The
ICANN-VeriSign Agreement: A Sweetheart Deal
Copyright
© 2001 Ellen Rony [1]
Those
attempting to comprehend the antics of the Internet
Corporation for Assigned Names and Numbers (ICANN) and
the impending changes in registry services might find
several cardinal themes in play: control, Machiavellian
politics, semantic gymnastics and a zero-sum game. The
latest ICANN-VeriSign Agreement manifests all these in
certain measure.
On April
2, 2001, ICANN's Board of Directors approved proposed
revisions to the 1999 agreement under which VeriSign,
Inc. operates registries for .COM, .NET and .ORG.
VeriSign would give up its .ORG and .NET registries to
keep long-term control over the lucrative registrar and
.COM registry operations. The proposed
revisions
have been forwarded to the U.S. Department of Commerce
(DoC) for final approval.[2]
ICANN says
the revised agreements would significantly restructure
the contractual relationship between the Internet's
technical coordinator and the operator of the world's
largest domain name registries.[3]
Few could argue with this assessment.
On June 8,
2000, VeriSign acquired Network Solutions, Inc. (NSI),
which has administered those three top level domains
since 1993 through a cost plus fixed-fee Cooperative
Agreement
awarded by the National Science
Foundation.[4]
NSI signed an agreement
with ICANN
in 1999 to divest either its registrar or registry
operations by May 10 , 2001 to promote competition among
ICANN accredited registrars.[5]
The divestment would extend VeriSign's right to be sole
operator of the .COM. .NET and .ORG registries until
November 10, 2007. In February of this year, VeriSign
announced its intention to spin off its lucrative
registrar business.
BINARY
CHOICE
The
proposed new ICANN-VeriSign Agreement was posted on March
1, 2001, only 12 days before ICANN's quarterly meeting in
Melbourne. Although ICANN counsel and management had been
engaged in negotiations with VeriSign for months, the
agreement came as a surprise to the Internet community
and generated considerable dysphoria among ICANN
watchers, stakeholders, and members of its own
board.
ICANN's
structural hierarchy includes a Domain Name Supporting
Organization (DNSO) established to advise the Board on
substantive policy issues relating to the Domain Name
System. It consists of a Names Council of representatives
elected by seven self-organizing constituencies and a
General Assembly of interested
individuals.[6]
The constituencies were united in their call for more
time to weigh the merits of the proposal. The ICANN board
obliged and extended the deadline for comments on the
substantive merits of the proposal for two additional
weeks.[7]
While the
constituencies were pressured to assess the proposed
agreement on a fast track, ICANN's outside counsel, Joe
Sims of Jones Day Reavis and Pogue, advised that the
proposed agreement was not subject to negotiation and
constituted only operational changes, not substantive new
policy. The public and the ICANN Board had to make an
unambiguous binary choice: accept Plan A or Plan
B.
Plan A is
shorthand for the current agreement under which VeriSign
was required to legally separate its registrar and
registry operations in order to extend its dominion as
.COM, .NET and .ORG registry for another four years. That
agreement was signed on November 10, 1999 after extensive
and contentious negotiation.
Plan B,
the revised agreement posted on March 1, refutes the 1.5
year old agreement. VeriSign would not be required to
sell off its registrar or registry business. Instead, it
would be divested of the .ORG registry by December 31,
2002 and .NET would be competitively rebid at the end of
2005.
Plan A or
Plan B; no modifications, additions, amendments or no
time extensions would be considered by ICANN.
"Neither
choice is perfect," ICANN's outside counsel, Sims told
the board.[8]
Sims had crafted the November 1999 Agreement which he now
eschewed as containing flaws that afforded substantial
market advantage to VeriSign.
DNSO
constituencies scrambled to respond. Their Names Council
representatives told the ICANN board that they were
concerned about the lack of earlier consultation on the
proposed agreement, which conceptually "represents a
substantive policy change and involves a fundamental
shift in the structure of competition."[9]
Forced to choose, a majority of the NC members said they
found no compelling reason to abandon the existing
agreements and adopt the new proposal between ICANN and
VeriSign. The DNSO General Assembly, disturbed by the
short notice provided to prepare adequate evaluation of
the deal, conducted a straw pool which reported that the
financial advantages for the Internet community of the
revised agreement were not balanced by its
drawbacks.[10]
FAVORED REGISTRY
STATUS
Despite
concerns expressed from many quarters, the ICANN Board
voted on April 2, 2001 to approve a modestly revised
ICANN VeriSign Agreement. (2 members for, three against,
1 abstention). Given the crimped deadline and unequivocal
insistence on an either/or-Plan A/Plan B choice in this
squeeze power play, there was, surprisingly, enough
wiggle room to craft Plan C, which incorporated
"technical amendments required to correct errors and
clarify meanings."[11]
The
landmark change voted by ICANN is the separation of the
single agreement covering the three registries now
operated by VeriSign into three separate registry
agreements. If DoC ratifies the change, VeriSign/NSI
would permanently relinquish its right to operate the
.ORG registry by the end of 2002, and an appropriate
sponsoring organization from the non-commercial sector
would be sought as a successor. A competitive process in
2005 would be established to determine the future
operator of .the .NET registry. VeriSign would not be
prohibited from competing for that role.
At first
look, it may seem that VeriSign/NSI is relinquishing vast
future profit potential and significant control within
the gTLD pantheon, particularly when coupled with two new
financial concessions. Under the proposed agreement,
VeriSign will establish an endowment of $5 million to
fund the operating expenses of .ORG for one year when the
as-yet-unnamed non-profit organization takes over its
management. In addition, VeriSign will invest up to $200
million over a ten-year period for research, development,
and infrastructure improvements including the creation of
a universal WHOIS for .COM, .NET and .ORG
registries.[12]
Run the
numbers, and it is clear that the strategic trade-off of
the .ORG registry for continued registrar accreditation
is a sweetheart deal for VeriSign. Approximately 76
percent of the gTLD market is in .COM
domains.[13]
ICANN's
President and CEO, Stuart Lynn, assured the Department of
Commerce that these new agreements will eliminate most
vestiges of the unique treatment afforded to VeriSign
resulting from its legacy activities, and "there is
little public benefit, and some significant potential for
disruption, in regular changes of a registry
operator."[14]
Many registrars disagree. They argue that the deal
changes the rules mid-game and threatens to undermine
competition in several significant ways:
1) The
revised agreement allows presumptive renewal of the .COM
registry in perpetuity.[15]
This
predictability will over the long term enable VeriSign
to fund and develop new services that increase its
competitive advantage. By holding onto the .COM
registry, VeriSign continues to receive $6 per .COM
name each year, even if a competing registrar handles
the registration. With 22.37 million .COM domain names
to date, the registry portion of VeriSign's business
is compared to a license to print money. It generates
more than $100 million annually for VeriSign's
corporate coffers.
2)
VeriSign divests its weakest earnings producer.
Comparatively,
.ORG is a low revenue top level domain. Even NET is
growing at a brisker pace than .ORG. Registrations in
.COM outpace .ORG nearly eight-fold and hold an
insurmountable lead over all other TLDs.
3) The
revised agreement collapses the boundary between
registrar and registry,
ICANN's
earlier insistence upon the structural separation of
VeriSign's registry and registrar operations was
designed to protect registrar competition and prevent
VeriSign from subsidizing its registrar promotions
from the revenues it derives as a registry. Registrars
were patient with VeriSign's dual registrar/registry
role because they believed that the special
relationship would end in May 2001. ICANN's departure
from this distinction began when ICANN licensed
Affilias as registry operator for the new .INFO top
level domain, which awaits DoC approval. Affilias is a
consortium of 19 ICANN-accredited registrars,
including NSI. Thus, ICANN has already annulled the
obligation for legal separation between registry and
registry.
4)
VeriSign is granted the unilateral right to raise the
prices it charges all registrars for every domain name
registration, renewal and transfer on 30-day
notice.[16]
This
proviso has antitrust implications, as many registrars
charge barely more than they pay the registry.
Incremental increases in registrar fees could have a
trickle-down effect, impacting registrar industry and
registrants alike.
COMPETITIVE
MARKET
VeriSign
president and CEO Stratton Sclavos says the market today
is far more competitive than it was when the Plan A
agreement was signed.[17]
Unquestionably, the domain name industry has
changed, but NSI enjoyed a monopoly franchise during a
long run of prime Internet growth.
NSI
Registrar had 91.7% of the gTLD market in December 1999
(Table 2), when fewer than half of the 88
ICANN-accredited registrars (Table 1) were operational. A
year after deploying a Shared Registration System
required by DoC to advance competition among registrars,
NSI's market share dropped to 52.9%. By the end of 2000,
ICANN had added 71 new rookie registrars worldwide; 79
were accepting registrations for domain names in gTLDs
that were once the sole province of NSI.
|
Table
1. ICANN REGISTRAR ACCREDITATION
CHURN
|
|
Announcement
Date
|
Number
Accredited
|
Cumulative
|
|
April
21, 1999
|
5
(testbed)
|
5
|
|
April
21, 1999
|
29
(post testbed)
|
34
|
|
May
25, 1999
|
8
|
42
|
|
July
6, 1999
|
15
|
57
|
|
August
11, 1999
|
7
|
64
|
|
September
21, 1999
|
12
|
76
|
|
October
26, 1999
|
11
|
87
|
|
November
4, 1999
|
1
|
88
|
|
December
21, 1999
|
10
|
98
|
|
January
25, 2000
|
12
|
110
|
|
May
11, 2000
|
14
|
124
|
|
July
10, 2000
|
11
|
135
|
|
November
10, 2000
|
24
|
159
|
|
Sources:
ICANN Announcements - http://www.icann.org/announcements
|
ICANN says
the goals of the original agreement to bring new
competitors into the domain registration market place
have been met. But the devil is in the details. Second
place Register.com was still waaaaay back with the rest
of the pack in December 2000, with 11.91% market share
(Table 2). Aside from NSI, only six registrars captured
more than 2% of the market; collectively those half dozen
had achieved 31% share. VeriSign/NSI remains a formidable
competitor.
Although
NSI's registrar market share has dropped precipitously
since the SRS was fully enabled, (Table 3), cumulative
registrations, for which the VeriSign registry receives
$6 apiece, have grown almost four fold. A smaller share
of an exploding market has brought record revenues and
earnings to the world's largest registrar.
CONGRESSIONAL
CONCERNS
The U.S.
Department of Commerce expects to complete its review of
the controversial agreement by
mid-May.[18]
However, a bipartisan group of U.S. Congressmen see a bad
moon rising here and seek formal investigation of ICANN's
procedures. On behalf of the lawmakers, W. J. "Billy"
Tauzin (R-Louisiana), Chairman of the House Committee on
Energy and Commerce, asked DoC Secretary, Donald Evans,
to conduct a thorough review of the contract negotiations
between ICANN and VeriSign. Without taking a position on
the propriety of the revised agreement, he wrote, "We
want to ensure that any actions by ICANN support and
encourage strong, vibrant competition."[19]
U.S.
Senator Conrad Burns (R-Montana), who chairs the Senate
Commerce Subcommittee on Communications, also urged the
Department of Commerce to refrain from taking any "hasty
actions" and "any major steps to further empower or
delegate authority to ICANN."[20]
In the
parlance of politics, the proposed revised agreement
represents a seismic shift in Internet administration.
The ball is now in the DoC's court. Statistics cannot
shield the fact that the Congress, and the Internet
community, need more time to scrutinize this sweetheart
deal with VeriSign.
In
my humble opinion.
By
Ellen Rony
© May 1, 2001
____________________________________________________________
[1]
Ellen is co-author of The Domain Name Handbook: High
Stakes and Strategies in Cyberspace, published by R&D
Books in July 1998. She maintains a website with
extensive links to domain name policies, disputes,
Congressional testimony and the activities of ICANN at
http://www.domainhandbook.com. In March 2001, she was
qualified by Federal Court in California to testify as an
expert witness in domain names. This article reflects
only her personal views.
[2]
Letter
from Stuart Lynn to Karen
Rose
Regarding Proposed Revisions to VeriSign Agreements (16
April 2001)
[3]
Revised
.COM/.NET/.ORG
Agreements
Forwarded to Commerce Department (16 April
2001)
[4]
Network Information Services Manager(s) for NSFNET and
the NREN: INTERNIC Registration Services,
NSF
Cooperative Agreement No.
NCR-9218742
(1 January 1993)
[5]
ICANN/NSI
Registry Agreement
(10 November 1999)
[6]
ICANN
Amended Bylaws, Article VI-B, Sections
1-4
(16 July 2000) -
[7]
Preliminary
Report: Meeting of the ICANN Board in
Melbourne
(13 March 2001)
[8]
Melbourne
Public Meeting Archive
(12 March 2001)
[9]
Names
Council Resolution on the proposed revision to the
ICANN/Verisign (NSI) Agreement
(28
March 2001)
[10]
Names
Council Resolution on the Proposed Revision to the
ICANN/Verisign (NSI)
Agreement:
8. General Assembly (28 March 2001) General Assembly
participants also noted that: "horizontal" separation
between Registrar and Registry, is a better safeguard
against a monopolistic position, and the revised
agreement constitutes a change in policy, done without
previous consultation of the DNSO and on strict,
inappropriate deadlines.
[11]
Letter
from Stuart Lynn to Stratton
Sclavos
regarding proposed revisions to VeriSign Agreements (31
March 2001)
[12]
Revised
VeriSign .COM Registry Agreement: Appendix
W:
Additional Covenants of Registry Operator (16 April
2001)
[13]
The gTLD domain count on 18 April 2001 was 29,415,351. Of
these, .COM registrations total 22,374,229; .NET total
4,293,519, and .ORG, 2,734,719. See Domain
Name Counts
[14]
Letter
from Stuart Lynn to Karen Rose regarding Proposed
Revisions to VeriSign
Agreements
(16 April 2001)
[15]
Revised
VeriSign .COM Registry Agreement, 25. Procedure for
Subsequent Agreement
(16 April 2001)
[16]
Revised
VeriSign .COM Registry Agreement: Appendix
F
(16 April 2001)
[17]
Letter
from Stratton Sclavos to Vint Cerf
Regarding
Proposed Revision of ICANN-VeriSign Agreements (28
February 2001)
[18]
Letter from Alden Abbott, U.S. Department of Commerce to
M. Stuart Lynn
(24
April 2001) -
http://www.icann.org/correspondence/doc-to-icann-24apr01.htm
[19]
Renegotiation
of a 1999 Contract Between Verisign and the Internet
Corporation for Assigned Names and
Numbers
(30 March 2001). The letter was signed by Reps. W.J.
"Billy" Tauzin (R-Louisiana), Chairman, Committee on
Energy and Commerce; John D. Dingell (D-Michigan),
Ranking Member; Fred Upton (R-Michigan), Chairman,
Subcommittee on Telecommunications and the Internet,
Edward J. Markey (D-Massachusetts), Ranking Member
[20]
Senator
Burns Queries Legality of ICANN-DoC
Relationship
(ICANNWatch - 21 March 2001)
