ICANN — A Regulator in Need of Antitrust Oversight

The pending transition of the Internet Corporation for Assigned Names and Numbers away from U.S. government oversight has involved in-depth discussion about how to maintain an open internet free from government control. What has received considerably less attention in these discussions is how ICANN has performed while under U.S. oversight—especially as a regulator. This lack of attention can partly be attributed to ICANN’s insistence that, as its president Göran Marby said at a Senate hearing last week, “ICANN is not a regulator.”

Perhaps not officially, but what ICANN actually does is indistinguishable from a regulatory agency. ICANN, however, is a regulator with a difference. It is not a government agency, but rather a private-sector corporation that is and will continue to be subject to U.S. antitrust laws whether or not its tie to the U.S. government ends. The presence of antitrust oversight is a good thing.

ICANN’s technical function of administering the Domain Name System requires it, albeit indirectly, to “license” the rights to use a top level domain name, such as “.com” or “.net”. ICANN does this through a system of registrars and registries.

This licensing function is similar to functions performed by regulatory agencies. ICANN licenses the right to sell domain names, dictating the terms and conditions under which the registries and registrars operate. Similarly, the U.S. Federal Communications Commission licenses broadcasters and other users of the radio spectrum, dictating the terms and conditions of use. ICANN sometimes holds auctions when there are competing applications for a license, just as the FCC auctions spectrum when there are competing demands to use it.

So, as the clock winds down on ICANN’s contractual relationship with the U.S. government, it is important to ask how well ICANN is performing its regulatory functions. Using the standard criterion for regulation—promoting competition and consumer welfare—it would appear that the U.S. antitrust agencies could provide ICANN some beneficial oversight.

Take the example of Verisign, the longtime operator (registry) of .com: Verisign also operates .net. Together, .com and .net account for 85 percent of the market for generic TLDs, with .com alone accounting for about 75 percent (excluding country code TLDs). It is reasonable to assume that this market share gives Verisign some market power, although a detailed market analysis would be necessary to confirm this.

ICANN recently took two actions regarding Verisign with potentially important competitive implications: First, ICANN extended Verisign’s contract to operate .com, which was scheduled to end in 2018, to 2024 without putting it out to bid by other applicants. At the same time, apparently operating through a third-party bidder, Verisign won an ICANN auction to operate the new “.web” domain name with a winning bid of $135 million.

Are either or both of these actions pro-competitive? Perhaps counterintuitively, the first one is, while the second probably isn’t.

In order for the TLD market to operate efficiently, registries—including Verisign, despite its large market share—should have a quasi-property right in their TLD registry that would give them a presumptive right to renew. Otherwise, these registries would have a diminished incentive to invest the large amounts needed to maintain and improve the quality and security of their infrastructure and services, especially toward the end of the contract period. Opening the contract to rebidding would subject these companies to the risk of losing their investment. Spectrum presents an analogous situation: If spectrum licenses were re-auctioned every 10-15 years, it’s safe to say there would be less investment in our mobile communications networks.

However, the principal goal of ICANN’s program over the last five years to expand greatly the number of new gTLDs—like .web—is to make the gTLD market more efficient and competitive. This objective will likely not be furthered by awarding a potentially major new gTLD—.web—to the company that already controls 85 percent of that market. Awarding the .web TLD to another company would provide competition to Verisign. The greater competition would likely mean lower registration fees for registrants and more responsiveness to their concerns. Even more important, entrants may offer new products and services that incumbents (and their customers) hadn’t envisaged.

There were eight bidders in the .web auction. In most cases involving multiple applicants for a TLD, the applicants work it out among themselves—e.g., by holding a private auction to determine the winner. The losing applicants share in the gains from allowing the winner to bid a lower price, and none of those gains go to ICANN. An ICANN auction is considered a last resort.

Nu Dot Co (backed by Verisign), the winner of the .web auction, was apparently the only participant that rejected the option of a private auction, thereby forcing an ICANN auction. Ultimately, Verisign is paying $135 million for the .web TLD—an amount that presumably reflects, at least in part, the value of protecting its market position in .com (and .net). In effect, Verisign seems to be paying ICANN a share of Verisign’s monopoly revenues in order to maintain those revenues.

In this case, a relatively straightforward antitrust response would entail an in-depth analysis of the competitive implications of the transfer of the rights for .web from Nu Dot Co to Verisign. Indeed, this is the type of transaction that antitrust agencies routinely review under the Clayton Act, which is intended to block acquisitions that “may substantially lessen competition.” A similar competitively focused review authority could also be used even if the transfer were directly from ICANN to Verisign, since both are subject to the antitrust laws.

The transfer of .web would appear to pass the threshold requiring notification of the Department of Justice and the Federal Trade Commission, commencing a review. The antitrust agencies should now do their job.


Thomas M. Lenard is a senior fellow and president emeritus at the Technology Policy Institute.
Lawrence J. White is professor of economics at the NYU Stern School of Business.

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