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Did Uniregistry over-sell the auction antitrust risk?

Kevin Murphy, March 20, 2013, 16:13:15 (UTC), Domain Registries

Uniregistry’s revelation that it believes private auctions to resolve new gTLD contention sets may be illegal — based on its talks with the US Department of Justice — has caused widespread angst.

Following yesterday’s news, some commentators — some interested — questioned the company’s motive for revealing that Justice had declined to give private auctions a clean bill of health under antitrust law.

Others wondered whether Justice had been given the full facts, whether it had understood the new gTLD program, and whether Uniregistry had accurately reported Justice’s advice.

Given that yesterday’s piece was straight news, I figured it might be good to delve a little deeper into the situation and, yes, indulge in some quite shameless speculation.

What is it that Uniregistry is saying?

Here’s the argument, as I understand it.

“Bid-rigging” is illegal in many countries, including ICANN’s native US, where the Department of Justice prosecutes it fairly often, securing billions of dollars in damages and sometimes criminal sentences.

More often than not, it seems, the prosecutions are related to government contracts, where agencies are looking for a company to carry out a job of work for the lowest possible price.

Bid-rigging emerges when contractors decide among themselves who is going to win the contract. If two contracts are up for grabs, two companies may agree to submit separate high-ball bids so that they can guarantee getting one contract each.

This, of course, inflates the price the government agency pays for the work. There’s no true competition, so prices are artificially high, harming the tax-payer. That’s why it’s illegal.

The ICANN new gTLD program is a bit different, of course.

First, ICANN isn’t a government agency. While it has quasi-governmental powers, it’s a private corporation. Second, it’s looking for high bids, not low bids. Third, it doesn’t care if it doesn’t see any money.

There can be little doubt that private auctions technically harm ICANN, because the winning bidder’s money would be divided up between applicants rather than flowing into ICANN’s coffers.

Uniregistry seems to believe that a new gTLD applicant signing a private auction agreement — basically, competitors agreeing to pay or be paid to decide who wins a contract — that takes money out of ICANN’s pocket could be considered illegal collusion.

But ICANN has stated regularly that it prefers applicants to work out their contention sets privately, explicitly endorsing private auctions and/or applicant buy-outs.

ICANN, it seems, doesn’t care if it is harmed.

According to Uniregistry, however, that doesn’t matter. Its view, following its conversations with Justice, is that what ICANN says is completely irrelevant: the law’s the law.

As the company said yesterday:

the Department emphasized that no private party, including ICANN, has the authority to grant to any other party exemptions to, or immunity from, the antitrust laws. The decision means that the Department of Justice reserves its right to prosecute and/or seek civil penalties from persons or companies that participate in anti-competitive schemes in violation of applicable antitrust laws.

In other words, just because it’s very unlikely that ICANN would start filing antitrust suits against new gTLD applicants, the DoJ could feasibly decide to do so anyway.

Why would it do so? Well, consider that the thing ICANN is auctioning is a spot in the DNS root server, and the root server is ultimately controlled by the US Department of Commerce…

ICANN may not care about the money, but the thing it is selling off “belongs” to the United States government.

That’s the argument as I understand it, anyway.

Isn’t this all a bit self-serving?

Uniregistry’s press release and DI’s blog post yesterday were met with disappointment (to put it mildly) among some new gTLD applicants, auction providers and others.

They noted that Uniregistry had no documentary evidence to back up information it attributed to Justice. Some accused DI of reporting Uniregistry’s statement without sufficient skepticism.

It seems to be true that the company has not been a big fan of private auctions since the concept was first floated.

Uniregistry has applied for 54 new gTLDs, the majority of which are contested. Its main competitors are Donuts, with 37 contention sets, and Top Level Domain Holdings, with 21.

Who wins these contention sets depends on who has the most money and how much they’re prepared to pay.

Unlike Donuts, Uniregistry hasn’t gone to deep-pocketed venture capital firms. It’s reportedly funded to the tune of $60 million out of CEO Frank Schilling’s own pocket.

And unlike TLDH, which is listed on London’s Alternative Investment Market, Uniregistry doesn’t have access to the public markets to raise money. It seems to be better-funded, however.

Donuts raised $100 million to fund its new gTLD ambitions. It’s more than Schilling claims to have put into Uniregistry, but Donuts has spent much more on application fees.

Donuts is involved in 307 applications, many more than Uniregistry’s 54.

The money remaining for auctions is also spread much thinner with Donuts. It’s also in 158 contention sets, more than three times as many as than Uniregistry’s 45.

Private auctions arguably benefit Donuts because, depending on the auction model, it could reinvest the money it raises by losing an auction into a future auction. Its VC money would last longer.

The same logic applies to all applicants, but it becomes more of a pressing issue if you’re on a tight budget or have a large number of applications.

Uniregistry may have calculated that it stands a better chance of winning more contention sets against Donuts and TLDH if its competitors don’t get the chance to stuff their war chests.

Of course, Uniregistry could have simply refused to participate in private auctions in order to force an ICANN auction in its own contention sets. All new gTLD applicants have that power.

But by publicizing its antitrust concerns too, it may have also torpedoed private auctions for some contention sets that it’s not involved in.

That could limit the amount of money flowing from losing auctions to its competitors.

Another theory that has been put forwards is that Uniregistry went public with its Justice conversations — over-selling the risk, perhaps — in order to give its competitors’ investors jitters.

That might potentially reduce the capital available to them at auction, keeping auction prices down.

So did Uniregistry stand to benefit from playing up the risk of antitrust actions against new gTLD applicants? Probably.

Does it mean that its interpretation of its Department of Justice conversations is not completely accurate? Ask a lawyer.

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Comments (16)

  1. Jean Guillon says:

    Isn’t Famous Four Media a competitor too?

  2. Tom Scopazzi says:

    I understand the angst, but instead of either agreeing or disagreeing with Uniregistry’s interpretation of their phone call with the DoJ, how about someone else reaching out to the DoJ on their own accord?

    Uniregistry felt it was important to get an opinion from the DoJ, and are entitled to their own opinion as to how that went. Everyone else can either a) ignore it and proceed as is, or b) contact the DoJ directly on their own and form their own opinion. Right?

  3. Antony Van Couvering says:

    I talked to the DoJ. The situation is as Uniregistry describes it, according to my conversations with a DoJ official. I don’t think it’s oversold.

    The asset, however, is ICANN’s, not the US Govt’s. But even if (the reasoning goes) ICANN does not mind being “defrauded,” that does not make it any less of a (potential) crime.

    None of this means that there would be prosecutions, only that there might be. Clearly not a risk that Uniregistry wants to take, and I can’t blame them.

    Antony

    • Mark A says:

      Re: “The asset, however, is ICANN’s, not the US Govt’s” –

      There are those at the DoJ and in similar roles in other Countries who would argue that the assets are not “owned” by ICANN or the US Government, but rather they form a part of a public trust that ICANN is charged with safekeeping. There-in lies the problem.

  4. Phil Buckingham says:

    Anthony, thanks for reaching out and providing feedback ( for the majority other applicants in contention).

    I guess it is now down to each applicant involved in a contention set to reassess the risk(s) and the impact on their business strategy to acquire and operate a particular string. It would so much easier if we could get a definitive decision from the DOJ – but guess that would take months and months , right ?

    Kevin, we have done similar porfolio matrix analysis. Of course Google and Amazon have a key part to play in the mix. Also Famous Four and Directi. Phil

  5. Tom Scopazzi says:

    So next question that nobody has addressed…..

    Does this apply private DEALS as well? (No auction ever takes place.)

    Let’s say applicant A and applicant B are in contention over .whocares. And there is never any auction whatsoever, but a deal is struck directly between the two whereby applicant A withdraws their application.

    Is this still a (potential) crime?

    • Mark A says:

      I would think that depends on the nature of the deal Tom. Is one party receiving compensation for going away? Is the purpose of the “deal” to avoid the public auction? If the answer is yes then that would seem to be problematic.

    • John Berryhill says:

      Here’s the process:

      http://www.justice.gov/atr/public/busreview/201659a.htm

      Persons concerned about the legality under the antitrust laws of proposed business conduct may ask the Department of Justice for a statement of its current enforcement intentions with respect to that conduct pursuant to the Department’s Business Review Procedure. See 28 C.F.R. Section 50.6.

      The Department believes that the business review process provides the business community an important opportunity to receive guidance from the Department with respect to the scope, interpretation, and application of the antitrust laws to particular proposed conduct. The Department realizes, however, that if the business review process is not timely, the value of the process, and therefore its utilization, may be diminished.

      Two of the most frequent types of business review requests the Department has received have involved proposals to form joint ventures or to collect and disseminate business information.

  6. Ron says:

    Some of these extensions are very valuable, and if the right parties strategically align there can be some serious wool pulled over someones eyes.

    ICANN is a farce, and everyone knows its, nobody respects them, there should be a better process in place, this just seems to messy.

  7. John Berryhill says:

    Kevin, there’s a piece you are missing here:

    “In other words, just because it’s very unlikely that ICANN would start filing antitrust suits against new gTLD applicants, the DoJ could feasibly decide to do so anyway.”

    Not just the DoJ – ANY party. As you may recall, we have seen this sort of thing before. When ICANN and Verisign came to terms on .com pricing, an antitrust suit was filed by CFIT. When ICM Registry was granted the .xxx TLD, an antitrust suit was filed by Manwin.

    There are more sharks in these waters than simply the DoJ and ICANN to think about, regardless of whether the DoJ or ICANN are maneaters.

  8. John

    So since ICM went through the ICANN process and not through any private resolution or anything outside of ICANN and got sued anyway, that just goes to show that this entire process is litigious and problematic.

    The choice applicants have are to be frozen by fear of what might happen if they take some control over their business and situation or sit still for an undetermined amount of time and allow ICANN to run the whole process only to still caught up in a legal mess

  9. John Berryhill says:

    “allow ICANN to run the whole process only to still caught up in a legal mess”

    But one of the justifications for the application fees collected by ICANN was to have a litigation war chest. Claims arising from the ICANN process are necessarily going to involve ICANN, which has been pre-funded by the applicants to litigate any such claims.

  10. Ken Hansen says:

    Can you say, “red herring”? Not buying this at all. No intentional misleading, but a big misunderstanding IMO.

    • PJT says:

      Does this mean Neustar will be engaging in private auctions anyway Ken? What are TLDH and Uniregistry getting wrong? Anyone can call Red Herring. At least they’ve shown their work.

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