Verisign and the US government have agreed to extend the cooperation agreement. The extension allows the registry operator <.com> – Verisign to increase the wholesale price of registration and renewal fees for domain names <.com>. Article 2(a) of Amendment 35 to the Cooperation Agreement allows for price increases of up to 7% per year in each of the last four years of each six-year term of the Registry Agreement <.com> with ICANN. In other words, by 2024, the annual wholesale price for registering and renewing domain names in the .com registry can reach $10.29, a 30% increase from 7, $85 current.
ICANN consent is still required
However, in addition to the Cooperation Agreement, a price cap is also set by the ICANN Registry Agreement <.com>. Therefore, before proceeding with a price increase, Verisign will need to obtain ICANN’s approval because the Registry Agreement <.com> current holds the price at $7.85. However, there is a strong expectation that ICANN will allow the increase because a) in the past, ICANN has consented to price increases on several occasions; b) ICANN has a stake in every renewal and registration and c) at a time when ICANN is facing budget cuts, additional money in the fund is most welcome. For these reasons, the current state of affairs suggests that ICANN will allow a price increase.
Why is this price increase particularly relevant?
With over 138 million domain names <.com> registered and a market share of 84%Verisign has a dominant position in generic top-level domains (“gTLD“) market. Add to that the fact that 485 of the Fortune 500 companies use a <.com>we can conclude that <.com> is the most dominant brand extension.
Due to the popularity of <.com>users expect to access a website through an extension <.com>. Therefore, it can be said that among the top-level domains there is no real substitute for <.com>. But even if there were, the cost of moving from <.com> to another top-level domain can result in high transaction costs. Therefore, the popularity of <.com> together with network effects, high switching costs, and sheer practical impossibility deter registrants from migrating to any other top-level domain (“TLDs“) extension. Simply put, Verisign’s significant market power allows them to raise prices without fear of losing customers to competitors.
Is there a justification for the price hike?
Given Verisign’s dominant position in the market, which makes it resistant to any competitive decision, the important question is whether there is a justification for an increase in the cost of <.com>.
Registry operating costs <.com> are quite modest and experts estimate that Verisign has fixed expenses from $1.00 for $3.50 per domain name per year. Moreover, due to the rapid development of technology, it is expected that in the coming years, the operation of the registry will become even cheaper than it is today. While the registry operating price <.com> does not increase, the number of domains <.com> increased by 135% from 59 million domains registered in 2015 to 138 million in 2018. Therefore, any price increase is directly reflected in their bottom line. Verisign is an extremely profitable organization with a gross profit margin exceeding 80% in 2017 when the company accumulated a gross income of 972 million on 1.17 billion in revenue.
Even if Verisign’s profitability is not at stake, as a private company it certainly has a legitimate goal of maximizing its profits. Therefore, even if there is no pressing economic need for the price increase at this time, Verisign obviously has an interest in generating revenue for its shareholders like any other company. While end users might resent paying more money without a commensurate increase in operating expenses or improved service, Verisign’s motivation to increase revenue is not unprecedented among companies. Nevertheless, the legitimacy of the eventual decision to lift the price freeze could be questioned given the fact that Verisign only provides technical services for the TLD registry it operates and does not actually own the gTLD. <.com>but that would be for ICANN to deal with once the registry agreement amendment process begins.
The U.S. Department of Commerce provided further justification for the price hike in the preamble to Amendment 35 to the Cooperation Agreement where it is stated that the Department “notes that ccTLDs, new gTLDs and the use of social media have created a more dynamic DNS market;and that one of the purposes of this amendment is “offer price flexibility for the registration and renewal of domain names in the .com registry.”
In light of this, it is truly undeniable that the domain name market is now much more dynamic than it was ten years ago. The expansion of the domain name space that emerged with the introduction of new gTLDs in the 2012 gTLD application cycle created many alternatives that caused some registrants to migrate from <.com> to newly introduced gTLDs. Additionally, the widespread use of social media has prompted some members of the small business sector to drop their domain registrations. <.com> and to limit their internet presence only to Facebook, Instagram and similar platforms. While the aforementioned changes in the DNS market are capable of disrupting the dominant position of <.com> and therefore to provide pricing flexibility to Verisign is somehow understandable, the question is whether the extension of the cooperation agreement which, hypothetically speaking, allows Verisign to increase prices by approximately 30% of here 2024, that’s right. To properly address this issue, further economic analysis is needed. However, with the more competitive DNS market now offering more options to registrants than ever before, Verisign may think twice before proceeding with the price increase. That’s why no one can guarantee that Verisign will increase registration and renewal fees. <.com> up to the maximum price allowed, because such a bold move could easily backfire.
Who will be hurt?
The ultimate price for domain name renewals and registrations is set by ICANN-accredited registrars (such as GoDaddy, Tucows Domains, NameCheap, etc.) and consists of wholesale price + Registry Office. Therefore, the increase in the wholesale price will certainly encourage registrars to charge their customers more for domain name registrations and renewals. <.com>. Due to the importance of the extension <.com>, the vast majority of registrants will comply with the fee increase. Therefore, rising prices will impact virtually all consumers, including non-commercial users, small businesses, corporations, domain name investors, and more. Accredited registrars are also vulnerable to price spikes as they will need to increase their fees in order to remain profitable. However, it should be noted that the extent of the damage will vary, with registrars and domain investors being the most affected, while the majority of users who consist of registrants maintaining only a few domain registrations will feel the hardly the price increase.
The extension of the cooperation agreement allowed Verisign to enter into discussions with ICANN to amend the registry agreement <.com> and negotiate the increase in the price of the registration and renewal fees of <.com>. Verisign’s dominant position in the TLD market as well as the impact that the price increase will have on all stakeholders within the ICANN community will certainly attract the attention of the global stakeholder community and generate much debate. It remains to be seen how ICANN will manage to reconcile the conflicts of interest between Verisign and the registries on the one hand and the rest of the community on the other. Yet one thing is certain: any new initiative by ICANN in this area will be subject to scrutiny by the community.