Mar, 2001 : Proposed Revision to ICANN-VeriSign Agreements

Marina del Rey, California, USA (1 March2001) ICANN and VeriSign are announcing today a proposed restructuringof the registry agreement covering the .com/.net/.org top leveldomains. If this proposal becomes effective, it will dramaticallyrestructure the relationship between ICANN and VeriSign in anumber of positive ways. As a general matter, it will largelyeliminate the vestiges of special or unique treatment of VeriSignbased on its legacy activities before the formation of ICANN,and generally place VeriSign in the same relationship with ICANNas all other generic TLD registry operators. In addition, itwill return the .org registry to its original purpose, separatethe contract expiration dates for the .com and .net registries,and generally commit VeriSign to paying its fair share of thecosts of ICANN without any artificial or special limits on thatresponsibility.

Linked to this narrative are four documents:the three proposed agreements that, if approved by the ICANNBoard and the US Department of Commerce would replace the existingagreement, and a covering letter from VeriSign to ICANN. Thesewill be discussed at the ICANN Public Forum in Melbourne on 12March 2001, and a web-based public comment forum has been establishedto receive written public comments on the proposed amendments.It is contemplated that the ICANN Board would take action onthese proposed amendments no later than 1 April 2001.

A. BACKGROUND ANDCONTEXT

The existingICANN-NSI Registry Agreement (covering the .com, .net, and.orgregistries) provides (in Section23) that the Agreement will expire on 10 November 2003, unlessNSI (now VeriSign) separates legal ownership of its RegistryServices business from its registrar business within 18 monthsof the signing of the agreement, or May 10, 2001. If that separationoccurs within the meaning of Section 23, the Registry Agreementis automatically extended for an additional four years, or until10 November 2007.

The original purpose of this provisionwas to create an incentive for the separation of ownership ofNSI's registry and registrar businesses, because that was thoughtlikely to be helpful in introducing and encouraging registrarcompetition. The main steps taken to encourage competition werethe agreements by NSI to (1) create the Shared Registration System("SRS"), and (2) to open that system to all ICANN-accreditedregistrars. In addition, to ensure that the NSI registrar businessdid not have any competitive advantage because of its affiliationwith the registry operator, NSI was required in Section21 of the Agreement (3) to provide all accredited registrarswith equal access to the SRS, and (4) to create an operationalfirewall between its registry business and its registrar businessthat prevented any information flow from its registry businessto its registrar business that was not equally available to allcompetitive registrars.

Section 23's incentive for ownership separationwas included as an additional protection, in recognition of thepossibility that the Section 21 protections might not be fullyeffective in opening the NSI registrar to full and fair competition.The automatic extension was seen as an attractive incentive toNSI (VeriSign) to complete an ownership separation of its registrarbusiness from its registry business.

B. CHANGES IN CIRCUMSTANCESSINCE THE ORIGINAL AGREEMENT

In fact, the introduction of competitionin the registrar business has been much more successful, andmore rapidly successful, than anyone anticipated. By all indications,VeriSign has honored its obligations under Section 21; ICANNhas received no substantial complaints about discriminatory accessto the registries operated by VeriSign, and there is no indicationor evidence that has come to the attention of ICANN that VeriSignhas not fully and effectively erected a complete firewall thatprevents any discriminatory information flow to its registrarbusiness. ICANN has nowaccredited approximately 180 competitive registrars, of whichabout 90 are already operating under the SRS. ICANN estimatesthat the average price of a one year domain name registrationoffered by the competing registrars in the .com, .net, and .orgregistries operated by VeriSign has fallen to under $15; priorto the introduction of competition, the only price at which adomain name registration was available was $70 for a two-yearregistration. The range of service alternatives is enormous,from a simple unadorned name registration to a large array ofdifferent packages of services.

Perhaps most relevantly, VeriSign's once-dominantmarket position has been severely eroded. VeriSign's share oftotal registrations has fallen to about 50%, its share of newregistrations to under 40%, and its share of net new registrations(taking into account non-renewals and transfers) to an even lowerlevel. This trend appears to be continuing in 2001.

C. DISCUSSION OFPROPOSED AMENDMENTS AND TIMING CONSIDERATIONS

For all these reasons, when ICANN and Verisignbegan to discuss VeriSign's plans to divest itself of its registrarbusiness so as to qualify for the automatic four-year extensionto operate the .com/.net/.org registries, it quickly became apparentthat the importance and value of the separation of ownershipof VeriSign's registry and registrar businesses to ICANN andthe community had diminished quite significantly over the 15months since the original registry agreement was signed. WhileVeriSign might well wish to retain its registrar business, thefact that separation of ownership will automatically extend itsability to operate the .com/.net/.org registries for an additionalfour years is a powerful incentive to cause that separation tohappen. On the other hand, that ownership separation is clearlynot as valuable to the community or ICANN under today's marketconditions as it appeared it would be at the time the agreementwas signed.

Given these circumstances, the managementof ICANN and VeriSign began exploring whether there was an alternativeset of arrangements that would be more attractive to both parties.The result of those discussions, which have been ongoing sincelast summer but more intensely over the last two months, is aproposal that VeriSign has now made to the ICANN Board to amendthe existing registry agreement.

If this proposal is accepted by the Boardand agreed to by the US Department of Commerce (which must approveany such amendments to the existing agreement), it would dramaticallyrestructure the relationship between ICANN and VeriSign in severalpositive ways. As a general matter, it would go a very long waystoward eliminating the vestiges of special treatment of VeriSignbased on its legacy activities before the formation of ICANN,and in large part place VeriSign in the same relationship withICANN as all other generic TLD registry operators and registrars.

ICANN management believes that there isa persuasive argument that amending the existing registry agreementwith VeriSign as proposed would be of far more benefit to theInternet community, and do more to enhance long-term competition,than would the continuation of the existing agreement. Therefore,we have agreed that we would post this proposal for public comment.

Timing considerations are important; there is a contractual deadlineinvolved. Even if this proposed amendment is approved by theICANN Board, it also requires approval by the US Department ofCommerce because it would involve amending existing agreements.Therefore, as a practical matter, the Board must make a decisionon this proposal no later than 1 April 2001. On the other hand,because this is likely to be of such interest to the communitygenerally, and because it does involve a significant change inthe most important of ICANN's contractual agreements, it is importantthat there be ample time for community comment and Board considerationof that comment. Therefore, it is contemplated that time willbe provided during the Public Forum in Melbourne for discussionof this proposal. In addition, a web-basedpublic comment forum has been established to receive publiccomment. Finally, a request for any comments and recommendationsthey choose to offer has been sent to each of ICANN's supportingorganizations.

Should the Board approve the proposed contractualamendments, they will then be submitted to the Department ofCommerce for its approval. Should the Board decide not to acceptthe proposed amendments, the existing contract will remain infull force, including the automatic four-year extension until10 November 2007, for all three registries if VeriSign complieswith the ownership separation requirement of Section 23.

D. THE SUBSTANCEOF THE PROPOSED AMENDMENTS

The proposed amendments can be summarizedas follows:

1. The existing RegistryAgreement covering .com, .net and .org would be split into threeseparate Agreements, one for each registry.

2. The .org Registry Agreementwould adopt the form of the registry agreements that will beentered into by the new global TLD registry operators. The termof the .org Registry Agreement would be shortened by almost oneyear to 31 December 2002, at which time VeriSign would permanentlyrelinquish its right to operate the .org registry, and an appropriatesponsoring organization representing non-commercial organizationswould be sought (through some procedure yet to be determined)to assume the operation of the registry. In addition, VeriSignwould establish an endowment of $5 million for the purpose offunding the reasonable operating expenses of a global registryfor the specific use of non-profit organizations, and would makeglobal resolution resources available to the operator of the.org registry for no charge for one year and on terms to be determinedthereafter, for so long as it operates the .com registry. Thenet result of this would be a .org registry returned, after someappropriate transition period, to its originally intended functionas a registry operated by and for non-profit organizations.

3. The .net Registry Agreementwould also adopt the form of the registry agreements that willbe entered into by the new global TLD registry operators. Theterm of the .net Registry Agreement would be extended only to1 January 2006, or twenty-two months shorter than the automaticextension in Section 23 of the existing agreement would produce.At that time, the .net TLD registry would be opened to competitiveproposals, under a standard adapted from the existing agreement,but with VeriSign having only the option of rapid arbitrationrather than litigation (as in the existing agreement) to reviewan ICANN decision to select someone else to operate the registry,should that occur.

4. The existing agreementwould be amended to provide that (1) it applies only to the .comregistry; (2) to conform it in many—but not all—respectsto the template of the registry agreements that will be enteredinto by the new global TLD registry operators; (3) to extendits term to 2007 (the four year extension provided by Section23 of the existing Agreement); and (4) to provide a presumptionfavoring renewal of VeriSign's right to operate the .com registry(but only pursuant to a Registry Agreement that conforms to thestandards of other registry agreements in existence at the time)if VeriSign meets the standards set forth in the amended Agreement.In addition, VeriSign will commit to invest no less than $200million in research and development activities, and resultingimprovements, in order to increase the efficiency and stabilityof the .com registry. The net effect of these changes is to grantthe four-year extension already contemplated by Section 23, toencourage investments aimed at improving the operational functionalityand stability of the .com registry, to create a presumption (butnot a certainty) favoring renewal of VeriSign following thatextension, and (by 2007) otherwise to conform the .com RegistryAgreement to the standard of all other global registry agreements.

5. The requirement inSection 23 for the separation of legal ownership of the VeriSignregistry and registrar businesses would be eliminated, but VeriSignwould agree to continue the structural separation described abovefor the term of the Agreements. The present structural separationwould be reinforced by the requirement that VeriSign's operationsbe placed in a separate subsidiary company. The rationale isthat ownership separation is no longer necessary or useful inpromoting competition, so long as the structural separation iseffective in accomplishing the basic purpose. A relevant factin this regard is that the registry agreement that has been developedfor other global TLDs requires only structural, not ownership,separation of registrar functions from registry functions. Thisreflects ICANN's belief that there is little if any additionalcompetitive value under today's market circumstances in forbiddingthe registry operator from also being a registrar, so long asit is done is such a way so as not to discriminate against othercompetitive registrars.

6. VeriSign would agreeto permit any ICANN-accredited registry operator (including .org)access to its global zone resolution and distribution facilitiesat terms to be determined. This would provide an option for globalregistries, perhaps especially smaller or specialized registries,to improve their global resolution capabilities in a cost-effectiveway.

7. In all three of thesenew registry agreements, the existing limits on VeriSign's responsibilityto share in the cost recovery efforts of ICANN would be amendedto conform to the relevant provisions of the registry agreementswith the other registry operators that have been negotiated.This would have the practical effect of generally eliminatingspecial treatment of Verisign in the cost recovery process, andplacing it on the same footing as all other registry operatorswith respect to ICANN fees.

E. CONCLUSION

ICANN and VeriSign management believe thisproposal offers many significant benefits to the community—notthe least of which is that it would lead to regularizing thecontractual and financial relationship between VeriSign and ICANNso that it is in most respects the same as that of any otherregistry operator or registrar. The elimination of special rulesor provisions dealing with VeriSign is an important step forwardin the ICANN process.

In addition, the return of the .org registryto its original intended use, especially with a financial structurethat ensures its cost-effective operation, and the separationof the arrangements for .net from those for .com by opening up.net to competitive proposals two years before that would happenunder the existing agreement, also are benefits to the community.Finally, the commitment to make significant investments in themore efficient and effective performance of these registriesare clearly important community benefits, since the stabilityand performance of those registries—and particularly thatof .com, by far the largest domain name registry—are ofgreat importance to the effective functioning of the DNS.

In return for these various commitments,VeriSign would be allowed to continue to act as a registrar onthe same terms as all other registry operators, and have thepresumptive (but not absolute) right to continue as the .comregistry operator. On the first point, in today's market conditionsthere is no significant benefit to the community in prohibitingVeriSign from doing what every other generic TLD registry operatorwill be permitted to do—operate as a registrar so long asthat business operation remains appropriately separate from theregistry business, and there is non-discriminatory treatmentby the registry of all accredited registrars.

With respect to the presumptive renewal of the right to operatethe .com registry, this also seems appropriate under the circumstances.Absent countervailing reasons, there is little public benefit,and some significant potential for disruption, in regular changesof a registry operator. In addition, a significant chance oflosing the right to operate the registry after a short periodcreates adverse incentives to favor short term gain over longterm investment. On the other hand, the community, acting throughICANN, must have the ability to replace a registry operator thatis not adequately serving the community in the operation of aregistry.

The registry agreements for the new TLDs try to balance theseobjectives by creating a fixed term, with an open renewal period,but allowing a right of first offer to the existing operator.In addition, they require compensation from any successor operatorfor the future revenue streams properly traceable to investmentsby the former operator. With respect to the .com registry, itssize make a change in the registry operator more significantthan for smaller registries, and potentially more disruptive.Therefore, a presumption of renewal for this registry, assumingthat the stated criteria of service to the community have beenmet and can reasonably be predicted to be met during the renewalperiod, is more appropriate. This leaves the ICANN Board theability to change the operator if necessary, but only if it candemonstrate that such a change would better serve the community.This seems an appropriate balance in these particular circumstances.

ICANN looks forward to comments from thecommunity on this proposal, both on the public forum and at theMelbourne meeting.