http://www.gtld-mou.org/docs/eco-structure-registries.htm

STATEMENT OF THE POLICY OVERSIGHT COMMITTEE

23 JULY 1998

The Economic Structure of Internet Generic Top-Level Domain
Name Registries Analysis and Recommendation

Summary: We considered proposed economic structures of
generic Top-Level Domain (gTLD) name registries. These
range from the for-profit, market-managed model,
to the constrained cost-recovery model. We develop
a model for selecting among these, beginning with
widely-accepted assumptions in the Internet (e.g., use
market mechanisms whenever practicable) and criteria
for choosing economic structure (stability, economy,
innovation, and flexibility). For-profit registries are
found to be not viable due to abuses which follow from
the monopoly each holds over their respective domain
names. Not-for-profit registries, without additional
constraints, are also rejected because they are similarly
able to abuse their monopoly position. Recommendation is
made for not-for-profit registries, with the additional
requirements of cost-recovery, audit and public oversight,
open access by any registrar, and no claim to property
rights in gTLDs. Such constraints must be applied uniformly
to all registries by the new IANA.

0. Introduction

One of the most important issues concerning the
central coordinating functions of the global
Internet is the economic structure of gTLD names
registries. This question is usually characterized as:
should registries be for-profit or not-for-profit?[1]
Although establishing not-for-profit registries enjoys
significant support, including positive comments
by the US Government, support by comments to the US
Government "Green Paper", and the consensus of the
European Consultative Meeting on Internet Governance
(http://www.ispo.cec.be/eif/dns/conclusions.html),
discussion continues. This paper describes the significant
considerations surrounding this question, suggests
perspectives from which the new IANA institution should
consider this issue, and recommends how the new IANA
should proceed with the selection and further development
of registry structure.

1. Working Assumptions

In Principle, Private, Competitive, For-Profit Structures
are Best

As is commonly accepted in the Internet community, this
paper takes as given the general principle that market
mechanisms are the best means for managing Internet
resources, where practical. Arguments to this end have
been made elsewhere and there is no need to repeat them at
length at this time. In brief, the advantages of private,
for-profit entities include:

    - driving down costs,
    - rewarding and stimulating innovation, and
    - simpler and less costly administration for the
      new IANA.

Some Structures Cannot Be Managed Strictly by the Market

In spite of the desirability and popularity of open,
competitive market mechanisms, it is not possible for
all Internet resources to be managed by the market. Some
resources must be administered centrally. Just as the
broadcast of RF signals on the same frequency in the same
location will result in interference, there is an analogous
necessity under the current design for the assignment of
unique IP addresses and unique domain names to ensure that
the Internet can function.

It is essential that the structure of the Domain-Name
System (DNS) and the allocation of blocks of IP numbers
be coordinated,. The requirement for some central
administration is long established in the Internet and in
other communication infrastructures. It is also recognized
as the principle responsibility of the new IANA, which is
endorsed by the US Government in the White Paper.

Each Top-Level Domain Name Will Be Allocated to a Single
Registry

Ideally, each gTLD would be allocated across all, or
at least multiple, registries.  However, this is not
presently possible due to a limitation in the state of the
art for distributed computer systems. Were it possible
for top-level domains to be multiply allocated, market
mechanisms would probably be viable and registries could
be competitive for-profit businesses. As an aside, there
is no significant technical constraint on the number of
gTLDs that could be managed by a single registry.

The Internet Continues to Evolve and Some Aspects are Not
Yet Fully Understood

The nature of the Internet is still being revealed. The
characteristics of Internet property (for example, with
respect to domain names and IP numbers), associated rights,
hoped-for new technologies (such as directory services),
and Internet law, are far from understood. Similarly, the
appropriate dividing line between free-market-manageable
Internet resources (e.g., assets traditionally managed
by ISPs) and common resources which require common
administration (e.g., the allocation of IP numbers) are
still being developed.

Sale of Second-Level Domain Names Will be Competitive

We take it as given that Registrars of Second-Level
(and probably deeper levels as well) Domain Names can
and will be competing enterprises which will have
the option of being for-profit. Market mechanisms
are fully capable of managing this part of the
Internets processes. Further details of a structure
and relations among naming-related entities may be
found in the "POC Open Letter to the Internet Assigned
Numbers Authority" dated 12 June 1998, from the Policy
Oversight Committee for Generic Top-Level Domain Names
(http://www.gtld-mou.org/docs/ianaopenletter.htm). Under
that model, registries will be owned and operated by
registrars.

Our investigation leads us to ask where the registries
should be located on the range from for-profit to
not-for-profit. Not-for-profit structures include the IANA,
the number registries, and the DNS root servers. For-profit
structures include the registrars and ISPs. Hence, one can
view the question which is the subject of this paper as:
"to what extent do registries share requirements with the
New IANA, and to what extent do they share characteristics
and operating requirements with registrars?" Once this
question is investigated, it is necessary to ask if either
approach is sufficient, or if additional considerations
must be addressed.

In Time there will Be Many Generic Top-Level Domain Names

Over the next few months there will be an increase in the
number of generic Top-Level Domain names (gTLDs). More
gTLDs are required to satisfy two requirements: a need
for a larger name space to permit many different domain
names with the same SLD (e.g., United), and a need to
satisfy the very significant demand for SLDs within the
gTLD name space (now numbered in the millions of SLDs).

2. Criteria for Choosing For- or Not-For-Profit Structure

Using the above assumptions as a starting point, the
decision to choose for-profit or not-for-profit registries
should be consistent with and find an appropriate balance
among, the following criteria.

Maintain and Enhance Stability

There are two types of stability: the actual technical and
operational reliability of the network and its facilities,
and the extent to which users believe that they can rely
upon them. Both must be preserved and enhanced. Whatever
structures are chosen must be well considered in terms of
both the near- and long-term. Where possible, consideration
should be given to the question of how structures are
likely to evolve in the future so that stability can be
maintained during this later evolution.

Maintain the Internets Cost Economy

One of the great values of the Internet is its profoundly
economical nature. Users have found that Internet services
often permit an order of magnitude reduction in costs for
similar non-net-based functions (e.g., E-mail vs postal
mail). This differential creates a real and serious threat
that the Internet could become a vehicle for the extraction
of excessive rents by many niche monopolies rather than a
driver of new cost savings. Artificially high prices will
not only reduce the economic efficiency of Internet use,
they will also distort the way that it is used: users will
migrate to lower-cost services which may be technically
inferior, and threaten Internet infrastructure.

Encourage Innovation and Evolution

The Internet is in its infancy and there are many new
technical developments on the way.  The new IANA should
ensure that the Internet is not frozen in its present
state, and that innovations can emerge and provide new
economic and social opportunities.

Preserve Options

The Internet will surely provide many future surprises,
and the new IANA must be capable of flexible response
to the challenges and opportunities that will present
themselves. For this reason, it is imperative that the
new IANA avoid structures now that are predestined to
limit flexible response in the future. With the benefit
of hindsight, it is now clear that enabling for-profit,
monopolistic control of registration in the existing gTLDs
was a mistake and it should not be repeated. Where there
is a choice between structures that are fixed or flexible,
there should be a bias toward the flexible. Similarly,
the new IANA should implement structures in stages, in
order to be able to investigate the various problems as
they occur, and thus have the best chance of realizing
solutions. In other words, the new IANA should initially
act conservatively, so as to minimize later need to reverse
decisions. This is particularly important for decisions
that are known in advance to be essentially irreversible.

3. Problems Associated with For-Profit Registries

One of the principal questions of the economic structure
of registries revolves largely upon whether they are
monopolies. That question in turn depends significantly
upon the nature of "switching costs" in domain names.

A registry controls name assignments for a particular
TLD. There is no competition between registries within a
single TLD, because current technology does not permit
it. Hence, if a user is sufficiently unhappy with the
administration of the TLD's registry, the user has no
choice but to change to another TLD. In other words,
the user must change its domain name.

Switching costs are those costs associated with a users
or an organizations move from a second-level domain name
(SLD) in one TLD to the same or a different SLD in another
TLD. If switching costs are negligible, then the registry
will have no special hold over the SLD holder. (Note:
The concept of "switching costs" comes from economics,
and is unrelated to the technology of "packet switching.")

Scenario: Switching Costs at PackCo Incorporated

In order to investigate the problem of switching costs, we
construct a scenario regarding a fictitious packaged goods
company, "PackCo Inc".  PackCo has the SLD "packco.goods",
which it has acquired from a registry, RegInc., which is
a for-profit company. It acts as both a registrar and the
sole registry for the top-level domain name ".goods", as
well as for a number of other top-level domains. For an
initial one or two year period, PackCo is charged a fair
price for its SLD  a price which is reasonably close
to RegIncs registration-related costs. RegInc has set
the initial price at this level in order to attract many
new customers.

After a number of years, RegInc decides that PackCo is
obtaining exceptional value from its very popular domain
name and that RegInc can succeed at extracting a larger
share of that value by increasing the price by a factor
of 10. PackCo is not happy with this price increase , but
is unwilling to make a change: the higher charge levied
by RegInc is much smaller than the cost of changing
to another domain name. Furthermore, there is another
company, a vendor of backpacks, which holds the domain
names "packco.sport" and "packco.recre", and yet another
company which is an international shipping company that
holds "packco.ship". Although PackCo is not really in the
same business as any of these other companies, PackCo is
concerned that changing gTLDs will result in name confusion
by their customers.  PackCo executives cannot guarantee
that all of its customers will be informed about the name
change  it has millions of anonymous customers. PackCo
has an additional problem: it has more than one domain
name; in fact, it has hundreds, each corresponding to the
different packaged goods it sells, each in turn potentially
subject to near-collisions with other companies domain
names. If PackCo were to change all of its domain names,
it would represent a significant fraction of its annual
profits. PackCo is thus forced to continue to use the
original domain name even in the face of rising costs.

The problem is exacerbated by the conflict created
between IANA - the ultimate authority over gTLDs - and
a registry which claims intellectual property rights
in its particular gTLD. If IANA is forced to consider
conflicting intellectual property rights claims in its
administration of the name space, it will face extremely
costly, burdensome, and likely long-term litigation risks.

Analysis

Problem: The Human Element - The Persistence of Memory

The Domain Name system was developed expressly to solve
an inherent problem with IP numbers: obscurity. Even
sophisticated early Internet users found it awkward
and inefficient to maintain lists of IP numbers of the
machines they wished to connect to. The domain name system
was deliberately designed to be simple and intuitive by
being readily identified by, and memorable to, users. It
has been remarkably successful at this.

The memories of possibly millions of users are the first
source of resistance to switching.  Both an SLD and a
gTLD together are the basis for the companys reference,
and the string that is associated in the mind of the
user. Thus, there will be confusion if the SLD is removed
from one gTLD and assigned to another. At first blush,
this may not seem to be a complex problem, but to a user
trying to find a specific name, possibly intersecting
with other similar or even competing businesses, it can
be time-consuming and difficult.  Proprietors could face
the threat of significant business losses.

Changing a domain name is akin to changing a major brand
name. It is very well-understood in the business community
that changing a brand name can be exceptionally difficult,
expensive, and result in long-lasting, even permanent
damage to a company's market position. Users unable to
change to another registry are said to be subject to
"lock-in."

Problem: The Technical Element - The Persistence of
Embedded Pointers

More significant than the persistence of human memory is
the persistence of computer-based pointers. One well-known
example is that of the Internet browser bookmark. Users
have grown accustomed to the convenience of saving
references to Web locations (Universal Resource Locators,
or URLs) in their browsers. If users find that their
references have begun to fail, they will need to spend
time and effort at finding the new URLs for the sites
and organizations that interest them. More and more such
transactions are strictly machine-machine; there is no
"human in the loop." In these cases, all manner of highly
efficient transaction processing could be retarded while
the new address is determined, if at all.

Pointers embedded in documents will become invalid if their
gTLDs change. The reference earlier in this document would
break in such a situation.  Documents are on servers of
various sizes and connectivity all over the world. How
are they to be updated? Authors regularly move on to
other projects and it is highly unlikely that they, being
mortals, would continue to update or correct reference
many years after the original publication date.

Embedded pointers in search engines are yet another
point of concern. Search engines use automated tools to
collect pointers. If a pointer becomes invalid due to
a change in a gTLD, it is very difficult for the search
engine to know to remove the invalidated reference. Is
a reference invalid when it has been unavailable for a
specific time? Servers and networks go down, sometimes
for significant periods. As more and more pointers become
incorrect, users will find search engines less and less
useful due to the proliferation of invalid references.

It will be extremely difficult, perhaps impossible,
to develop automated, software-based solutions to
these sorts of problems, and such proposals are at best
speculative. They do not exist today and it is entirely
inappropriate to make current operations depend upon their
uncertain development.

Problem: Monopolistic over the Long Term

It is clear that initially, there will be competition among
domain names . Before a position has been taken in a given
SLD/gTLD, a prospective name holder will have significant
degrees of freedom in choosing among gTLDs. When additional
gTLDs are made available, the preponderance of such
customers will drive competitive behavior by registries:
prices will be kept low, and services will be maintained
at reasonable levels of quality.  However, over time,
as indicated by our scenario, once a name is allocated,
domain name holders will tend to be locked in to their
SLDs and their associated gTLDs. Correspondingly, over
time, allocated domain names will generally increase
in value. . This creates a real and potentially strong
incentive for a for-profit registry operator to increase
prices- they will have control over their customers.

It may be that for some time there will be relatively
larger demand for registration of new domain names
compared to the number already registered.  In this case,
there would be some pressure to keep long-term prices at
a reasonable level. However, the number of new names to
be registered will eventually diminish relative to those
already installed, and the motivation to keep prices low
will diminish significantly or disappear entirely.

Each registry thus holds a monopoly over the top-level
domain names it administers.

Problem: Rising Prices Delinked from Costs

The appearance of monopoly registries will cause prices to
rise if the registry organizations are for-profit. There
may be periods during which prices will reasonably
track costs, but this will not continue reliably. It is
unreasonable to expect for-profit organizations not to
migrate to value-based pricing (as seen in our scenario)
and thus begin to charge based on switching cost, rather
than based on the cost of provision. . A for-profit
company must seek to maximize profit. The more control
it has over its customers, the more profit margin it can
extract. Value-based pricing will allow substantially
higher profit margins than will cost-based. This is a
clear violation of the criterion: "Maintain the Internets
Cost Economy."

High switching costs are not the only problem. There are
additional problems associated with for-profit registries.

Problem: Inappropriate Property Claims

The above scenario demonstrates that a registry might
be able to establish property rights over a domain
name. To preclude this, the new IANA must constrain
registry operators so that they will not be able to make
property claims over TLDs, which must be kept as public
resources. It is clear that allowing intellectual property
rights in a gTLD held by a registry is an invitation
to monopolistic abuse of economic power. In addition,
a registry should not be permitted to use as its company
name, the name of the gTLD that it operates.

Problem: Additional Monopolistic Practices

It is in the nature of monopolies that they are able
to impose constraints upon users far beyond simple
overcharging. They could, for instance, require that
name holders or registrars sign up for a special level of
"gold service", thus providing "improved and guaranteed"
performance. Users and registrars could be motivated to
step up to such new services as they discover that the old
services and performance levels are simply not sufficient
to keep up with the changing loads and requirements of
the Internet. Registries could let contracts expire, and
thereafter require name holders to enter into new, onerous
agreements. Such techniques cannot be easily predicted,
especially given the changing nature of the Internet
(e.g., new protocols).  Hence, initial guaranteed-price
contracts, and detailed contract terms, will not reliably
keep name holders from being subject to creative techniques
used by monopoly registries to separate them from their
money. Imposing a corresponding regulatory burden on the
new IANA is equally problematic; the specific techniques
are far from understood at this time, and even if some of
them were, management of new and changing techniques would
likely impose a very expensive, slow, and time-consuming
cat-and-mouse game on the IANA. Enforcement is equally
problematic, and especially so due to many possible
jurisdictions and legal systems. Legal and other costs
incurred by monopoly registries in this area would surely
be passed on to their customers. Registries would surely
argue that these are a regular part of their operating
expenses.

Problem: A Proliferation of Claimants "Rights" in gTLDs

Even before the creation of additional gTLDs, there
are numerous claimants to "rights" in particular gTLDs,
some of whom are operating so-called DNS "root servers"
that are recognized by a tiny minority of the servers
comprising the Internet. There are claimants to the entire
alphabet, there are claimants to every word in the English
dictionary, there are claimants to sexually oriented TLDs -
the list goes on and on. If the rights of any single one
of these claimants is recognized, what is to prevent other
claimants with plausible intellectual property rights in
the same or similar names from filing law suits to press
their claims? What is to prevent an enormous number of
claimants from making claims that they are each entitled
to operate one or more for-profit registries? It would of
course be possible to establish a global lottery offering
a pre-determined (by IANA) number of gTLDs to the universe
of would-be registries who meet some minimum standards
This is surely the worst possible way to provide for a
registry system that is stable, efficient and operating
in the best interests of the Internet as a whole.

Problem: Irreversibility

Should the new IANA choose to permit for-profit
registries, it will be taking a substantial risk. If
for-profit registries are permitted, and are shown to have
a negative impact on the Internet or cost economics, it
will be quite difficult to convert them into not-for-profit
registries. On the other hand, it is far easier to convert
not-for-profit registries into for-profit. Our criterion,
"Preserve Options", is best supported by choosing
not-for-profit registries.

Past Experience

Past experience in the Internet with Networks Solutions
Incorporated (NSI) demonstrates many of the above problems,
including registration fees far beyond cost-recovery
(as evidenced by their unusually high profitability) and
inappropriate property claims over ".com". This proof by
demonstration shows that similar problems could readily
occur in other TLDs, if similarly structured.

The above analysis demonstrates that domain name registries
are inherently monopolistic.  For-profit market mechanisms
are thus inappropriate; they will not work. Past discussion
that has referred to one of the choices of registry
structure as being competitive is inaccurate. They are
in fact anti-competitive. Competing domain name registries
are not possible until the state of the art in distributed
systems changes.

If for-profit structure will not work, will not-for-profit
structure? We consider that question in the next section.


4. Not-For-Profit gTLD Registries

Not-for-profit registries are superior to for-profit
registries simply because they are not necessarily
driven to make profits. However, being relieved from
this requirement does not mean that they are in and
of themselves an appropriate structure. There are five
potential problems with not-for-profit registries. We
analyze each and consider if additional mechanisms can
make them appropriate for gTLD domain name registries.

Registries Must Be Cost-Recovering with Public Review

A cost-recovery model is not on its own sufficient to
preclude abuse. Not-for-profit organizations may provide
unusually high staff salaries or perks, or accumulate
assets unrelated to the operation of a registry. Other
abuses could occur by maintaining a large bank account
in common with an owning registrar  which in turn could
act as a hidden source of profits for the registrar. It
will be necessary to ensure that no such "hidden profits"
are permitted by requiring that registries operate in
a manner consistent with other, similar not-for-profit
organizations, and that they consist of a single financial
"envelope". This can best be accomplished by having public
review of registry financial practices and management,
with the assistance of an internationally recognized public
accounting firm.

Registries Must Allow Registration or Reregistration by
Any Registrar

We assume at the beginning of this paper that registrars
will be competitive. In order promote effective
competition among registrars, each will require open
access to any registry both for initial registration and
for re-registration. Similarly, to avoid the problem of
lock-in between users and registrars, registrants must
be able to freely move their domain names to any other
registrar (domain/registrar portability).

Domain Names Must Be Public Assets

As demonstrated above, for-profit registries could claim
inappropriate property rights in gTLDs; not-for-profit
registries could possibly make similar claims. In order
to preclude this, there must be no property rights in
any top-level domain. This must include a requirement
that a registry not be permitted to use any gTLD as part
of a brand or company name (e.g., no "ORG.COM Registry
Incorporated").

Registries Must Be Motivated to Innovate

Under our model the registries will be financially
distinct entities without a profit motive.  Even though
the existence of multiple registries will encourage a basic
tone of competition among them, they could conceivably lack
motivation to foster innovation and could have difficulty
raising capital. However, these problems are precluded
if the owners of the registries are the registrars (as
cited in the "Open Letter"), which will generally be
businesses operating for-profit. This will enable them
to raise capital and will provide the motivation to drive
innovation within the registries. Whether registries may
be owned by organizations other than registries is a item
for consideration by the IANA and depends in part upon
satisfying this criterion.

Constraints on Registries Must Be Applied Uniformly

The new IANA, as a corporation subject to the laws of the
jurisdiction in which it is located, must uniformly apply
the above constraints on registries to avoid violation of
anti-trust laws.

This concludes our development of an appropriate economic
structure for registries: not-for-profit organizations with
the additional constraints of cost recovery with public
review, open registration, public-asset domain names,
motivation for innovations, and uniform application of
constraints by the new IANA.


5. Criteria Reviewed and Summary

The implementation of a not-for-profit, cost recovery
registry system will meet the four criteria set forth
above:

Maintain Internet Cost Economy

Not-for-profit registry prices will track actual
costs. Overhead costs, which will be transferred ultimately
to registrants, will be kept at industry-standard levels
through the auditing and public review process.

Maintain Stability

Not-for-profit registries will be long-standing stable
structures. They should not subject their users to concerns
about possible monopoly pricing and registry long-term
business stability.

Encourage Innovation and Evolution

Use of not-for profit registries will be motivated
to innovate under at least one model, as described
above. Additional models are open to specification by the
new IANA.

Flexible Response by the New IANA

The new IANA will be able to observe the behavior of
registries, registrars, users, and associated technical
developments. If it is desired to make changes to the
system, it will be easier to go from not-for-profit to
for-profit than the other way around.

Summary

We have observed that for-profit-Registries cannot
appropriately limit the negative consequences of the
monopoly control over of gTLDs. We have demonstrated
that not-for-profit registries, with additional control
mechanisms (public oversight, etc.), are an effective
way do so. Economy, stability, and innovation will be
well-supported by not-for-profit registries. Finally,
as experience is gained, and new developments occur,
the new IANA will have the option of shedding part of its
regulatory burden by moving part or all of the registry
process to open, competitive market mechanisms.

-- [1] The term registry is used here to describe the
organization responsible for the operation of the data base
of one or more generic top level domains, the gTLDs. The
term  is distinct from registrar, which describes the
entities that accept orders for registration of second
level domains and transmit the orders to the data base
operated by the registry.  For brevity, we occasionally
refer to domain name registries simply as registries.


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