ICANN is about to do serious damage to its reputation by making a precipitous, ill-considered leap into the unknown should it follow through on removing price constraints on several legacy extensions, most notably .org. Doing so would expose a global community of non-profits to the risk of quickly-escalating exploitative pricing. The rationale for eliminating price caps relies on three points, all of which are incorrect — 1) that the registries for the legacy gTLDs should be treated the same as the new gTLD registries, that is as owners entitled to capture the entire value of the name spaces, 2) that price competition will restrain prices, and 3) that it is not ICANN's role to set and to regulate prices.

Some argue that legacy domain names are currently underpriced and that the registry operators are being prevented from charging what the domain names are "worth". This misconception arises from treating the registry operators of legacy gTLDs as owners of the legacy name spaces. The legacy registries are essentially different from the new gTLD registries. The new gTLD registries bought the right to their "sponsored" gTLDs and created their registration base from scratch. The legacy gTLD registries were contracted to operate pre-existing name spaces that had a pre-existing base of established respondents in return for a contractually determined fee. The value in the name spaces entrusted to the legacy registry operators was not created by them and includes the substantial goodwill created in the domain names by the registrants themselves. Treating a contracted service provider as an owner would enable the legacy registry to deprive the domain name registrants of much of the value that the registrants themselves created. This would be an unjust transfer of wealth, with the registrants receiving no benefit in exchange.

If price caps are eliminated, competition will not keep prices in check. Competition is effective in restraining prices only if registrants can easily switch one domain name for another. An organization's domain name becomes its online brand for the life of the organization. Moving to another domain name requires undergoing the hugely expensive and disruptive ordeal of rebranding and is to be avoided at nearly any cost. Organizations wish to continue using their existing domain name, for which there is no adequate substitute. When there is a unique product that cannot be easily substituted for any other, there is no effective competition.

In the absence of competition, registrants can be protected from extortionate pricing only through pricing constraints, such as price caps. ICANN as the trustee for the legacy name spaces has the responsibility of an owner.

It is ICANN's proper role and responsibility to thwart the legacy registries' efforts to usurp the role of owner for themselves. But as the registries control levers of power and influence throughout ICANN, ICANN staff is currently advocating for its own abdication from the role of owner in order to grant the legacy registries the unchecked ability to raise prices in a non-competitive marketplace. That ICANN staff is promoting such an approach raises concerning structural questions about ICANN's failure to protect the public interest and about the undue influence exerted at ICANN by the registries who stand to benefit from this misguided policy.

Who owns the value in legacy domain names?

The legacy domain extensions, such as .com, .net, .org and .info have no clear owner, which creates confusion as to who is entitled to benefit from the enormous value in these name spaces. These extensions were created through the U.S. Government, entrusted to ICANN, which in turn contracted with various entities to operate them. These registry operators are service providers, not owners.[1]

This confusion does not exist with country code top-level domains (ccTLDs), such as .uk, .de, .nz., .au, and .in. With the ccTLDs, it is clear that these are assets of each respective nation, under the control of the relevant domain authority, not owned by a third-party registry provider. ccTLD domain authorities have demonstrated their ability to look out for the public good by treating the registry operators as what they are — service providers. At times, the ccTLD authorities have put the contract to operate the ccTLD registry out for competitive bid, which usually results in lower fees charged by the registry service provider. If ICANN creates an unstable pricing environment in all gTLDs in which registries can raise prices at will, then registrants and businesses may start migrating to those ccTLDs that offer stable, predictable pricing.

ICANN appears fearful of taking on the responsibilities of ownership, which include setting prices and keeping the legacy registries in their place as service providers. By ducking its responsibilities, ICANN has failed its obligations to the individuals and businesses who are domain registrants, and instead are turning them over to be fleeced by the registries.

Legacy domains and new gTLDs are crucially different

Like a maître d' who acts as if he were the restaurant owner, the legacy registries were engaged to provide a service but wish to be treated as owners, with all the profits that come with ownership. Unlike the registries that won the right to sponsored new gTLDs, the legacy registries did not create the name spaces, did not risk their capital to purchase them, and as a result are not the owners of the legacy name spaces.

Due to ICANN's failure to assert ownership of the legacy extensions, the legacy registries have stepped into the void and are now successfully masquerading as owners of the legacy extensions. ICANN staff is now pushing this false equivalence, as it is justifying removing price caps on legacy registries in part to achieve:

"the goal of treating the Registry Operator equitably with operators of new gTLDs and other legacy gTLDs utilizing the base registry agreement".[2]

The new gTLD operators often paid millions of dollars, and in some cases tens of millions of dollars for the right to all of the value in their sponsored name spaces and for the right to charge whatever price they wish for their domain extensions, that were turned over to them as unpopulated spaces with no existing registrants. The legacy name spaces were created as a public benefit where the value of the domain names was offered to the public at low, and for a time, declining rates. Unlike the new gTLD registries, the legacy registries did not pay to acquire all the value in the name spaces. Unlike the new gTLD registries, the registries of the legacy extensions were entrusted with name spaces that contained millions of existing registrants. Yet ICANN now proposes to simply hand over the value contained in the legacy name spaces to those organizations managing the legacy extensions.

One of the apparent reasons that registration rates in the new gTLDs have fallen far below expectations is that new registrants are understandable leery of building their online presence on a domain name whose price could vary dramatically from year to year. In 2017, Uniregistry, the owner of 27 new gTLDs, announced price increases of up to 3,000% for some of its name spaces.[3] When a prospective new registrant has the choice between a domain name with stable pricing, in particular in .com where the U.S. Government has stepped into the void created by ICANN and is looking after the public interest by mandating price stability, it is no surprise that new registrants prefer a stable pricing environment to an unstable pricing environment. Indeed, despite the availability of hundreds of new top-level extensions with wide-open name spaces, and despite many being offered for low, "teaser", first year registration fees, in 2018 the growth in the number of registered .com domain names outpaced growth in the number of registrations in all the new gTLDs combined by over 2 to 1.[4]

Some new gTLD registries are learning the importance of offering stable pricing since lack of price stability alienates potential registrants. Uniregistry backtracked on its plan to drastically increase renewal rates on all registrants in certain extensions, by instead grandfathered in existing registrants at the old prices.[5] The largest new gTLD registry, Donuts, took a similar approach when it sharply raised prices on many of its domain names but grandfathered in the current registrants at the lower price levels.[6]

Disregarding the demonstrated and common-sense desire of domain name registrants to build their online home in a stable pricing environment, and ignoring the lessons on price stability that even the new gTLD registries are learning, ICANN is pushing forward to destroy the last bastion of stable pricing under its purview by negotiating the removal of price controls in the legacy extensions. ICANN is choosing to take the worst aspects of the new gTLD program and force them on legacy registrants.

Legacy extensions, especially .com and .org, are largely insulated from price competition

ICANN's move to eliminate price caps will render registrants in the legacy extensions vulnerable to exploitative pricing from the legacy registries. When legacy registries seek to attract new registrants, they compete with other registries. But when legacy registries charge their existing registrants to renew their domain names, they are largely shielded from price competition since once established on a particular domain name it is not easy for many registrants to switch to a different domain name.

For the legacy registries, in particular .com and .org, renewals from their base of established registrants is a far greater source of revenue than from new registrations. As a result, they primarily operate in an environment where they are not subject to effective price competition. Where competition does not restrain prices there is a market failure and external price caps are required for the benefit of registrants. Otherwise the proposal to remove the price cap, on .org in particular, could force registrants to absorb large price increases while receiving no corresponding benefit in return.

The Red Cross, for instance, has spent 20 years building an online brand and goodwill in its RedCross.org domain name. The Red Cross cannot obtain the RedCross.org domain name from any registry other than from the .org registry. There is no other domain that it can substitute for RedCross.org that would not destroy the millions of dollars of goodwill that has been invested in this domain name. The .org registry is the monopoly, sole-source supplier of the RedCross.org domain name.

It would be cold comfort to the Red Cross if the .org registry increased the renewal price for the RedCross.org domain name to $100,000 per year and ICANN staff blithely reassured the Red Cross "not to worry, you can move to RedCross.group or RedCross.info for less than $25 per year". Giving up its RedCross.org web presence would require that every staff email would need to be updated with every contact. Every link to the RedCross.org website would need to be updated. The search engine ranking of the Red Cross website would be jeopardized. Yet all these switching costs likely pale in comparison to the loss of the credibility, reputation and trust associated in the public awareness with the RedCross.org domain name. If the Red Cross were to move to RedCross.group or RedCross.info, would potential donors trust that they were dealing with the real Red Cross and not with an imposter? Starting over without the benefit of its 20-year web presence on RedCross.org would require the Red Cross to embark on a costly, disruptive and risky campaign to educate its community and to promote its new web address.

The availability of cheaper, alternate domain names does not benefit the Red Cross, nor any of the hundreds of thousands of other non-profits who have established web presences on .org domain names. The organizations need exactly what ICANN is proposing to deprive them of — the assurance of stable pricing for their existing .org domain names, not the illusory benefit of the availability of a move to a different lower cost domain name.

An example may help. Let us say that you live in a long-established city of millions of people. One day some state officials announce that they are going to remove all price controls from the electric company for your city. The electric company will soon be able to charge whatever it wishes to provide you electricity. The state officials say that it is only fair for your electric company to be able to set fees at any level that it chooses since the state recently allowed the electric companies in some new developments to set fees at whatever level they chose (and these companies paid handsomely for the privilege). Those electric companies are not happy because so few people want to move to their developments (in part, you think to yourself, because the residents have no protection against being overcharged on their electric bill), so to make things even, all citizens in the state will lose their protections from being overcharged on their electric bills as well. When you express concern that your electric company might jack up your rates, the state officials offer the reassurance that the electric company would not be able to increase your rates that much because if you did not like the higher rates you could sell your house and move to a different city. The rationale that "don't worry, you can move" that is clearly absurd in the example from the physical world is being touted as reasonable when applied to the virtual world of domain names. Indeed, the disruption may be even greater in the virtual world of the Internet where one's domain name is indistinguishable from one's online brand.

In the physical world, only a compromised and out-of-touch government that did not require the consent of the governed would adopt such policies. What does it say about ICANN that it supports the interests of the registries rather than registrants?

ICANN's role in setting price caps in legacy domain names is critical for the welfare of registrants

The definition of market failure due to a monopoly includes when a "firm has exclusive use or ownership of a scarce resource".[7] The .org registry has been awarded the exclusive rights to the .org name space, and this is the only name space that matters to those registrants who have an entrenched web presence built on a .org domain name. As explained by Elliot Noss, the CEO of the registrar Tucows, it is important to be quite clear when discussing monopolies in connection with domain name registries. As Noss stated, the domain name that matters to him is tucows.com, and Verisign has the monopoly over that domain name. If Verisign were to charge him $10 million per year to renew the tucows.com domain name despite "the bile that would rise" in his stomach he would likely pay that renewal fee because it is only through Verisign that he can obtain the tucows.com domain name and because the domain name is that vital to his business.[8]

ICANN is creating a situation where the domain name registries are able to exploit their monopolies over all the online brands that exist within their name spaces to charge extortionate prices should they so wish. This is an example of market failure. The proper remedy in cases of market failure is "setting price controls".[9] Rather than expose the captive registrants within each legacy domain name extension to the possibility of exploitative pricing, it is ICANN's proper role to remedy the market failure created by the lack of meaningful competition by setting reasonable price controls.

Price restraints are appropriate when the "restraint alleviates a market failure".[10] In 2006, ICANN itself argued that its award of the .com registry to Verisign as a sole source supplier with presumptive right of renewal did not violate antitrust laws because ICANN's role was to impose the necessary price constraints for the benefit of consumers. ICANN denied that the "limitations placed on VeriSign's authority to raise prices could offend the antitrust laws when, in a single supplier market, price caps are, if anything, procompetitive”.[11] ICANN appears to have forgotten what it knew in 2006, that in a single supplier market, such as with .org domain names for non-profits that have long used a particular domain name as its online home, price caps are necessary to protect registrants from the market power that a sole source supplier has to increase prices without fear of competition.

Some might argue that no registry would sharply increase their prices because this would make them unattractive to new registrants. But this too is a fallacy. A registry with a large base of captive residents has no need of new registrants, it can make more money from overcharging its existing registrants than it can from lowering prices in an effort to compete with every other registry for a relatively insignificant number of potential new registrants.

Since ICANN came into existence, we have yet to see any evidence that competition has caused prices to fall. Once the registries were free to raise prices, the prices charged by the legacy registries seem to always go up, never down. The registries' own expenses are going down- Internet infrastructure and connectivity costs are falling rapidly. All the evidence demonstrates that the legacy registries are insulated from competition and can keep increasing prices and can keep boosting their profit margins because they have a base of captive registrants that is forced to absorb price increases. Why the magical thinking that despite all the evidence to the contrary that legacy extensions are affected by competition that will restrain them from continuing to raise prices?

Let us use New York City as a real word example. New York City has a population of over 8 million people. Will it make more money by raising taxes on its residents, even if it may drive some away and may discourage some people from moving to NYC, or by reducing taxes on its residents in order to attract a few thousand new people each year who might otherwise move elsewhere? When New York City needs more tax revenue it raises taxes. It does not pretend that competition from other cities would require it to lower taxes in order to attract new residents and that the taxes from those new residents would more than offset the drop in taxes collected from its existing 8 million residents. Indeed, even if the taxes were increased, some people would still move to NYC because they need to be there, just as .com and .org attract many new registrants each year even though there are much cheaper domain name options available. For similar reasons, New York state is able to impose a state income tax of up to 8%[12] even though Florida does not have a state income tax. When legacy registries, like .com and .org, have large existing populations of registrants who cannot easily pick up and move, they are largely insulated from competition and they can safely increase prices without fear of seeing a mass move of registrants to other registries.

This dynamic is borne out by registration numbers in .org. The number of registrations in .org is gradually declining, from 10.4 million as of March 31, 2017 to 10.2 million as of December 31, 2018.[13]

Period .Org registrations (millions) .Com registrations (millions) 2017 Q1 10.4 128.4 2017 Q2 10.4 129.2 2017 Q3 10.3 130.8 2017 Q4 10.3 131.9 2018 Q1 10.3 133.9 2018 Q2 10.3 135.6 2018 Q3 10.3 137.6 2018 Q4 10.2 139.0

.Org is already failing to attract net new registrations. It is not aggressively competing with the new gTLDs by offering discounted registration fees. On the contrary, it is milking its long-established base of registrants for revenues by steadily increasing fees. The .org registry is in the "cash cow" phase of its life cycle. Cash cows are "part of mature, slow-growing industries, have a large chunk of the market share and require minimal investment to thrive."[14] PIR, like managers of other cash cows, increase revenues not primarily by attracting new customers but by raising prices on their existing customers.

If PIR raised renewal fees to $50, it could increase its revenues from $90 million per year to upwards of $500 million per year. This compares to ICANN's annual operating budget of $140 million.[15] Not all registrants would renew, but unless the rate of those failing to renew hit 80%, PIR would make more money with a $50 renewal fee than by maintaining the renewal fee at the current wholesale rate of $9.93.

That registrants have the option of renewing for 10 years at current rates only delays the inevitable and does not convert a misguided policy into a sensible one. A secondary consideration is that being coerced into prepaying one's renewal fees 10 years in advance to avoid the threat of a price increase also puts registrants in a worse position that they are in now and produces a large windfall for the registry. Further, not all registrants will be aware of the elimination of the price caps and the risk that they face from higher fees, so some registrants will not renew in advance and those registrants would soon face the prospect of higher fees.

Once higher renewal fees go into effect, are .org registrants likely to pay higher renewal fees, or would they stop paying to renew? The .org name space is home to a large global community of established non-profits for whom the value of an online identity incorporating ".org" is quite high. Domain investors, who are often quite price sensitive, do not invest heavily in .org domain names.[16] Based on the likely composition of registrants in .org, it is reasonable to expect that by and large the .org registrant base would be forced to absorb price increases rather than give up their domain names.

So why stop at $50 renewal rates? The likely supply/demand curve for .org renewals means that PIR may not maximize its revenues at $50 renewal fees, but instead perhaps at $100, $200, or higher. If PIR chose to set renewal fees at $200 per year, it would be extracting $2 billion per year, less those who failed to renew, primarily from other non-profits.

Legacy registries therefore have a strong financial incentive to raise prices on their base of long-established registrants who will be forced to swallow the price increases to avoid the disruption of being uprooted. Unfortunately for the non-profits who are the predominant registrants of .org domains, they may soon be unwilling subjects in the first large-scale experiment on what happens when price caps are removed on a captive population of domain registrants.

ICANN is failing in its role as trustee of the legacy extensions. It has turned over the powers of ownership to contractors hired to run the glorified databases that are the essence of a domain registry. The value in the .com, .net and .org name spaces runs into the billions of dollars. It is in these extensions that most of the Internet economy makes its home. Yet ICANN has turned over these extraordinary valuable public resources to the contracted registry managers and are permitting the registries to act as de facto owners of these name spaces.

ICANN has budget concerns of its own. Why not do as any sensible trustee would and put out the registry services for competitive bid, and then add on sufficient margin to fund ICANN's own operations? Perversely, this is the model that ICANN has adopted in enabling ISOC to fund its operations by marking up prices for .org domains.[17] Between ISOC and ICANN, who should receive the benefits of acting as the owner of the .org name space? Why has ICANN turned over effective ownership of .org to ISOC and now proposes to permit ISOC to mine the .org name space for funds at a level that dwarfs ICANN's own budget?

Disregarded by those who developed the terms for the .org, .biz, .asia and .info contract renewals are the interests of the millions of registrants in legacy extensions. The first major legacy extension to bear the brunt of this disruption is .org. ICANN is proposing to forcibly evict .org registrants from the stable pricing environment they have enjoyed and relied upon for over 20 years into an uncertain and unpredictable pricing environment where they could be subject to sharp price increases from year to year.

ICANN risks a backlash should registrants find themselves at the mercy of exploitative pricing once price caps are removed. If ICANN is dead-set on removing price caps, the only sensible way to do so would be to grandfather existing registrants at current prices. Price caps could be removed on new registrants going forward so that new registrants could choose their new domain name with the awareness ahead of time that there would be no assurance of stable pricing. Existing respondents would be spared a potentially disruptive and exploitative increase in fees without any corresponding benefits and when in many cases they have no choice but to pay the higher fees.