Verisign loses dot-com piggybank

US government intervenes, raising questions about ICANN stewardship

Verisign shares have plunged 15 percent, wiping $850 million off the company's value, on the news that it will not be allowed to raise prices on dot-com domains for the next six years.

The current wholesale price for dot-coms stands at $7.85 and the company had already agreed a six-year extension on its right to exclusively sell the domains with DNS overseeing organization ICANN. That agreement mirrored one signed in 2006 that allowed Verisign to raise the price by seven percent in four of the six years the contract ran.

However the contract was subject to approval by the US Department of Commerce and it decided to remove the price-rise clause before signing. A short statement issued by the DoC quoted Assistant Secretary Larry Strickling saying that "consumer will benefit from Verisign's removal of the automatic price increase".

An amendment to the contact now caps the price of dot-com domains at $7.85 until the contract expires in November 2018, except in exceptional circumstances and with the agreement of the Department of Commerce.

In acting to remove the price caps, the DoC reflects a widely held view in the domain name industry that Verisign makes a significant profit on every dot-com. While the wholesale price is $7.85, industry estimates are that it costs Verisign a little over $1 per domain. As well as this profit margin, dot-com domains are the most resilient products in the domain name market with the largest total number sold (over 105 million, compared to 14 million of the next largest, dot-net) and the industry's highest renewal rates (73-74 percent).

Questions over ICANN

The decision of the DoC to step in raises significant questions of the ability of ICANN to fulfill its role as overseer of the domain name system.

There was significant anger directed at ICANN in 2006 when the previous contract was signed, even leading to a lawsuit. ICANN was almost entirely reliant at the time on the sale of dot-com domains to fund its activities since it received 25 cents for every domain sold. The dot-com contract was negotiated in secret and when its results were revealed, the domain name industry was united in its belief that ICANN had been comprehensively out-negotiated.

ICANN's lack of commercial nous was made apparent when the contract came up for renewal six years later. As we pointed out in March this year, ICANN's inability to understand the domain name market it oversees, and its failure to carry out any market research, led to it agreeing to a cap of $15 million each year in fees. It would never have received less than $15 million each year and would have received $28 million in 2011 alone without such a cap.

Additionally, ICANN agreed to seven percent price increases in four of the six years of the contract, with no understanding of the real costs to Verisign and, incredibly, with no justification for the inflation-busting seven percent figure. ICANN even argued that since the price rises were optional, Verisign may choose not to exercise them. Verisign, a publicly quoted company, of course raised prices as high as it was contractually entitled to do.

At the start of the year, ICANN then stunned industry experts when it repeated the exact same mistakes in negotiating the 2012 contract, retaining the cap but increasing it to $25 million a year fee, and agreeing again to large price increases.

Big changes, bigger issues

The contract signing comes with a significant backdrop: the creation of hundreds of new Internet extensions starting next year that will change the market in unforeseeable ways.

During the "new gTLD process" ICANN was repeatedly criticized by business groups, lawyers and even the US government for having not even carried out a market analysis of the domain name market to inform its decisions. Three hastily commissioned market reports were then heavily criticized as lacking real depth or understanding of the market.

Adding to the sense that ICANN has inadequate market understanding or broader financial capability, the organization currently sits on $350 million on fees it has taken from applicants for new extensions; fees it has placed in a non-interest-bearing account ostensibly to provide it with FDIC protection.

With dot-coms by far in a way the most popular domain names of the 17 top-level domains that ICANN oversees, its failure to protect consumers or act in the public interest over its largest contract puts a big questionmark over the organization's ability to handle the 1,500 or so new extensions that will be added in the next 12 months.

On top of that, especially with Internet governance issues likely to be discussed at the United Nations next week at the WCIT conference, it will be noted that it required the US government to intervene to protect millions of Internet users from commercial pressures.