .com and Net agreements to allow it to provide a wait-listing service, for a fee, as part of its operation of the .com and Net registries;

Resolved [02.54] that the Secretary is directed to advise the Address and Protocol Councils of VeriSign's request and the Board's intent to consider that request at its Bucharest meeting on 28 June 2002, with an invitation to those councils to submit comments (if any) on the request before that time;

Resolved [02.55] that the Board invites public comments on VeriSign's request and directs that a suitable mechanism be established for allowing comments to be submitted over the Internet to ICANN for at least a thirty-day period; and

Resolved [02.56] that the Board invites comments on VeriSign's request at the Public Comment Forum to be held on 27 June 2002 in Bucharest, Romania.

The proposal was called to the attention of all three Supporting Organizations; web-based comments were invited; and the topic was discussed at the 27 June Public Forum in Bucharest. At that Public Forum, the Names Council gave a report on a consultative process it was conducting, but its work was not yet completed. Presentations were given by the Names Council task force and VGRS that tended to narrow, but not eliminate, areas of controversy regarding the proposed WLS. Accordingly, the Board adopted the following resolutions regarding WLS in Bucharest:

Resolved [02.84] that the Names Council is requested to provide, no later than 26 July 2002, its final recommendations, with its supporting rationale and any separate positions of DNSO constituencies, on the VeriSign WLS request (including the modifications made on 27 June 2002), so that the Board may act shortly thereafter.

The Names Council (and its task force) continued its work, and on 14 July 2002 the task force issued the Final Report of the Transfer Task Force on the WLS Proposal. After a public comment period, the Names Council voted 15-3-1 (one member not voting) to adopt the task force's final report, including separate statements of the gTLD registry and intellectual property constituencies, as well as an extensive set of links to statements from other groups and persons. The task force report calls for the WLS proposal to be rejected, but also recommends various conditions to be implemented if it is approved.

Analysis

As noted in the Bucharest presentations, introduction of the WLS would require various amendments to the .com and .net registry agreements because (a) it changes the functional specification under which those two registries are to be operated (it involves a change in the name-allocation algorithm) and (b) it involves VGRS offering a new registry (sole-source) service for a fee. As has become apparent in the extensive community discussions, a broad spectrum of opinion exists in the community regarding whether these amendments should be made, though as noted above the scope of controversy has been significantly narrowed in the consultative process.

In analyzing VGRS's request, it is useful to separate it into two issues (these questions have been prevalent in the community discussion and are reflected in the Names Council's work):

  • Should the VGRS be permitted to offer some form of WLS?

    The principal objection that has been raised to implementation of the WLS in any form has been that it is a sole-source service that would tend to displace services offered at the registrar level. The "displacement" of registrar-level services is due to the fact that the registry-level service would provide consumers with wait-list reservations that would be guaranteed effective (in the event that the existing registration is deleted) because they would be fulfilled before a deleted name is released to the pool of available names that registrar-level services can access. (In this connection, it should be noted that WLS reservations would not be offered by VGRS directly to consumers, but through registrars on an equivalent-access basis.)

    To some consumers, the resulting registry-level service would likely be a more attractive and convenient option than registrar-level services even at a higher price. The "displacement" of registrar-level services is due to this increased attractiveness and convenience.

    In the past, when confronted with a situation where a registry operator wishes to offer a service, on a sole-source basis, to customers that might displace competitively offered services due to the sole-source service's enhanced features, ICANN has permitted the sole-source service while taking steps to ensure there are safeguards in place so that the registry operator does not abuse its sole source position. In particular, in the case of .name, in July 2001 the Board considered whether the registry operator should be permitted to offer a second-level e-mail service, which for technical reasons could be offered only at the registry level. Because the service simply offered consumers an additional (and potentially more attractive) option, the Board decided the service should be permitted, subject to various protective conditions (equal registrar access, performance requirements, and a price cap).

    Although the specifics of the WLS differ from the .name second-level e-mail service, many of the same considerations apply:

    • In both cases, a registry operator wishes to offer an optional service to consumers that some consumers may find attractive.
    • In both cases, some consumers are likely to prefer the proposed service. (It should be noted, however, that in both cases other consumers may not find the proposed service more attractive than alternatives. In the case of the .name second-level e-mail service, consumers had many other alternatives for e-mail services under other names. In the case of the WLS, some consumers may prefer certain existing services that charge only when the name is deleted and then successfully registered, in contrast to the WLS which requires a payment whether or not the existing registration is deleted allowing the WLS reservation to be successfully fulfilled.)
    • In both cases, only the registry operator is situated (for technical reasons) to offer the service.
    • In both cases, consumers may be diverted from purchasing other services offered competitively.

    The approach followed in the case of .name suggests that the WLS should be allowed, thereby giving consumers an additional option, provided there are appropriate safeguards in place to prevent the registry operator from abusing its sole-source position to the detriment of consumers. In other words, the focus should be on promoting consumer choice, and registry services that offer consumers additional choices should ordinarily be permitted, subject to any conditions needed to prevent abuse of the sole-source position.

  • If so, what conditions, if any, should be required?

    Assuming VGRS is permitted to offer some form of WLS, the question arises what conditions (if any) should be required. In its report, the DNSO task force suggested several, and some others have been agreed by VGRS:

    1. The WLS should only be introduced after the Redemption Grace Period is in place. The task force's report recommends that the introduction of WLS should be "dependent on the implementation and proven (for not less than six months) practice envisaged in the proposed Redemption Grace Period for Deleted Names policy . . . ." The Redemption Grace Period was authorized by the Board in Bucharest and is currently in the implementation process. The reason stated for this condition is so that existing registrants are afforded an appropriate mechanism to mitigate the effects of inadvertently deleted names, and are not required to purchase, as a matter of course, WLS reservations on their own registered names to avoid deletions that are caused by errors in the process that are currently occurring. (Registrants would be able to purchase WLS subscriptions on their own names, but once the Redemption Grace Period is in place this should not be necessary.)

    All constituencies support implementation of the Redemption Grace Period, but the gTLD registry constituency believes that its implementation should be unrelated to WLS. Particularly because the implementation of the Redemption Grace Period will require cooperation of the registry operators, however, it seems appropriate to condition the WLS on prior implementation of the Redemption Grace Period. Otherwise, registry operators would have the incentive to implement WLS before their implementation of the Redemption Grace Period, resulting in existing registrants being induced to purchase WLS reservations as "insurance" against the too-frequent inadvertent deletions that are occurring. It also seems appropriate to promote consumer awareness by requiring a period of months between the introduction of the Redemption Grace Period and the WLS; this might be three months (as originally proposed by the task force) or six months (as finally proposed by the task force).

    The DNSO also recommended that the WLS not be introduced before "establishment of a standard deletion practice." The rationale for this proposed condition is not well explained in the task-force report. Moreover, because the establishment of a standard deletion practice will likely be an extended process (because it may require cooperation from every registrar), this condition may have the effect of delaying WLS for an extended period.

    2. No preferential treatment should be given to existing SnapNames "SnapBack" reservations. VGRS originally proposed to preference its technology partner, SnapNames, by a special provision under which presently existing SnapNames' registrar-level "SnapBack" reservations would not be permitted to be reserved within the WLS. This special provision had the effect of preferentially exempting SnapNames subscribers (but not subscribers of others) from having their reservations affected by the introduction of the WLS. This special preference prompted extensive community criticism. VGRS has responded to the criticism by revising its WLS proposal so that there will not be any preference or exclusion given because of SnapBack or any other existing registrar-level reservation service.

    3. Avoidance of registrar preferences through advance knowledge of deletion. Some of the discussion regarding WLS involves the concern that the WLS might have the effect of benefiting registrars that are currently sponsoring desirable names. Thomas Roessler has pointed out that the registrar sponsoring the registration of an existing, highly desirable name might have an advantage in marketing WLS reservations for that name because it is the first to learn of the upcoming deletion of the name. To address this concern, it has been proposed that registrars not be permitted to place (for customers) WLS reservations on names under registration through their sponsorship at any time after a date sixty days before the date the name is deleted. This should minimize the possibility of some registrars having an unfair advantage by virtue of their knowledge of a likely deletion. VGRS has agreed to this condition.

    4. Transparency of reservations. The DNSO task force voted 6-1-1 in favor of requiring full transparency as to who (registrar and registrant) has placed a WLS reservation on a particular name. The intellectual property constituency is opposed and the gTLD registry constituency abstained.

    As reflected in the task-force vote, there are opposing arguments regarding whether the WLS should provide this transparency. On the one hand, intellectual property owners are concerned that disclosing their WLS reservations would disclose their interest in registering names if they are deleted, and would therefore cause present registrants (including perhaps cybersquatters) not to allow the registrations to expire, perhaps leading to extortive activity. Others argue that transparency allows consumers to have maximum information, which allows for appropriate and well-informed conduct, and that there are other measures available to deal with cybersquatting. Furthermore, the existence of a WLS reservation can in any event be detected by attempting to reserve the same name.

    The Board should consider whether a transparency requirement should be put in place; VGRS is indifferent to this requirement.

    5 . Pricing. Much community discussion revolved around the price VGRS proposed to charge registrars for placing WLS reservations. The task force voted (5 in favor, 0 opposed, 3 abstentions) for the proposition that "WLS should be cost based, consistent with previous considerations for approval of Registry services by the ICANN Board." The intellectual property, gTLD registry, and noncommercial constituencies abstained from this task force vote.

    The registry agreements provide for price caps for domain-name registrations and other registry services because the sole-source basis on which those services necessarily must be provided creates the potential for abusive charges. Where a registry operator is placed in a position of market power (particularly customer lock-in) by virtue of its appointment by ICANN, it has been viewed to be appropriate to guard against abuses of this market power. This can mean that cost-plus-reasonable profit price caps are appropriate in some cases. Where market mechanisms are effective to restrain prices, on the other hand, it should not be necessary to establish price caps. Whether or not VGRS would have market power with respect to the WLS at this point in time has been debated, and there are cogent arguments on both sides of this question.

    The treatment of economic/competition issues (such as the establishment of price caps) is a difficult role for ICANN, because of limitations both on ICANN's appropriate role and on its economic expertise. Some have expressed concern that the role of establishing price caps stretches beyond ICANN's appropriate mission, while others have noted that registry operators are placed by ICANN in a position of economic power, sometimes with little or no market-based restraints, that requires protective conditions including limitations on prices charged for sole-source services. This dilemma – the potential need for price restraints in some situations coupled with the general unsuitability of ICANN to supply those restraints – has led ICANN in the past to seek to rely on competitive mechanisms to establish price caps where possible (such as by allowing prospective operators to provide competitive bids of prices and then requiring them to adhere to their proposals). Although economic/competition issues are necessarily implicated by ICANN's activities from time to time, it has been remarked in the ongoing reform process that ICANN should establish means to obtain appropriate expert advice from better-situated organizations to assist in addressing these issues.

    In this case, it may be appropriate to avoid this difficult question because the WLS is currently being proposed for only a one-year trial and because it does not present the prospect of lock-in of existing registrants. The price VGRS now proposes to charge for WLS reservations is US$24 per year (this is reduced from the US$40 it originally proposed), and in view of the limited time of the trial, the uncertain volume of reservations that will be sold, and need to amortize start-up costs over one year, the proposed price appears to be plausibly cost-based (accounting for the risk of limited consumer interest). Accordingly, it may be appropriate to permit the WLS trial to proceed at the US$24 price, while initiating a parallel policy-development process to determine how, and with what expert assistance, ICANN will make decisions that rest in significant part on economic/competition issues. This could include evaluation of the ways in which outside expert bodies (such as OECD, or national competition authorities) and/or panels (of individual experts) can be used to provide expert analysis on particular issues. Furthermore, if the price is too high then WLS will not be accepted in the marketplace.

    6 . Trial period. As VGRS has proposed, the WLS should be implemented on a one-year trial basis, so its effects on registrants and consumers can be better evaluated. The WLS should include a sound plan for data gathering and analysis.

Respectfully submitted,

Louis Touton
General Counsel


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