Of domain name prices — The economics

ICANN has a duty to cap renewal prices of domain names.

Today is the last day to comment on ICANN’s proposal to lift price caps on .org and .info domain names.

If approved, the registries that run .org and .info will be able to raise prices as high as they want on both fresh registrations and renewals as long as they give notice to the registrars. ICANN has proposed removing price caps on other domains as well.

This is a controversial topic for both domain investors and end users. It’s notable to think regarding the dynamics of domain registration to understand the impact this will have.

Market power at the time of registration

It is technically true that there are a lot of choices when it comes to choosing a domain name. If I want to register example.com, I can choose to register a longer .com, opt for a .net or .info domain, a ccTLD or choose from hundreds of fresh top level domains such as example .xyz.

But let’s face it, people usually want .com. It has extraordinary market power.

Back in 2008, the U.S. Department of Justice Antitrust Division explained (pdf) this in a letter to ICANN regarding fresh top level domain names. It stated:

“Our investigation of the proposed .com agreement generated a number of findings that bear on the likely effect of creating fresh gTLDs. First, we found that VeriSign possesses significant market power as the operator of the .com registry since many registrants do not perceive .com and other gTLDs (such as .biz and .info) and country code TLDs (“ccTLDS,” such as .uk and .de) to be substitutes…

…We also concluded that existing gTLDS would not become a competitive threat to .com registrations since the network effects that make .com registrations so valuable to consumers will be difficult for other TLDs to overcome. Due to a first-mover advantage and high brand awareness, .com registrations account for the overwhelming majority of gTLD registrations…

Even with the introduction of hundreds of fresh top level domains since this letter was written, they have barely chipped away at .com’s market power.

Do other TLDs have market power? I’d argue .org does. Charities and non-profits often think of .org first instead of .com. The antitrust department noted:

“Finally, our investigation of the .com agreement found evidence that other gTLD registry operators may possess a degree of market power. The market power inherent in other gTLDs is less than the market power in .com, but is still material.”

In order of power in the gTLD market, I’d argue that .com is highest and .org is second highest. ccTLDs also have market power in some countries.

The presence of market power for initial registrations suggests that prices for some top level domains ought to be restricted. A non-profit is unlikely to choose .charity over .org unless it is unable to acquire the .org domain. It will usually choose an alternate, longer .org domain ahead of choosing something else. This might not be true in twenty years but it is true in 2019.

For top level domains that don’t have market power and are easy substitutes for each other, controlling initial registration prices is not as notable. That’s part of the reason people are complaining more regarding .org price caps than .info.

High switching costs and market power at the time of renewal

Domain names have immense switching costs. Firms that switch from one domain name to another often spend months planning the move. Some spend years. Some spend hundreds of thousands of dollars.

There are two reasons the switching costs are high.

First is search engines. Google is the lifeblood of many website’s traffic. Even the best-planned domain name transition can have serious traffic (and thus monetary) impacts. When HomeAdvisor switched its domain from ServiceMagic.com it saw a marked drop in traffic and revenue. On its conference call following switching domains, the firm stated:

HomeAdvisor domestic revenue was negatively impacted by a 20% decrease in accepted service requests due primarily to the domain name change.

20% from a domain name change!

It took the firm a while to regain the search rankings it had ahead of.

Even firms that create and manage websites for a living have to expend significant resources to change domain names.

It can be done but it’s very difficult.

The second reason for high switching costs is email. Firms often have thousands of email addresses tied to their domain name. These email addresses are then tied to many online accounts. Switching domain names means updating all the mailboxes technically and all the accounts associated with them. It means emailing all clients and telling them regarding the fresh addresses. It undoubtedly means missing some notable emails when the switch happens.

I have an acquaintance who was offered over $200,000 for a domain name he registered in 1997. He declined since he and his family have email addresses tied to the domain. It would mean changing hundreds of account registrations at websites and countless hours of work.

It’s one thing to switch email addresses if the firm retains its prior domain name and can forward email to the fresh one. But if a firm has to relinquish an old domain name due to renewal costs, it will miss out on this email forwarding and probably miss notable messages.

These high switching costs make domain owners hostages to the registries that operate their domains. They simply have to pay whatever they are charged. The cost to switch is too much.

For this reason, renewal costs must be capped.

How domain registration and renewal costs ought to be managed

Some top level domains have market power at the time of registration. All top level domains have tremendous power over registrants at the time of renewal.

For this reason, ICANN ought to consider capping initial registry fees for top level domains that have some level of market power, such as .com and .org.

It ought to limit prices on all domains at the time of renewal.

The organization has stated that registrants have some protection since they can renew domains for up to ten years at current prices ahead of price hikes take effect.

There are two problems with this.

First, the registries must notify the registrars of the price increase. It’s up to the registrars to notify clients. Busy clients might overlook these notices or not have the cash to renew for ten years today.

Second, and most importantly, this just kicks the can down the road. What does a firm do ten years from now when it has to pay the fresh rates.