VeriSign’s
proposed Wait-listing Service
(WLS) is not only anti-consumer and inefficient in its pricing structure,
but also potentially bad for VeriSign’s shareholders.
The service would allow those seeking ownership
of a particular .com or .net domain name to pay a fixed fee for
the right to claim it, should
the current owner/registrant fail to renew it. The right would be
allocated on a first-come, first-served basis.
Below I will demonstrate that (1) in the current
product environment, the service is a clear demonstration of monopoly
power that will crush incumbents, (2) its pricing system is inefficient, (3) it may be bad for VeriSign’s shareholders,
and (4) there is a strong possibility of a market-driven
solution that would compete with WLS.
I will then offer two recommendations:
-
That The Department of Commerce (DOC), which
still needs to approve WLS, grant a conditional approval to allow
the market a chance to react to WLS. There is a high likelihood
that the market will come up with solutions, similar to the
one DomainMart has put forth, to create competitors of WLS.
- That, if the market fails to come up with a competitive solution,
WLS pricing should be regulated to allow VeriSign to earn only
a fair return on WLS, or The DOC should withdraw its approval.
THE CURRENT MARKET
There are a few independent third-party companies
that, on behalf of a customer interested in a particular domain
name, attempt to re-register it immediately after it is returned
by the registry (VeriSign for .com and Net) to the pool of available
domain names. However, since VeriSign does not set a precise date
for the actual release, such companies flood the registry with requests
to register the domain names in the hope that they will be first
to secure them for their clients. It is this burden that VeriSign
cites as the main motivation behind WLS.
Providing more precise expiration dates, while
allowing special circumstances for disputed domains, VeriSign would
also alleviate the excessive re-registration attempts. However,
automated registration requests will continue unabated for expiring
domain names that no one pays WLS or any other competing service
to secure.
VeriSign AS A MONOPOLIST
In a competitive market, the introduction of a new
service can displace incumbents only if it adds value, inducing
customers to switch over. Obviously, in the process there will be
winners and losers. If it creates value, then its benefits outweigh losses to consumers. That’s what creative destruction is
all about. However, if the new entrant muscles its way in by exerting
a monopoly power, the benefits to consumers become murky. Microsoft’s trouble with The Justice Department is an example
of such a scenario.
For efficiency and security reasons, it makes economic
sense to have a single company control the domain-name-registration
database, which is why VeriSign was granted full control of the
dot-com and dot-net registries. However, the benefits of such control
over information-based products come with the drawbacks associated
with a monopoly. Basic economics
tells us that being a monopolist does not necessarily mean being
profitable. Only if a cost structure is low, compared to the monopoly
price, does the firm make a profit.
There is no doubt that VeriSign has monopoly power
over the .com-registration database. This gives it an advantage
in developing services that only it can provide -- competitors cannot
develop identical services to compete head on. Competitors need
to compete indirectly by developing a product that provides the
same end-service. Hence, the concern over the proposed WLS is whether
VeriSign is engaging in activity that crushes the competition upon
adoption of WLS and prevents any new entrants.
With WLS, VeriSign will crush existing firms because
their volume of business will be considerably diminished and practically
eliminated even if the WLS price is higher than the competition’s.
This is because only VeriSign has the sanctioned ability to guarantee
the transfer of a domain name to a customer after expiration. Competitors,
under the existing structure, can only make their best effort to
secure an expired domain name. Thus, a customer would be willing
to pay a higher price for the guarantee provided by WLS.
WHAT IS ANTI-COMPETITIVENESS?
Anti-competitiveness refers to whether an action
by a firm would have an adverse effect on consumers; it is not about
the impact on incumbent firms. Thus, to analyze the impact, we first
need to determine who the market participants are, i.e., the source
of demand and supply. Then we need to consider the impact of WLS
on price, quantity, quality, and future innovations.
Large
companies are not immune from failing to renew their domain names,
but there is no excuse for domain names such as the JPMorgan.com to
expire, as there are services such as our Corporate Domain Management
that ensure against renewal failure and provide trademark protection.
Demand. The demand comes from two sources:
(1) speculators who believe that some unrenewed domain names are
worth more than the proposed re-purchase service cost, or that some
quality names not protected by trademarks will accidentally expire;
and (2) investors who would like to acquire a domain before it expires,
but are unable to contact the current owner to negotiate a purchase
price due to incorrect Whois registration information, or who believe
that the domain name is worth acquiring at a low price but not a
must-have domain. For more information on purchase and ownership
strategy, click here.
BENEFITS TO CONSUMERS
The
benefits to consumers of a new product come from lower price, increased
supply, improved quality, or positive spillovers. I will look at
each of these issues individually.
Price. VeriSign
proposes to charge a fixed fee of $24 per domain name. This is an
inefficient pricing mechanism compared to an auction system, where
prices are determined by demand for each domain name individually.
Moreover, there is no reason to believe that, once VeriSign crushes
incumbents, it will not charge a much higher price unless new competitive
services are developed. Moreover, there is no guarantee that a requested
domain name will expire, so a lot of people will be wasting their
money.
Supply. WLS should
have no direct impact on the supply side. However, the press can
produce a benefit to consumers if they cover the WLS controversy
news more aggressively, which should lead to more owners checking
the status of their domain names before they expire and protecting
them, if necessary.
Spillover. Had WLS
opted for an auction mechanism instead of a fixed price, we would
have a fair re-registration price and auction prices could be used
to value domain names more accurately. Again, the media can create
a positive spillover, if they report proactively to serve their
audience.
SHAREHOLDER VALUE DESTRUCTION
The fact that no registrar, individually or as a
consortium, has developed an alternative mechanism suggests that
either the VeriSign proposal does not make any financial sense to
shareholders or the registrars want to force VeriSign to commit
to an unprofitable investment before launching their version of
the service.
Moreover, VeriSign’s cost of legal fees and the
negative impact of managerial distraction continue to mount, while
the company waits for approval from The Department of Commerce.
On the other hand, it is possible that VeriSign
is using this controversy as a publicity stunt.
ONCLUDING
REMARKS
Although current entrepreneurs dealing with recovery
of expired domain names will almost certainly be crushed by WLS,
the market may not fail to produce a new breed of competitors. One
possible explanation as to why registrars have not yet come up with
an alternative solution is the difficulty of coordinating the design
and implementation of such a service. But now that the Internet
Corporation for Assigned Names and Numbers (ICANN) has approved
WLS, there may be an added urgency to develop a coordinated solution
or for some of the major registrars to adopt a solution similar
to the one we have proposed.
Other than monopoly-related legal issues for The
Justice Department to consider, some regulatory oversight is needed
to prevent unfair price gouging in the future and better protection
of domain owners against unscrupulous registrars/resellers who do
not notify their clients of expiration dates.
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