I received two LinkedIn requests from stock analysts yesterday asking for my thoughts on what Verisign (NYSE:VRSN) will be able to charge for .com domain names going forward. I suspect this is in response to Ted Cruz’s most recent letter.
Analysts typically want a lot of my time for free so they can make boatloads of money for themselves. So instead of spending time with each individually, here’s my take on .com pricing.
Recent history of .com pricing and why it matters to Verisign:
Verisign’s contract to run .com was renewed in 2012, but there was a wrinkle.
Its previous six-year contract enabled it to raise prices 7% in four of the six years of the contract. Verisign took advantage of each of these increases, ending the contract with a $7.85 wholesale price.
ICANN and Verisign agreed to a similar deal for the six-year contract commencing 2012, but the U.S. government stepped in and said the price increases were unwarranted. It froze the price at $7.85 per year until 2018.
The contract still allows Verisign to increase prices for .com in one of two ways:
1. It can petition for removal of the price cap if it can prove to the U.S. Department of Commerce that market conditions no longer warrant price restrictions. It will have to demonstrate “that competition from other top level domains, use of alternative Internet navigation techniques (including search engines, browsers and URL shorteners, among others), reduced demand for domain names, or other factors are sufficient to constrain Verisign’s pricing of Registry Services at the current Maximum Price.”
2. It can show that a new Consensus Policy or extraordinary expense “from an attack or threat of attack on the Security or Stability of the DNS” raised its costs.
A small price increase means big money to Verisign. There are nearly 128 million .com domains registered. If the price is increased 7% from $7.85 to $8.40, that’s another $70 million of pure profit per year for Verisign.
The .com contract extension:
ICANN is about to extend Verisign’s contract to run .com until 2024. The current .com contract doesn’t expire until 2018, but the extension is being made early to tie the expiration date to the new root zone maintainer agreement.
The root zone deal was previously part of a deal between Verisign and U.S. National Telecommunications and Information Administration (NTIA). The contract will now be direct with ICANN as part of the U.S. government ending “its role in the internet.”
The ICANN extension through 2024 does not include a price increase. It maintains the status quo price of $7.85 set the last time the contract was renewed.
How Verisign could still get a price increase:
But pricing wasn’t a discussion for the contract extension. The idea was that pricing would be discussed again when Verisign’s current agreement, Amendment #32 to the Cooperative Agreement with the U.S. government, expires in 2018.
Although it’s not entirely clear to me, I think there are two ways Verisign can get a price increase. One would be to petition the U.S. government based on the market power clause in its current contract. Another would be to strike an agreement with ICANN to raise prices, either for no reason or due to some Consensus Policy, and then this would be presented to the U.S. government for approval.
What are the odds of a price increase? On recent investor calls, Verisign CEO James Bidzos has hinted that he thinks the domain name market is moving closer to the point at which Verisign might be able to trigger price increases.
From a market power perspective, I think this point is way, way off. If you’re looking at competition in terms of other top level domains, other navigation techniques or reduced demand for domain names, that seems like something that’s at least ten years out.
Alternative domain names aren’t making a dent. Search engines, apps, etc. are important for navigation, but this hasn’t increased significantly since the last renewal. And there certainly hasn’t been a reduction in demand for domain name registration.
It’s possible that Verisign bought .web to jumpstart new TLD acceptance as a way to ultimately convince the government that .com no longer has market power. It will have to sell a lot of .web domain names to prove that point.
Take a close look at that contract language in the Cooperative Agreement, though. Verisign would have to show that there’s enough competition or reduced demand that market forces would push Verisign to keep a price of about $7.85. The entire point of removing the price cap would be to increase prices. It’s a circular argument, isn’t it?
A more likely (or nearer) prospect is that Verisign and ICANN agree that price restrictions should remain but be increased. ICANN might be shy about doing this after the U.S. government shot down its last attempt. And, let’s face it, if .com were put out to bid, other registries would offer to run it for less than a couple bucks per domain name. (It won’t be put to bid since Verisign has a contractual right to renew.)
Still, I could see ICANN agreeing to a small increase to make Verisign happy and then see what the Department of Justice thinks. It could do this under the guise of new policies increasing the cost to run .com.
What the U.S. government’s role change for managing the internet means for its role in approving price increases:
There’s another wrinkle in this whole pricing equation.
Some people have asked if the government dropping its role in certain aspects of domain management might mean it can no longer control .com pricing.
I wish I had a clear answer, but I don’t.
The NTIA told me the transition doesn’t eliminate its role in setting prices. Afterall, the Cooperative Agreement between Verisign and the U.S. remains.
But what incentive does Verisign have to continue the Cooperative Agreement going forward?
I think the U.S. government will always be able to exert control over pricing because of the anti-trust hammer, and perhaps the settlement between ICANN and Verisign last decade to end a dispute.
Senator Ted Cruz has been on a mission to halt the elimination of the U.S. government “handoff of the internet.” His most recent letter to the DOJ asks questions about .com pricing. It’s just one more letter in a long line of questioning Cruz has put forth, so I don’t put much stock in his concern over .com prices. But it shows that the government is paying attention and elected representatives might protest a .com price increase.