Investors would have two ways to cope with rising prices.

American Enterprise Institute submitted a comment (pdf) to ICANN about .com pricing during the comment period. Much of it echos Verisign’s own comments on the matter, and that shouldn’t be surprising.

The letter questions the role of domain name investors in the market for domain name pricing and suggests more investigation into the role of investors.

Perhaps the author, Roslyn Layton, could have asked Verisign for data related to this. After all, Verisign kind of invented the idea of domain investing at the top level by introducing premium pricing for high-quality .TV domain names.

But it got me thinking: what does happen to domain investing in an era of increasing wholesale prices?

It’s a difficult question. The last time this happened, most domain investors focused on parking revenue rather than sales. They would look at the cost to renew vs. how much money the domains generated and make their decision that way. It was a simple calculation. And Verisign and investors were able to take advantage of domain tasting to test domains for five days before committing to a full-year registration.

The equation is trickier when it comes to renewal prices vs. selling domains.

Layton posits that investors might reduce their domain holdings in the face of higher prices. This would make more domains available to people at “regular prices” on the primary market.

Let’s consider a domain investor who we will call “Large Portfolio Owner” (LPO). LPO owns one million domains that it sells on the aftermarket.

LPO sells 1% of its domains on the aftermarket each year for an average price of $2,500 each. This generates $25 million in revenue. In addition to the sunk cost of acquiring these domains, LPO has to pay $7.85 million to Verisign and $0.18 million to ICANN to renew the portfolio. We’ll round down to $8 million.

Now, let’s say Verisign increases prices 7% per year for four years starting this year. I’m going to assume that Verisign rounds down to the nearest penny each year, so the price would increase to $10.26 in 2023.

The cost for LPO to maintain its portfolio is now about $10.4 million, assuming it replenishes its portfolio each year. So LPO is making $2.4 million less each year.

LPO has two choices if it wishes to maintain its same profit level. One is to release marginal domains that it calculates have a low chance of selling. As Layton suggests, this would make more domains available at standard prices. However, they would be the ones least likely to appeal to consumers.

The alternative is to raise prices. LPO would need to charge an additional $240 per domain name to maintain its revenue. It’s unclear what impact this would have on the sell-through rate.

In all likelihood, LPO would use a combination of the two methods to maintain its profit levels.

You could certainly argue one impact would be greater than the other, depending on what your own economic interests are. Or if you want to scapegoat domain investors.