Comments on Economics
Study of ICANN's New TLDs
Alex
Tajirian
July 19, 2010
ICANN has taken another crack at the question
of the economics of launching new top-level domains (TLDs). The
first
report that the group commissioned on the subject was greeted
by a loud and unhappy uproar. Now we have the preliminary draft
of a new
report, this one by professors Katz, Rosston, and Sullivan.
It is insightful and analytic, but the final version needs to consider
the theoretical and empirical issues outlined below.
Theoretical
1. Advantages of using a signaling
framework
-
Puts into focus the areas of unmet needs
for new TLD signals/messages by new registry applicants and
registrants. TLDs such as .com, .tel, and .me have strong signaling
value propositions. For example, .com has practically no substitutes
for signaling a global brand. TLDs that signal location include
country-code TLDs (ccTLDs) and some proposed TLDs such as .NYC
(which signals New York City). TLDs that signal a particular
business strategy include .outlet and
.eco.
The .tel has a strong
use differentiation because it signals the brand owner's alternative
contact information, while .me is personal and reassuring, as
opposed to the chilly and faceless .name.
-
Clarifies the strategic approach that needs
to be followed by new TLD registry applicants. For example,
to compete with .com, a product differentiation strategy needs
to consider established network effects and to recognize that
the argument
for shorter second-level domain names is not viable. On
the other hand, new unmet needs require a strategy for expanding
the pie.
-
Temporal approval decisions have to take
into account the type of TLD signal. Otherwise, there might
not be any informational benefits from sequential launches.
Without a signaling framework, a multitemporal approval mechanism
would ignore the reality of first mover advantage (FMA). Consider
.green and .eco, two initial substitute-signal applicants. Quite
an unfair advantage would accrue to .eco if it were approved
first, followed by .green after a considerable wait.
-
One cannot perform market power analysis
without intuitively knowing what constitutes similarity signals.
Numerical measures of substitution effects may not be reliable.
For example, no matter what the numbers may say, the signals
from .com and .me are intuitively different.
2. Externalities: The report
-
Does not identify the sources of domain name
externalities so as to work on reducing them.
-
Uses a framework more suited for downstream
analysis and ignores the possibility of an upstream-produced
externality, namely one produced
by ICANN.
-
Considers trademark infringements and search
costs as operating costs, though arguably they are externalities
(within the framework of the report).
-
Ignores the costs of potential rogue TLDs,
whose private benefits outweigh their social value.
3. Instead of adopting a general
social-private cost-benefit framework, the report can narrow down
the scope of the analysis to, say, search,
navigation, companies, and registries.
4. The report proposes no solution
to trademark infringements except establishment of a clearinghouse.
It ignores the benefits of establishing a cooperative
regime as a complement to any registry-level trademark solution.
An effective trademark regime can only be reached and implemented
through negotiations.
5. The report ignores the distinction
between defensive
and offensive second-level domain registrations. The latter
are value adding and thus should not be automatically labeled as
a net operating cost.
Empirical
-
Without a signaling framework, the number
of registrations of various existing TLDs cannot be used to
estimate a TLD's demand and/or its market power. The lack of
registrations by brand owners under certain TLDs can be due
to the irrelevance of their signal to the brand name. Hence,
I agree with the report's assessment that registrations of new
TLDs under currently underserved signals would increase the
cost of infringement rates and/or cybersquatting costs significantly.
-
The economic rationale for a domain registration
is that its value must be greater than its cost. Statistical
pricing models have been developed that can shed light on
the value of keyword-based domain names. Moreover, such models
identify statistically significant factors that drive prices
for different TLDs and are useful in estimating
price-premium variations over time. By contrast, using average
and/or median sale prices is practically useless, as prices
of various statistically comparable domain names fluctuate at
different rates; during the same periods, prices of comparable
domain names have not always moved in the same direction nor
magnitude.
-
Such statistical models can also be used to
estimate cross-price elasticity of demand for purposes of determining
market power and competition.
Related References
Topic tags: new
ICANN TLDs
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