Registries could become registrars by summer

The big incumbent top-level domain registry operators could apply to also become registrars as early as June this year, according to a just-passed ICANN resolution.
Last November, ICANN decided to dump its longstanding policy of generally not allowing TLD registries to also own and operate registrars.
While the rule was designed primarily for TLDs won under the new gTLD program, it will also retroactively apply to operators of existing gTLDs.
Neustar (.biz) has already publicly stated its intention to vertically integrate, and is keen for ICANN to lift its current 15% registrar ownership restriction before the new gTLD program kicks off.
According to a resolution passed by ICANN’s board of directors on Thursday, Neustar is not the only registry operator to make such a request.
The board last week…

RESOLVED (2011.04.21.13), the Board directs the CEO to develop a process for existing gTLD registry operators to transition to the new form of Registry Agreement or to request amendments to their registry agreements to remove the cross-ownership restrictions. This process would be available to existing operators upon Board approval of the new gTLD Program.

ICANN currently plans to approve the gTLD program June 20 at its meeting in Singapore.
That gives CEO Rod Beckstrom and his team just two months to come up with a process for allowing the likes of VeriSign, Neustar and Afilias to either amend their contracts or move to the standard contract outlined in the new TLD program’s Applicant Guidebook.
I see a potential source of tension here.
The registry agreement template in the Guidebook has been described by some as an “adhesion contract” due to its heavy balance in ICANN’s favor.
Existing registries will very likely prefer to simply delete the cross-ownership restrictions in their current contracts and incorporate the new proposed Code of Conduct rules.
On the other hand, some have suggested that registries should be obliged to adopt the new Guidebook agreement in full, rather than amend their existing deals, in the interests of equitable treatment.
Registrars still signed up to ICANN’s 2001 Registrar Accreditation Agreement only get the option to upgrade wholesale to the 2009 agreement, it has been noted.

Neustar wants to be a registrar ASAP

Neustar, registry manager for the .biz and .us top-level domains, has put the wheels in motion to acquire an ICANN registrar accreditation as soon as possible.
It’s the first major gTLD operator to formally request permission to “vertically integrate” since ICANN announced last November that it was prepared to lift the ownership caps that have previously kept registries and registrars quite strictly separated.
Neustar’s .biz contract currently forbids it from owning more than 15% of an ICANN registrar.
In a letter to ICANN sent this afternoon, Neustar vice president of law and policy Jeff Neuman said the company wants this provision deleted:

We are asking for this language now to allow Neustar to compete fairly for new gTLDs on the same terms and conditions as registrars entering the new gTLD registry market.
…
It is critical to resolve this issue immediately to ensure that Neustar is able to compete on a level playing field with the new entrants into the marketplace and to promote the efficiencies and innovation for consumers as advocated by the ICANN Board.

ICANN shocked the industry last year when its board of directors decided to allow registries and registrars to own each other.
The decision meant that niche community and brand TLDs will be able to sell direct to registrants, without having to secure the support of reluctant big-name registrars.
It also meant that existing gTLD operators will be able to own registrars for the first time.
As a caveat, designed to protect consumers from gaming registries, ICANN proposed a Code of Conduct designed to limit the cross-pollination of data that could be abused.
Similarly, the Code calls for registries to treat all approved registrars equally, regardless of ownership stakes, to avoid competition concerns.
Neuman wrote that Neustar is prepared to have language along the lines of the current draft Code of Conduct, but “no more restrictive”, incorporated into the .biz registry contract.
Other incumbent gTLD registry operators, notably VeriSign and Afilias, are bound by similar contractual restrictions and will presumably also pursue their options along the same lines in future.

Why ICANN dropped registrar ownership rules

ICANN has quietly published a list of 10 reasons explaining why it decided to start allowing domain name registrars and registries to buy each other.
Last November, ICANN’s board of directors voted to drop so-called “vertical integration” rules that previously prevented registries owning more than a small percentage of registrars.
Now, under the forthcoming new top-level domains program, the likes of eNom and Go Daddy will be able to apply to become gTLD registries, and registries like VeriSign and Neustar will be able to apply to run their own registrar businesses.
The decision was unexpected, appeared to be a U-turn, and ICANN’s explanation was not articulated sufficiently to sate critics such as the US Department of Commerce.
So now ICANN has published a “Draft Rationale” (pdf), a 17-page document that outlines some of the thinking that went into the decision.
In a nutshell, ICANN dropped the VI rules to increase competition, to avoid antitrust lawsuits, and because the harms that could arise due to cross-ownership are best addressed by other means.
Here are the rationale’s 10 major bullet points in full:

• None of the proposals submitted by the GNSO reflect a consensus opinion; as a result, the Board supported a model based on its own factual investigation, expert analysis, and concerns expressed by stakeholders and the community.
• ICANN’s position and mission must be focused on creating more competition as opposed to having rules that restrict competition and innovation.
• Rules permitting cross-ownership foster greater diversity in business models and enhance opportunities offered by new TLDs.
• Rules prohibiting cross-ownership require more enforcement and can easily be circumvented.
• Rules permitting cross-ownership enhance efficiencies and almost certainly will result in benefits to consumers in the form of lower prices and enhanced services.
• Preventing cross-ownership would create more exposure to ICANN of lawsuits, including antitrust lawsuits, which are costly to defend even if ICANN believes (as it does) that it has no proper exposure in such litigation.
• The new Code of Conduct, which is to be part of the base agreement for all new gTLDs, includes adequate protections designed to address behavior the Board wants to discourage, including abuses of data and market power. Data protection is best accomplished by data protection tools, including audits, contractual penalties such as contract termination, punitive damages, and costs of enforcement, as well as strong enforcement of rules. By contrast, market construction rules can be circumvented and cause other harms.
• Case-by-case re-negotiation of existing contracts to reflect the new crossownership rules will permit ICANN to address the risk of abuse of market power contractually.
• In the event ICANN has competition concerns, ICANN will have the ability to refer those concerns to relevant antitrust authorities.
• ICANN can amend contracts to address harms that may arise as a direct or indirect result of the new cross-ownership rules.

The document still needs to be approved by the ICANN board of directors before it can be considered official.
It appeared without fanfare on the ICANN web site a little over a week ago.

Incumbents get the nod for new TLD apps

Domain name registries such as Neustar, VeriSign and Afilias will be able to become registrars under ICANN’s new top-level domains program, ICANN has confirmed.
In November, ICANN’s board voted to allow new TLD registries to also own registrars, so they will be able to sell domains in their TLD direct to registrants, changing a decade-long stance.
Late last week, in reply (pdf) to a request for clarification from Neustar policy veep Jeff Neuman, new gTLD program architect Kurt Pritz wrote:

if and when ICANN launches the new gTLD program, Neustar will be entitled to serve as both a registry and registrar for new gTLDs subject to any conditions that may be necessary and appropriate to address the particular circumstances of the existing .BIZ registry agreement, and subject to any limitations and restrictions set forth in the final Applicant Guidebook.

That doesn’t appear to say anything unexpected. ICANN had already made it pretty clear that the new vertical integration rules would be extended to incumbent gTLD registries in due course.
(However, you may like to note Pritz’s use of the words “if and when”, if you think that’s important.)
Neustar’s registry agreement currently forbids it not only from acting as a .biz registrar, but also from acquiring control of greater than 15% of any ICANN-accredited registrar (whether or not its sells .biz domains).
That part of the contract will presumably need to be changed before Neustar applies for official registrar accreditation or attempts to acquire a large stake in an existing registrar.
VeriSign and Afilias, the other two big incumbent gTLD registries, have similar clauses in their contracts.

ICANN director slammed vertical integration

ICANN really shook up the domain name industry last month when it said it was dropping rules that prevent registrars and registries from owning each other.
But two of its directors voted against the decision and one, George Sadowsky, entered a lengthy dissenting opinion in which he said the benefits of so-called “vertical integration” are “largely illusory”.
Vertical integration would allow existing registrars to apply to run new top-level domains. It would enable companies to more easily apply for “.brand” or small niche TLDs.
This has been banned in previous registry contracts, due in part to the potential for abuse of registry data and anti-competitive behaviour by registrars.
Sadowsky delivered a four-point objection to the VI resolution, which was passed in early November, according to minutes published this week.
He said that introducing VI at the same time as the new TLD program would create unpredictable and irreversible consequences for the industry, and questioned ICANN’s ability to enforce compliance with data-sharing rules.

in spite of the measures to be taken to ensure “good conduct,” the resolution has the potential to commingle all of the data, public and private, regarding a registry in one place, providing the possibility of easy and invisible sharing of data within a merged or co-owned entity regardless of the scope of any agreement with ICANN.
Such sharing is likely to be undetectable given the close affiliations among the entities. Data now forbidden to be shared between registries and registrars will be shared. Both auditing and enforcement by ICANN are unlikely to be effective, all the more so as we move from 20+ to hundreds of new gTLDs.

Data sharing would give registrars greater insight into valuable domains, potentially facilitating registrant-unfriendly activities such as warehousing.
Those companies which opposed VI, including Afilias and Go Daddy, have previously said that the potential for registrar abuse, harming registrars, was too great.
Sadowsky said:

Assuming that each gTLD registry must continue to treat all registrars equally, the real benefits of vertical integration are largely illusory, but those that can be easily obtained by the officially forbidden sharing of data are real

The minutes also show that Mike Silber voted against the resolution, saying he “believes there will be very unpleasant, unintended consequences”.
Harald Alvestrand, Ram Mohan, Thomas Narten, Jonne Soininen and Bruce Tonkin had conflicts of interest and were not in the room for the debate. The two voting directors, Tonkin and Alvestrand, officially abstained from the vote.
The minutes also contain this mysterious entry:

Confidential Issue
Pursuant to Article V, Section 5.4 of the ICANN Bylaws, the Board of Directors, by unanimous vote, determimed that, to protect the interests of ICANN, the matter under discussion should not be included in the minutes until such time as the Board designated the item should be published.

Anybody with any ideas what this might be, please feel free to theorize in the comments.

Minds + Machines to raise $4.7m for new TLDs

Top Level Domain Holdings plans to raise £3 million ($4.7 million) in a stock sale to help finance the TLD aspirations of its main business, Minds + Machines.
The funds would almost double the cash reserves TLDH has on tap, which currently amount to $5.5 million, according to StockMarketWire.com.
Recently appointed CEO Antony Van Couvering said in a statement that ICANN’s recent decision to allow registries and registrars to vertically integrate had a bearing on the decision to raise funds:

Having reviewed ICANN’s Final Proposed Applicant Guidebook, and in view of the ICANN Board’s historic decision to do away with cross-ownership restrictions between registries and registrars, we believe that the timing is right for additional investment by TLDH. ICANN’s registry-registrar decision means that additional gTLD business models are now viable, and we have already seen a marked increase in interest from prospective new clients. We intend to make sure we have the resources to take advantage of this opportunity.

M+M is already associated with new TLD applications including .gay and .eco, both of which are expected to be contested by other applicants.
TLDH is listed on London’s small-cap Alternative Investment Market. The announcement of the placement can be found here.

Vertical integration was not a slam dunk

Two members of ICANN’s board voted against the decision to allow registrars and registries to own each other, according to a preliminary report from its November 5 meeting.
The decision was a surprise when it was announced last week, as it was diametrically opposed to the board’s previous stance essentially opposing vertical integration.
The new position, already incorporated in the Applicant Guidebook, allows registrars to apply to run new top-level domains, subject to a code of conduct.
From the board of directors’ meeting report:

Eleven Board members voted in favor of the Resolution. Two Board members were opposed to the Resolution. Two Board members did not participate in the discussion or the vote on the Resolution due to conflicts of interest. The Resolution carried.

I believe Bruce Tonkin was one of the people who recused themselves from the vote. I’m not certain who the other was.
We won’t discover who the dissenting opinions belonged to, or what they were, until the minutes are published, probably not long after the Cartagena meeting next month.

Could vertical integration kill registrar parking?

Will ICANN’s decision to allow registrars and registries to own each other help reduce the practice of registrars parking unused or expiring domain names?
A reading of the new top-level domain Applicant Guidebook in light of the recent “vertical integration” ruling it incorporates certainly raises this kind of question.
The AGB includes a policy called the Trademark Post-Delegation Dispute Resolution Procedure, or PDDRP, which allows trademark owners to seek remedies against cybersquatting registries.
The policy is quite clear that registries cannot be held accountable for cybersquatting by third parties in their TLD, unless they have, for example, actively encouraged the squatters.
But another example of infringement is given thus:

where a registry operator has a pattern or practice of acting as the registrant or beneficial user of infringing registrations, to monetize and profit in bad faith.

Now, this wouldn’t be a cause for concern in the current vertically separated market.
Most registries are only generally able to register domain names in their own TLD by going through an accredited registrar. Proving bad faith intent in that situation would be trivial.
But what of an integrated registry/registrar that also automatically parks recently registered or expiring domains in order to profit from pay-per-click advertising?
This is common practice nowadays. It’s been used to prove a registrant’s bad faith during many recent UDRP proceedings and one registrar is even being sued by Verizon for doing it.
Would a registrar parking an expired, trademark-infringing domain constitute it acting as a “beneficial user” of the domain “to monetize and profit in bad faith”?
Text added to the PDDRP section of the AGB in its most recent revision strongly suggests that “the registrar did it” would not be a defence for a vertically integrated company:

For purposes of these standards, “registry operator” shall include entities directly or indirectly controlling, controlled by or under common control with a registry operator

The PDDRP allows complainants to seek remedies such as injunctions, as well as the suspension of new registrations in a TLD and, exceptionally, the full revocation of their registry contract.
With that in mind, would an integrated registry/registrar want to risk any practice that puts their TLD at risk?

First reactions to ICANN’s VI bombshell

Shortly before 8am UTC today, ICANN announced that it plans to blur the lines between domain name registries and registrars by eliminating cross-ownership restrictions and enabling vertical integration of the two functions.
The shock move is likely to have profound repercussions on the domain industry for years to come.
I’ve spent the last ten hours collating a bunch of early reaction from Twitter and the blogosphere.
Like blind men groping an elephant, everyone had their own take on the news, which perhaps indicates how broad-reaching its effects will be.
Linkfest coming up.
Apparently the first to notice the news, which came just before midnight in California, was AusRegistry, the Australian registry services company, with this pithy tweet:

Any Registrars wanting Registry software can enquire within…

The company later followed up with a blog post:

The positives of this resolution is that it is highly likely that we will see the adoption and growth of smaller more boutique TLDs being championed to market by their Registrar owners and for many industry participants, anything that promotes the success of the new gTLD program and the reduced risk of Registry failure can only be seen as a good thing.

As Europe woke up to the news, Michele Neylon of Irish registrar Blacknight decided to eschew diplomacy, and pondered the possible fallout from ICANN’s decision:

Now the next question is – what next?
How will people react?
Are we going to see a flood of nastygrams from Afilias and PIR being sent to the ICANN board demanding them to backtrack?

Across the pond, Minds + Machines CEO Antony Van Couvering quickly rattled off a typically eloquent blog post that focussed on what he seems to see as ICANN’s sudden spine growth:

This is the only principled decision the ICANN Board could have come to, and they deserve a lot of credit for doing it. By “principled,” I mean taking ICANN’s stated institutional principles and following them to their logical conclusion.
…
The new landscape will require everyone in the domain name business to re-examine their business, their partners, their strategy. It will have consequences between those I enumerated above. It will re-invigorate the industry, and it will help establish the respect that ICANN has lacked for so long.

Another new TLD applicant, Constanine Roussos of .music tweeted:

ICANN allows Vertical Integration for new top-level domains. .MUSIC is thrilled. #ICANN makes history. The lobbying effort was well worth it

Over in Japan, Jacob Williams of new TLD consultants UrbanBrain reflected some of the industry’s shock that ICANN went against many observers’ expectations.

This announcement is a full 180 degree turn from the verbiage in DAG 4 and the resolutions passed at the public meeting in Nairobi earlier this year. This decision comes huge surprise, but surely a relief to many New gTLD applicants.

On the policy side of things, veteran ICANN commentator Danny Younger expressed surprise of a different kind on his new ICANNology blog:

I’ve been wondering how an ICANN Board session that is “not designated as an Official Board Meeting” can result in official Board Resolutions.
…
If the meeting is specifically not designated as “special”, but rather as a board “retreat”, should official board resolutions be promulgated at the conclusion of such sessions?

Fellow policy wonk George Kirikos tweeted:

“It is better to remain silent and be thought a fool than to open one’s mouth and remove all doubt.” applies to #ICANN’s latest moves.

Former ICANN staffer Kieren McCarthy tweeted, less ambiguously:

Good call #ICANN Board. Recognizing the realities of new top-level domains and standing up for principles over pressure

Finally, EnCirca, a US-based registrar, tried to pick winners and losers and concluded that it is the “.brand” TLDs that will gain the most, and that it is the registrars that are in for a shake-up.

the real winners will be the major brands on the internet: Apple, Yahoo, Google, Facebook, Microsoft. Any one of these could launch their own TLD to rival dot-com.
Who are the biggest losers? The Registrar channel. Registrars will no longer be assured of being able to offer new TLD’s to their customers. Registries will start to bypass their registrar partners and deal directly with end-users.
Registries and registrars will need to start innovating to remain relevant. It is time to start competing.

As you might expect, there has been not much reaction yet from those, such as Go Daddy, which opposed full vertical integration.
But Warren Adelman, Go Daddy’s president, tweeted within the last hour:

Let the games begin

Quite.

Vertical integration – bad news for domainers?

ICANN’s decision to allow domain name registrars to operate registries is a game changer on many fronts, but what impact could it have on domain investors?
For the first time, registrars will be able apply for and run new top-level domains, giving them unprecedented insight into registry-level data.
If they also act as registries, registrars will, for example, be able to see what non-existent domains in their TLD get the most type-in traffic.
They will also be able to see how much traffic expiring domains get, even if the registrant does not use the registrar’s own name servers.
As claimed by some participants in ICANN’s vertical integration working group, this data could be used to “harm” registrants; harms that could be especially noticeable to domainers.
There was a concern from some in the WG that combined registry-registrar entities (we’re going to need a name for these) could use registry data to, for example, identify and withhold high-value names, increasing prices to potential registrants.
The possibility of an increase in “domain tasting” and “front-running” – practices generally frowned upon nowadays – was also raised.
However, some registrars are already owned by companies that register large numbers of traffic domains for themselves, even without access to registry data.
Demand Media subsidiary eNom, the second-largest gTLD registrar, is a good example.
As DomainNameWire reported in August, the company already uses domain name lookups to decide what names to register for itself (though it told DNW it does not “front-run”), saying in SEC filings:

These queries and look-ups provide insight into what consumers may be seeking online and represent a proprietary and valuable source of relevant information for our platform’s title generation algorithms and the algorithms we use to acquire undeveloped websites for our portfolio.

Demand also said that it acquires eNom customers’ expiring domains if they are attractive enough:

Domain names not renewed by their prior registrants that meet certain of our criteria are acquired by us to augment our portfolio of undeveloped owned and operated websites.

Access to registry data could prove invaluable in refining this model, and eNom has, unsurprisingly. long indicated its desire to apply for and operate new TLDs.
But will registries be allowed to exploit this data to line their own pockets?
ICANN indicated today that it plans to introduce a code of conduct for registries, to prevent “misuse of data”, and will likely step up its compliance activities as a result.
What this code of conduct will look like remains to be seen, but I expect we’re looking at “Chinese wall” provisions similar to those self-imposed by VeriSign when it still owned Network Solutions.
It should be pointed out, of course, that standalone registries already have the ability to register domains to themselves, based on their own registry data, and I’m not aware of a great many incidents where this has been abused to the harm of registrants.