UK domain name holders are being overcharged while the company behind it wins contracts by undercutting the market in what may be illegal market abuse.

In recent months, Nominet has signed a number of back-end contracts with commercial operators of dozens of internet extensions ranging from .boston to .vodka. More deals are in the offing with large corporations like Comcast, and form part of an explicit push by the company's new CEO to take the non-profit organization in a more commercial direction.

However, industry experts are warning that those deals were likely won by Nominet offering below-market rates, effectively using the company's vast profits from the .uk registry to cross-subsidise its commercial ambitions.

Such behaviour almost certainly runs foul of UK competition law and after months of stonewalling by the company, some of Nominet's competitors are now considering lodging a formal complaint with the Competition and Markets Authority (CMA).

In addition to the suspicious commercial deals Nominet is signing, the non-profit organisation is continuing to resist reform efforts that were outlined a year ago in a report that the company itself commissioned. Some of the Lyons Report reforms were explicitly focused on the risks associated with Nominet pursuing commercial contracts, yet have been ignored by the organisation's board and staff.

Market abuse

Under UK competition rules, Nominet holds a "dominant position" in the UK domain name market. By its own reckoning, the company controls "approximately 60 per cent of the domain name market in the UK." The CMA views 50 per cent and above as proof of dominance.

In fact, the CMA has already recognised that Nominet holds a dominant position, noting: "It appears that Nominet may possess substantial market power at the wholesale level of this market."

There is of course nothing illegal about holding a dominant position in a market, but under the law it comes with an undertaking not to impair competition or distort the market. In particular, the CMA takes a very dim view of a dominant company if it is seen to use its position to eliminate competition or leverage its position in a related or neighbouring market.

The clearest signs of such abuse are typically:

Predatory pricing – where a company charges less than the market rate in order to keep out competitors.

Cross-subsidisation – where a company charges higher prices to one group of consumers to subsidise lower prices for another group.

Price inflation – where a company uses its control of a market to increase prices beyond what is reasonably justified.

Nominet appears guilty of all three.

Makes the world go around

In April, Nominet announced it had won the contract to take over the back-end registry functions of 28 top-level domains owned by Minds and Machines. Those domains are commercial entities and include city names like .boston, .budapest and .miami, as well as generic and lifestyle endings such as .fishing, .vodka and .yoga.

In May, it was chosen to run the back end for the new and high-profile .blog top-level domain. The company has also announced it will be used to run the back end for some big brand names: .BBC, .Bentley and .Comcast. Nominet is also competitively bidding for other new brand names as they go live.

Nominet CEO Russell Hawarth said of the Minds and Machines contract: "Expanding our presence in the RSP [Registry Service Provision] market is a logical next step for us. It puts us in pole position to grow one of the things which we’re great at – our registry services – and positions us well to open up exciting new opportunities for our registrars."

Other registry operators are suspicious about how Nominet won the contracts, however. In a market where margins can often be razor thin and profits are built on large transactions numbers, typically the lowest-priced company wins.

Even though Nominet has run one of the largest registries on the internet – .uk, with 10 million domains – it does not have as much experience of dealing with other companies and multiple registries, unlike its main competitors: US-based Neustar, London-based CentralNic and Dublin-based Afilias. Representatives from two of those companies were present at Nominet's recent AGM and asked some probing questions about the contract win.

Head of Consulting Services at CentralNic, Rishi Maudhub, noted his and others' "concern" at Nominet entering into the contract with a for-profit operator, and asked that the member-organization answer five key questions:

How the deal served UK internet users, especially since many of the domains are aimed at foreign markets.

How the deal fitted with Nominet's public-benefit requirement that is a part of its articles of incorporation.

Whether .uk domain profits were being used to offer lower prices on other domains.

Whether .uk domains were effectively subsidizing for-profit domains.

Whether Nominet was engaging in predatory pricing.

Jonathan Robinson, who for some time served as a Nominet board member and is currently executive chairman of Afilias, put some figures on the table and also asked a key question: is the deal profitable?

Robinson noted that for .uk domains, Nominet was charging £2, or $3, per name and yet the industry understanding of the contract it had signed was for just $1, or 75p, per domain. Pushing back on Hawarth's claims that the deal had been reviewed by the staff and board to ensure it was profitable, Robinson asked a simple question: is it profitable from day one?

Nominet's responses were revealing.