Verisign has great quarter but sees China growth slowing

Verisign beat its sales expectations in the first quarter of the year, but leadership said rapid growth from Chinese registrants will now “normalize”.

The .com/.net registry last night reported net income up 21% at $107 million, on revenue that was up 9.1% to $282 million.
That’s based primarily on it selling 2.65 million net new .com/.net names during the quarter, at 7.1% increase on the Q1 2014 level baseline. It said it sold 10 million new names in the quarter, up from 8.7 million a year ago.
For comparison, Q1 2015 saw 1.51 million net adds across the two TLDs. Three months ago, the company had predicted net adds to be 1.5 to 2 million names.
It had 142.5 million names at the end of the quarter, 126.6 million of which were .com.
CEO James Bidzos told analysts: “We again saw activity coming from registrars in China that exceeded our expectations.”
However, he added: “At this point, we expect activity from registrars in China to normalize as we continue through the second quarter.”
When pressed, CFO George KIlguss elaborated (according to the SeekingAlpha earnings call transcript):

as we look at the trends, we’ve seen the demand that happened in the second half of the first quarter kind of ebb and flow. So we saw it come. It was pretty strong for a few weeks and then it came back to more than normalized path. So we don’t have a perfect crystal ball, but based on the trends that we’ve seen that we’ve been tracking, it seems to be back on the normalized path for that particular region, at least as what we’ve seen historically.

Verisign is currently negotiating for the renewal of its .com contract with ICANN, which may or may not enable it to raise its government-frozen registry prices in future.

M+M turns $22m profit into $10m loss

Minds + Machines today reported a 2015 loss of $10 million and further outlined its “transformative” restructuring and China strategy.
It’s the second full year of operating results M+M has posted since its first new gTLDs went live, and they’re not encouraging.
Revenue for accounting purposes was $6.3 million, but the cost of sales was $6.2 million, leaving gross profit of just $101,000.
Factoring in $12.1 million of operating expenses, a $7.9 million gain from losing new gTLD auctions, and other expenses, the total loss before tax was $10 million.
That’s compared to the $22 million profit M+M reported for 2014, a number entirely reliant on $33.7 million of auction loss payments.
The company also reported its “billings”, a line item that does not use the accounting method of deferring revenue across the life of a domain and is therefore more in line with incoming cash.
Billings for 2015 were $7.9 million, compared to $5 million in 2014. Gross profit under that measure was $1.7 million, but the $12 million of operating costs still made the company very unprofitable.
Ignoring the auction benefits in 2015, which will not last forever, it’s pretty clear that M+M was a company spending much more operating new gTLDs than it was making from them.
COO/CFO Michael Salazar said in a statement:

However, billings of $7.9 million for the year were simply not of a sufficient scale to cover the associated cost of sales ($6.2 million) and operating expenses ($12.2 million), which combined reached $18.4 million for 2015. Similarly, the $0.6 million savings achieved in the period by the decisions mid-year to stream-line the existing operational set-up were not of a magnitude to have any material impact in the year under review. That said, forfeited cost of sales and operational expenses as a result of the 2015 cost-cutting decisions will amount to $2.7 million in 2016

It’s perhaps little wonder that activist shareholders, apparently not prepared to play the long game, threw out half of the board and key senior executives during the period.
Former PR man Toby Hall took over as CEO in February, replacing co-founder Anthony Van Couvering, and announced earlier this month that M+M is dumping its registrar and back-end registry businesses.
Its registrar customers have been sold to Uniregistry, and it will outsource its registry back-end to Nominet, to save costs.
Salazar said that the two deals will lead to $2 million in savings, but won’t be complete before the fourth quarter. It seems unlikely they’ll have a great impact on 2016 numbers.
Headcount has been reduced from a peak of 61 to 43 at the end of the year, and is expected to drop further to 25. Salazar said this will save it $4.7 million a year.
Even with these cost reductions, M+M will still need to essentially double its revenue in order to hit operating profitability, it seems.
The company is pinning some of its growth hopes on .vip, which it expects to do well in China. It launches May 18.
Hall said in a statement that M+M would not follow the lead of competitors (Famous Four Media springs to mind) by offering first-year registrations for free to build market share. He said:

Based on the enquiries received during Sunrise and feedback gained through our two recent marketing trips to China, it is clear that there is genuine interest in the domain both within and outside of China. As a result, we will not be using a year-one freemium approach to simply inflate year-one registrations. Instead, we intend to be keenly priced to ensure margin to ourselves — and registrations — as well as protect the integrity of the domain. The volume we anticipate to be generated through keen pricing will then support the sales of our premium names in this domain.

The company also plans to invest in its .law sales team, because billings for that gTLD have been behind expectations.
M+M had $34.6 million in the bank and eight outstanding contested new gTLD applications at the end of the year.

ICANN refuses to play Ted Cruz’s game

ICANN has blown off US senator Ted Cruz by declining to answer a bunch of framed questions about its engagement with China.
In a letter (pdf) to Cruz and fellow senators Michael Lee and James Lankford, ICANN chair Steve Crocker testily explains that ICANN has offices and relationships all over the world, given the nature of its mandate.
There’s a suggestion that ICANN’s board resents the “insinuation” that talking to China means it’s ready to be captured by it or implement its censorship policies.
Crocker wrote:

ICANN does not endorse the views of any particular stakeholder, regardless of the organization’s engagement efforts, the composition of its advisory committees, and where it holds its meetings. In this sense, ICANN’s engagement with China as a global Internet stakeholder does not suggest any level of support for the nation’s government or its policies. Similarly, no endorsement of such matters could reasonably be inferred from the operations of the United States’ largest technology firms operating in China, including Cisco, Dell, HP, IBM, Intel, LinkedIn, Microsoft, Qualcomm and Uber. These firms, like ICANN, do not endorse the policies, laws, and regulations of China simply by operating there. As long as the U.S. Government has a policy of engagement with China, U.S. firms operate there without the insinuation that doing so makes them complicit in China’s censorship.

The letter was written in response to a bullet-pointed list of a few dozen question Cruz has posed in letters over the last couple of months.
The Cruz missives were a fairly obvious fishing expedition, with the senators apparently looking for sticks to beat ICANN with in the form of evidence that the organization is too friendly with the dreaded Chinese.
Some on the right wing of American politics seem to see the transition of ICANN/IANA partially away from US government oversight as a wedge issue they can use to show Obama is happily selling the ‘Murican constitution to China.
But Crocker ducks most of Cruz’s questions, preferring instead to present an alternative narrative.
He does not, for example, give answers to simple factual questions related to former CEO Fadi Chehade’s joining as co-chair of a committee of the China-led World Internet Conference.
Instead, he refers Cruz to a previous letter from Chehade, and notes that Chehade is no longer with ICANN.
He does not answer anything related to XYZ.com’s proposals related to selling .xyz domain names in China, which Cruz reckons could be used to censor the people of Hong Kong.
Neither does he confirm that ICANN pays government-affiliated CNNIC for collocated office space in Beijing, which wasn’t disclosed until it came out at a press conference last month.
I imagine Cruz, in receipt of Crocker’s letter, is feeling much the same as I do when an interviewee waffles in response to simple questions.
Pissed off.
I doubt this exchange is over.

China floats domain crackdown plans

The Chinese government is planning a crackdown on internet domains that could see mass censorship of non-Chinese names.
Draft rules floated for public comment this week are being widely reported as potentially blocking any domain that is not registered via a registry or registrar with a government license.
There are more than 50 provisions in the draft, but Article 37 is the one causing the most concern.
A translation published by Quartz yesterday has it reading like this:

Domain names engaging in network access within the borders shall have services provided by domestic domain name registration service bodies, and domestic domain name registration management bodies shall carry out operational management.
For domain names engaging in network access within the borders, but which are not managed by domestic domain name registration service bodies, Internet access service providers may not provide network access services.

At its worst, it suggests that every domain name not registered entirely through China-approved registries and registrars could be blocked from resolving in China.
You’d need a domain in .cn or a licensed gTLD, registered through a Chinese registrar, to access Chinese internet users, in other words.
But even Chinese locals who follow the issue closely are reportedly saying the regulations are vaguely worded, so it’s not clear exactly what would be blocked.
If you can read Chinese, the draft rules can be downloaded from this page. I’d be interested in hearing your take on them.
The rules also demand that domain name companies prevent domains carrying words deemed harmful from being registered.
There are additional controls on content — bans on porn, “rumor” and basically anything the Chinese government does not like — and registrant identity validation requirements.
The rules appear to be designed to replace the existing 2004 regulations that among other things force registrars and registries to obtain government licenses before the names they sell are allowed to resolve.
Those rules have led to several Western new gTLD registries, including Rightside, Famous Four Media and Minds + Machines, opening up corporate entities in China, in order to tap into the thriving market.
Local entities are of course subject to local laws — and ICANN contracts oblige them to abide by all applicable laws — which opens up the risk of Chinese regulations leaking out into the wider internet.
That almost happened with XYZ.com, which announced and then retracted (or clarified) an apparent plan to globally block domains deemed unsuitable by the Chinese censors.
It is inevitable that the proposals, which are open for public comment until April 25, will be used by US Congressional Republicans as a stick to beat ICANN and fight the imminent transition of IANA away from US government oversight.
High profile GOP politicians including presidential hopeful Ted Cruz have pointed to Chinese censorship as a risk of removing the USG from DNS root zone management.
But this isn’t really an ICANN problem as such. It’s a market forces problem.
Some new gTLD registries are seeing huge sales volume from Chinese registrants, who are trading many thousands of short, meaningless domains like baseball cards at the moment.
DI data shows that Chinese registrars accounted for 18.4 million gTLD domains in November 2015, up by 8.8 million domains in 12 months.
That number is likely to be several millions greater now, given the speculative activity of the last few months.
For registries, fully exploiting this market requires some sort of local presence, which in turn means exposing themselves to the already pretty bad Chinese censorship regime.
They’re going to have to be careful if they want to avoid China using the market to achieve the kind of back-door policy control it would never be able to obtain via ICANN.

ICANN China “conflict” denied as Cruz looks for dirt

ICANN chair Steve Crocker has denied that outgoing CEO Fadi Chehade has a conflict of interest with the Chinese government, after US Senator Ted Cruz pressed him for more details on Chehade’s extra-curricular activities in the country.
“There’s no money involved, so there’s no conflict of interest involved at all,” Crocker said at a press conference, in response to a DI question, at ICANN 55 in Marrakech today.
I put the question because presidential hopeful Cruz, along with fellow senators James Lankford and Michael Lee, said in a letter last Thursday (pdf) that Chehade has a “confirmed personal conflict of interest” when it comes to the Chinese government.
That appears to be based on his admission, in a letter to Cruz et al last month, that his travel expenses to the World Internet Conference (aka, the Wuzhen Summit), where he’s agreed to be co-chair of an advisory committee after he leaves ICANN, would probably be picked up by the Chinese government.
According to Cruz, Chehade is in the pocket of the Chinese government because he has accepted or will accept flight-plus-hotel expenses to a Chinese conference, which could distract him from his $900,000-a-year ICANN salary.
Cruz’s most recent letter seeks further information about Chehade’s involvement with Wuzhen and the ICANN board’s response when they found out about it.
It appears to be basically an effort to get as much evidence as possible to support the ludicrous Republican claim that the IANA transition process initiated by the Obama administration risks handing control over internet censorship to the Chinese.
This, while some governments are complaining that the community-drafted IANA transition proposals actually weaken the hand of governments.
“There’s much less there than people are making an issue of, so there’s just no problem from our point of view,” Crocker said at the press conference.
“There are several degrees of separation between matters at ICANN and involvement with the Chinese government,” Crocker said. “[Wuzhen is] not controlled by the Chinese government and it’s intended to facilitate bringing in people from all over the world, it’s a matter of inclusion rather than exclusion.”
While Cruz asks quite a lot in his latest letter, one of the questions that leaped out at me claimed that ICANN does not publish the address of its Beijing office on its web site.
All the other local “Engagement Centers” have physical addresses listed, but not the Chinese one, Cruz said.
It turns out he’s correct.
I asked at the press conference why the address was not published on the ICANN web site and whether Cruz was correct to infer that ICANN is based in the same office as CNNIC, the government-controlled .cn ccTLD registry.
Chehade replied: “As I’m sure you’ve read in our press releases when we opened that office, that office was opened with a very clear press release by us and one by CNNIC indicating that our office would be collocated with CNNIC. So there’s nothing new here.”
He thanked Cruz for pointing out the omission on the ICANN web site and said it would be corrected.
He said that it’s ICANN’s habit to collocate engagement centers with local players, and that Beijing was nothing different. ICANN pays CNNIC for the collocation, he said.
Looking at the ICANN press release (pdf) announcing the Beijing office opening, back in 2013, it seems Chehade was incorrect, however. The press release makes no mention of CNNIC hosting the new ICANN engagement center. It does not mention CNNIC at all.
CNNIC did at the time state in its own press release, in a roundabout way, that ICANN Beijing would be sharing its office.
I also asked whether the outcome of the US presidential election would have a direct bearing on whether ICANN is able to execute the IANA transition. Would the transition happen if Cruz gets elected president of the USA in November?
Crocker gamely waffled for a couple of minutes but didn’t confirm what many take as a given: that Obama initiatives such as the IANA transition are likely to be at risk of a scuppering should a Republican, particularly Cruz, enters the White House.
“As an American I have to say this is one of the most interesting and unpredictable presidential election processes we’ve ever seen,” Crocker said, “but as chairman of the board of ICANN I hope it has no relationship at all to a process that was started in principle when ICANN was initiated in 1998.”

Rightside moves into China too

Rightside has become the latest gTLD registry to open up in China.
The company said today it has created a Wholly Foreign-Owned Enterprise, basically a local subsidiary, in the country.
This is the same beachhead in China taken by Minds + Machines and Famous Four Media recently.
Draconian Chinese government regulations on domain registries and registrars require formal accreditation before domain names can be used by Chinese citizens.
Opening up a local office or working with a local proxy appear to be requirements to obtain this accreditation.
Rightside points out that 45% of new gTLD domain names — 5.4 million — are registered in China. Its own portfolio has seen 90,000 of these.

Two new gTLD registries open offices in China

Portfolio gTLD registries Famous Four Media and Minds + Machines have both announced that they’re formally entering the Chinese market.
Both companies are establishing “wholly foreign-owned enterprises” (WFOEs), a form of company that does not require local investment, on the mainland.
The moves are aimed at getting the registries’ respective gTLDs accredited by the Chinese government, something that is required before local registrants are allowed to use them.
In a press release, FFM senior legal counsel Oliver Smith said:

It was clear to us soon after launching our first domain registry that domain registrations from China comprised a strong proportion of the total. It was a natural progression of our strategy to build a physical presence in China. The accreditation process is complicated but well-structured and, thanks to the help of advice from the Chinese government, should be completed relatively quickly.

In some of Famous Four’s gTLDs, Chinese registrars are the overwhelming majority of the sales channel.
In .win, the registry’s biggest-seller, China was responsible for about 85% of registrations at the last count, for example.
Meanwhile, M+M is taking a slightly different route into the country.
It said today that while it also shortly plans to open a WFOE, it has also partnered with ZDNS, a local provider of proxy services for registries.
ZDNS was the company XYZ.com partnered with for its controversial launch into China. According to M+M, it’s also working with .CLUB Domains and some Chinese gTLD registries.
M+M is also using the specialist consultancy Allegravita for its marketing there.
Its local entity will be called Beijing Ming Zhi Mo Si Technology Company Limited (which may or may not translate to something like “Wise Mediation”).
M+M’s first Chinese launches will be .beer, .fashion, .fit, .law, .wedding, .work and .yoga, with .vip and .购物 (“.shopping”) coming later in the year.

.top gTLD tops a million as China goes domain nuts

China-based new gTLD .top has become only the second new gTLD to pass the one-million-domain milestone.
The gTLD, managed by Jiangsu Bangning Science & Technology Co, had 1,000,469 domains in its zone file on Saturday, an increase of 5,808 on the day.
The zone has grown by 453,833 domains in the last 90 days, according to DI PRO stats.
It’s growing just slightly faster, in percentage terms, than new gTLD volume leader XYZ.com’s .xyz.
The rapid growth can no doubt be attributed largely to price, feeding the current Chinese appetite for domain investment.
Its most successful registrar, West.cn (Chengdu West Dimension Digital Technology Co), is currently selling .top names prominently for CNY 4 for the first year. That’s just $0.60.
The registry says that registrants come from 231 countries and regions. On its web site, it highlights France’s Gandi.net and Gibraltar’s budget registrar AlpNames as key international partners.
However, the latest registry reports show that over 90% of its sales are coming from China-based registrars.
Despite .top being a Latin-script TLD, European and North America registrars seem to account for a very small number of registrations.
It’s not even carried by the likes of GoDaddy and eNom.
The third-place 2012-round new gTLD is currently .wang, another Chinese registry, which yesterday had 628,125 names in its zone file.
Number four is .win, which despite being run by Gilbraltar-based Famous Four Media is utterly dominated by sales via Chinese registrars.
At number five is .club, with 552,065 names and a much more international distribution of registrars.

Verisign warns about Chinese .com boom

Verisign has warned investors that the current boom in .com sales is largely coming from Chinese domainers and may not be sustainable.
The company has added an unprecedented 4.1 million domain in .com and .net so far during the fourth quarter.
“While there continues to be demand for domain names globally, the recent increased volume for Verisign’s top level domains, as well as top level domains of other registries, during the fourth quarter is coming largely through registrars in China,” the company said in a Securities and Exchange Commission filing.
It listed several factors that are likely responsible for the sudden uptick, but warned that renewal rates are typically not great.

In the past, Verisign has discussed many factors that affect the demand for domain names, including, but not limited to economic, social, and regulatory conditions, Internet adoption, Internet penetration, and increasing e-commerce. In addition to these factors affecting demand, Verisign is also evaluating additional potential factors unique to China that may also be responsible for the recent increased volume of new registrations in China.
In no particular order, these potential factors, or combination of factors, could include, but may not be limited to, government initiatives in China to develop their online economy such as ‘Internet Plus;’ registry and registrar regulatory requirements; cultural influences such as the popularity of numeric domain names; increasing competition amongst Chinese registrars; potential increases in domain name investment activity; and recent capital markets volatility and access to capital in China.
Verisign cannot predict if or how long this increased pace of gross additions will continue and we cannot at this time predict what the renewal rate for these domain names will be. Verisign has noted in the past that renewal rates for domain names registered in emerging markets, such as China, have historically been lower than those registered in more developed markets.

It’s difficult to imagine that Chinese investors have managed to find four million unregistered domains worth keeping.
There are currently 123,497,852 domains in the .com zone file, according to Verisign’s web site.
Verisign is not the only registry that appears to be benefiting from a deluge of registrations from China.
XYZ.com has seen over 440,000 domains added to its .xyz zone file in the last three weeks, bringing its total to over 1.5 million, which appear to be largely coming through Chinese registrars.

XYZ says it won’t block censored Chinese domains

New gTLD registry XYZ.com has said it will not preemptively censor domain names based on the wishes of the Chinese government.
Over the last couple of days, CEO Daniel Negari has sought to “clarify” its plans to block and suspend domain names based on Chinese government requests.
It follows XYZ’s Registry Services Evaluation Request for a gateway service in the country, first reported by DI and subsequently picked up by the Electronic Frontier Foundation, a Wall Street Journal columnist, Fortune magazine and others.
The clarifications offered up by XYZ probably did more to confuse matters.
A blog post on Wednesday said that XYZ will not reserve any .xyz domain names from being registered, except those ICANN makes all new gTLD registries reserve.
Subsequent comments from Negari stated that XYZ will, as the RSEP stated, prevent names that have been banned in China from being registered.
However, there’s one significant difference.
Now, the registry is saying that it will only put those bans in place for domain names that have been specifically banned by the Chinese government when the name had already been registered by a Chinese registrant.
So, if I understand correctly, it would not preemptively ban anyone anywhere from registering [banned term].xyz.
However, if [banned term].xyz was registered to a Chinese resident and the Chinese government told the registry to suspend it, it would be suspended and nobody would be able to re-register it anywhere in the world.
Negari said in a blog comment yesterday:

if we receive a Chinese legal order tomorrow (before the gateway has launched) which requires disabling a domain name registered in China and properly under Chinese jurisdiction, then it will be disabled at the registry level, and not by the gateway. When the gateway launches the name will continue to be unavailable, and the gateway will not implement the action on a localized basis only in China. The normal registry system would continue to be the only system used to resolve the name globally. Again — the specific stability concern ICANN had was that we would use the Chinese gateway to make .xyz names resolve differently, depending on what country you are in. I completely agree that our [RSEP] re-draft to address that concern came out in a way that can be read in a way that we sincerely did not intend.

So there is a list of preemptively banned .xyz, .college, .rent, .security and .protection domains, compiled by XYZ from individual Chinese government requests targeting names registered to Chinese registrants.
Negari said in an email to DI yesterday:

To clarify the statement “XYZ will reserve domains,” we meant that XYZ will takedown domains in order to comply with “applicable law.” Unfortunately, the inaccuracies in your post caused people to believe that we were allowing the Chinese government to control what names could be registered or how they could be used by people outside of China. The idea that XYZ is going to impose Chinese law and prevent people outside of China from registering certain domain names is simply incorrect and not true. To be 100% clear, there is no “banned list.”

That was the first time anyone connected with XYZ had complained about the October 12 post, other than since-deleted tweets that corrected the size of the list from 40,000 domains to 12,000.
The RSEP (pdf) that causes all this kerfuffle has not been amended. It still says:

XYZ will reserve names prohibited for registration by the Chinese government at the registry level internationally, so the Gateway itself will not need to be used to block the registration of of any names. Therefore, a registrant in China will be able to register the same domain names as anyone else in the world.

This fairly unambiguous statement is what XYZ says was “misinterpreted” by DI (and everyone else who read it).
However, it’s not just a couple of sentences taken out of context. The context also suggests preemptive banning of domains.
The very next sentence states:

When the Gateway is initially implemented we will not run into a problem whereby a Chinese registrant has already registered a name prohibited for registration by the Chinese government because Chinese registrars are already enforcing a prohibition on the registration of names that are in violation of Chinese law.

This states that Chinese residents are already being preemptively banned, by Chinese registrars, from registering domains deemed illegal in China.
The next few paragraphs of the RSEP deal with post-registration scenarios of domains being banned, clearly delineated from the paragraph dealing with pre-registration scenarios.
In his blog post, Negari said the RSEP “addressed the proactive abuse mitigation we will take to shut down phishing, pharming, malware, and other abuse in China”.
I can’t believe this is true. The consequence would be that if China sent XYZ a take-down notice about a malware or phishing site registered to a non-Chinese registrant, XYZ would simply ignore it.
Regardless, the takeaway today is that XYZ is now saying that it will not ban a domain before it has been registered, unless that domain has previously been registered by a Chinese resident and subsequently specifically banned by the Chinese government.
The registry says this is no different to how it would treat take-down notices issued by, for example, a US court. It’s part of its contractual obligation to abide by “applicable law”, it says.
Whether this is a policy U-turn or a case of an erroneous RSEP being submitted… frankly I don’t want to get into that debate.
Disclosure: during the course of researching this story, I registered .xyz domains matching (as far as this monoglot can tell) the Chinese words for “democracy”, “human rights”, “porn” and possibly “Tiananmen Square”. I have no idea if they have value and have no plans to develop them into web sites.