Long abstract

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This paper addresses two areas. First it provides an overview of the structure of the market for domain name registration with a particular focus on generic Top Level Domains (gTLDs). The aim of this work is to provide a review of the reforms introduced by ICANN and their impact. The second focus of the paper is a discussion of the main procedures available to ICANN to allocate resources.

ICANN’s management of the Internet’s domain name system (DNS) is aimed at benefiting users of the Internet. This goal needs to be borne in mind in considering changes to the DNS, because the networks it supports have become a critical part of economic and social development. Potential efficiency gains, in managing the DNS, need to be weighed against their potential impact on the wider economic endeavours and social activities the Internet supports. ICANN is right to be cautious to preserve the benefits wrought by the Internet and to be conscious of the need to enable the benefits which can accrue from further innovation and competition. The paper concludes that ICANN’s reform of the market structure for the registration of generic Top Level Domain names has been very successful. The division between registry and registrar functions has created a competitive market that has lowered prices and encouraged innovation. The initial experience with competition at the registry level, in association with a successful process to introduce new gTLDs, has also shown positive results.

As with any reform, there have been challenges and some further initiatives may be required. One challenge has been for the new gTLDs to win recognition and acceptance by users. The Domain Name System’s need to have unique identifiers, and a consequent need for there to be a single registry for each name, means that any registry can exercise a degree of monopoly power over the domain for which it has responsibility. To some extent this can be addressed by competition between registries, but it will also require ongoing contractual oversight by ICANN. The extent to which such a requirement may be lightened depends on the future success of ICANN’s reform process, in terms of the acceptance of new gTLDs by the market. However, the large investment many users have in their domain name makes the cost of transfer between registries, and therefore a change of top level name, prohibitive for them.

The existence of defensive registrations, as well as a combination of domain name speculation and traffic aggregation, makes it difficult to assess the real demand for the new gTLDs that have been introduced. Initial experience suggests that user demand for new names may be relatively limited. Much of the user focus is still on .com and the other traditional names, with market acceptance of new names being lower than projected. For many existing users, new gTLDs simply represent an additional cost in terms of defensive registrations. On the other hand supporters point to the promise of new services and opportunities for broadening participation that they say will arise with the creation of new names. This potential means that there is support in some sections of the business community for the creation of some
new names.

ICANN faces a number of allocative decisions over the coming years, some of which relate to the creation and allocation of new resources. For many of these decisions, the paper does not seek to be prescriptive as they are decisions to be taken by ICANN in consultation with all stakeholders. There is, however, an additional reason. In some instances, the actual resource to be allocated needs to be defined, so that issues such as whether scarcity exists can be determined prior to deciding the most appropriate allocation procedure. Accordingly, the paper discusses the pros and cons of different procedures, such as auctions and comparative selection, to encourage broader discussion. In contrast, for those resources that are already in existence, and precisely defined, firmer advice can be proffered.

On balance, where scarcity exists the economic arguments favour the use of auctions in some form, in relation to the goals set by ICANN for allocation procedures. They are particularly strong in relation to allocation decisions related to existing names and where a ‘tie-breaker’ is needed during a comparative selection procedure for a new name. In all cases where auctions are used, the best elements of comparative selection procedures could still be incorporated at a pre-qualification stage using straightforward, transparent, and objective procedures that preserve the stability of the Internet. Pre-qualification procedures, prior to the use of auctions, as a final allocative step for new names, could deal with concerns
that a standalone auction might otherwise engender among the Internet community. The choice to be made by ICANN does not have to be purely one process or another but could be a combination of auctions and pre-qualification.

Most concerns that might apply to using auctions as a tool to allocate new gTLDs do not apply to any decision on the future allocation of existing gTLDs. For example, there seem to be few, if any, obstacles to ICANN auctioning the right to be the registry responsible for .net as an adjunct to pre-qualification procedures. Indeed, there would be clear and demonstrable benefits in meeting the objectives set by ICANN. An auction would provide a transparent and verifiable mechanism for the market to value .net appropriately and avoid the pitfalls associated with comparative selection. Such an auction could also act as a practical demonstration, for auctions, in relation to other allocative choices as and when they arise.

A further issue ICANN could consider is whether the division between registry and registrar needs to apply to relatively small sponsored top level domains. One option would be to create a threshold number of registrations below which registries would have the option to sell second level domains, direct to their community, with appropriate safeguards. An example would be to allow .museum to market directly to their community.