ICANN Releases Two “Whitewash” Reports to Defend its Positions on new gTLDs

Reports argue new gTLDs should move forward with no price caps.

I’ve been duped.

When ICANN announced it was commissioning a report on the effect of price caps on new TLDs, I assumed it would seek an unbiased report. Instead, ICANN used domain owner’s money to hire an economist to defend its views.

ICANN released two “studies” by University of Chicago economist Dennis Carlton:

Preliminary Report of Dennis Carlton Regarding Impact of New gTLDs on Consumer Welfare (pdf)

Preliminary Analysis of Dennis Carlton Regarding Price Caps for New gTLD Internet Registries (pdf)

The first report about consumer welfare (i.e. competition) argues that new gTLDs will create competition amongst registries in TLDs, but that trademark holders and existing domain owners needn’t worry because new gTLDs won’t be very successful.

Sound conflicting? It is. Here’s an excerpt:

I conclude that ICANN’s proposed framework for introducing new TLDs is likely to improve consumer welfare by facilitating entry and creating new competition to the major gTLDs such as .com, .net, and .org

Followed shortly thereafter by:

It would not be sensible, from an economic perspective, to block entry of gTLDs to prevent potential trademark concerns. Indeed, the relatively small number of registrations achieved by new gTLDs such as .info and .biz introduced in recent years suggests that the need for defensive registrations in new gTLDs is limited.

And then:

While several new gTLDs have been introduced in recent years, these have achieved only limited success in attracting registrants and Internet activity.

Hmm. There’s a need for new TLDs. But don’t worry, trademark owners, these new TLDs won’t matter so you won’t have to pay for defensive registrations.

But wait, now let’s switch back and say they will promote competition, since that’s ICANN’s view:

An increase in the number of gTLDs increases the number of alternatives available to consumers, and thus offers the potential for increased competition, reduced prices, and increased output.

The report also argues that the introduction of new TLDs will foster innovation as .com faces competitive pressure (please ignore the aforementioned arguments to consider this):

Removing entry barriers is also likely to foster innovation. In the absence of competition from new gTLDs, registries and registrars that serve .com and other major TLDs face limited incentives to develop new technologies and/or improved services that may help attract new customers.

Here’s the problem. That’s assuming a free market, which the registry system is not. If ICANN removed the presumptive right of renewal, it’s true that competition may push some registries to innovate. I doubt it with .com, but it may do it for other TLDs.

The report then discusses some examples of how new TLDs could be beneficial. These examples, such as the use of .generalmotors.com or .cars suggest that finding information will be easier with new TLDs. I don’t understand how this will be easier than with existing TLDs.

The second report about pricing makes rational arguments that letting new TLD registries set their own prices will be kept in check by competition. This is mostly true. But the report manages to gloss over this little issue of existing TLDs being able to change their prices. Existing registry contracts give registries the right to argue for clauses in other registry’s contracts. So VeriSign (NASDAQ: VRSN) can argue that it shouldn’t be subject to pricing caps.

The argument in the report that “a supplier that imposes unexpected or unreasonable price increases will quickly harm its reputation making it more difficult for it to continue to attract new customers” would not apply to VeriSign. It could raise it’s prices by $25 in a year and businesses would just be forced to pay it.

I don’t believe Carlton was aware of this contract clause. He uses price caps on existing TLDs as rational for letting new TLDs set their own prices:

The fact that major TLDs are currently subject to price caps further constrains the ability of new gTLD registry operators to charge non-competitive prices.

The reports discuss the high switching costs between TLDs (e.g. changing your web site from dnw.com to dnw.org) but completely underestimates them. The switching costs are massive. It’s virtually impossible to switch to a new TLD without irreparable harm to your company. That’s why renewal cost increases must be capped. Letting new TLDs set initial registration prices is OK, but giving them free reign to jack up prices on existing web site owners each year is not.

Fool me once, shame on you. Fool me twice, shame on me.