ICANN Proposed Revisions to VeriSign Agreements

From: http://www.icann.org/melbourne/proposed-verisign-agreements-topic.htm

ICANN Melbourne Meeting Topic: Proposed Revisions to VeriSign Agreements

Posted: 1 March 2001

As described in the announcement below, ICANN is inviting public comment on proposed revisions to its agreements with VeriSign, Inc. (formerly Network Solutions).

Marina del Rey, California, USA (1 March 2001) ICANN and VeriSign are announcing today a proposed restructuring of the registry agreement coverin= g the .com/.net/.org top level domains. If this proposal becomes effective, it will dramatically restructure the relationship between ICANN and VeriSign in a number of positive ways. As a general matter, it will largely eliminate the vestiges of special or unique treatment of VeriSign based on its legacy activities before the formation of ICANN, and generally place VeriSign in the same relationship with ICANN as all other generic TLD registry operators. In addition, it will return the .org registry to its original purpose, separate the contract expiration dates for the .com and .net registries, and generally commit VeriSign to paying its fair share of the costs of ICANN without any artificial or special limits on that responsibility.

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

A. BACKGROUND AND CONTEXT

The existing ICANN-NSI Registry Agreement (covering the .com, .net, and.org registries) provides (in Section 23) that the Agreement will expire on 10 November 2003, unless NSI (now VeriSign) separates legal ownership of its Registry Services business from its registrar business within 18 months of the signing of the agreement, or May 10, 2001. If that separation occurs within the meaning of Section 23, the Registry Agreement is automatically extended for an additional four years, or until 10 November 2007.

The original purpose of this provision was to create an incentive for the separation of ownership of NSI's registry and registrar businesses, because that was thought likely to be helpful in introducing and encouraging registrar competition. The main steps taken to encourage competition were the agreements by NSI to (1) create the Shared Registration System ("SRS"), and (2) to open that system to all ICANN-accredited registrars. In addition= , to ensure that the NSI registrar business did not have any competitive advantage because of its affiliation with the registry operator, NSI was required in Section 21 of the Agreement (3) to provide all accredited registrars with equal access to the SRS, and (4) to create an operational firewall between its registry business and its registrar business that prevented any information flow from its registry business to its registrar business that was not equally available to all competitive registrars.

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

B. CHANGES IN CIRCUMSTANCES SINCE THE ORIGINAL AGREEMENT

In fact, the introduction of competition in the registrar business has been much more successful, and more rapidly successful, than anyone anticipated. By all indications, VeriSign has honored its obligations under Section 21; ICANN has received no substantial complaints about discriminatory access to the registries operated by VeriSign, and there is no indication or evidence that has come to the attention of ICANN that VeriSign has not fully and effectively erected a complete firewall that prevents any discriminatory information flow to its registrar business. ICANN has now accredited approximately 180 competitive registrars, of which about 90 are already operating under the SRS. ICANN estimates that the average price of a one year domain name registration offered by the competing registrars in the .com, .net, and .org registries operated by VeriSign has fallen to under $15; prior to the introduction of competition, the only price at which a domain name registration was available was $70 for a two-year registration. The range of service alternatives is enormous, from a simple unadorned name registration to a large array of different packages of services.

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

C. DISCUSSION OF PROPOSED AMENDMENTS AND TIMING CONSIDERATIONS

For all these reasons, when ICANN and Verisign began to discuss VeriSign's plans to divest itself of its registrar business so as to qualify for the automatic four-year extension to operate the .com/.net/.org registries, it quickly became apparent that the importance and value of the separation of ownership of VeriSign's registry and registrar businesses to ICANN and the community had diminished quite significantly over the 15 months since the original registry agreement was signed. While VeriSign might well wish to retain its registrar business, the fact that separation of ownership will automatically extend its ability to operate the .com/.net/.org registries for an additional four years is a powerful incentive to cause that separation to happen. On the other hand, that ownership separation is clearly not as valuable to the community or ICANN under today's market conditions as it appeared it would be at the time the agreement was signed.

Given these circumstances, the management of ICANN and VeriSign began exploring whether there was an alternative set of arrangements that would b= e more attractive to both parties. The result of those discussions, which hav= e been ongoing since last summer but more intensely over the last two months, is a proposal that VeriSign has now made to the ICANN Board to amend the existing registry agreement.

If this proposal is accepted by the Board and agreed to by the US Department of Commerce (which must approve any such amendments to the existing agreement), it would dramatically restructure the relationship between ICANN and VeriSign in several positive ways. As a general matter, it would go a very long ways toward eliminating the vestiges of special treatment of VeriSign based on its legacy activities before the formation of ICANN, and in large part place VeriSign in the same relationship with ICANN as all other generic TLD registry operators and registrars.

ICANN management believes that there is a persuasive argument that amending the existing registry agreement with VeriSign as proposed would be of far more benefit to the Internet 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 deadline involved. Even if this proposed amendment is approved by the ICANN Board, it also requires approval by the US Department of Commerce because it would involve amending existing agreements. Therefore, as a practical matter, the Board must make a decision on this proposal no later than 1 April 2001. On the other hand, because this is likely to be of such interest to the community generally, and because it does involve a significant change in the most important of ICANN's contractual agreements, it is important that there be ample time for community comment and Board consideration of that comment. Therefore, it is contemplated that time will be provided during the Public Forum in Melbourne for discussion of this proposal. In addition, a web-based public comment forum has been established to receive public comment. Finally, a request for any comments and recommendations they choose to offer has been sent to each of ICANN's supporting organizations.

Should the Board approve the proposed contractual amendments, they will then be submitted to the Department of Commerce for its approval. Should the Board decide not to accept the proposed amendments, the existing contract will remain in full force, including the automatic four-year extension until 10 November 2007, for all three registries if VeriSign complies with the ownership separation requirement of Section 23.

D. THE SUBSTANCE OF THE PROPOSED AMENDMENTS

The proposed amendments can be summarized as follows:

1. The existing Registry Agreement covering .com, .net and .org would be split into three separate Agreements, one for each registry.

2. The .org Registry Agreement would adopt the form of the registry agreements that will be entered into by the new global TLD registry operators. The term of the .org Registry Agreement would be shortened by almost one year to 31 December 2002, at which time VeriSign would permanently relinquish its right to operate the .org registry, and an appropriate sponsoring organization representing non-commercial organizations would be sought (through some procedure yet to be determined) to assume the operation of the registry. In addition, VeriSign would establish an endowment of $5 million for the purpose of funding the reasonable operating expenses of a global registry for the specific use of non-profit organizations, and would make global resolution resources available to the operator of the .org registry for no charge for one year and on terms to be determined thereafter, for so long as it operates the .com registry. The net result of this would be a .org registry returned, after some appropriate transition period, to its originally intended function as a registry operated by and for non-profit organizations.

3. The .net Registry Agreement would also adopt the form of the registry agreements that will be entered into by the new global TLD registry operators. The term of the .net Registry Agreement would be extended only to 1 January 2006, or twenty-two months shorter than the automatic extension in Section 23 of the existing agreement would produce. At that time, the .net TLD registry would be opened to competitive proposals, under a standard adapted from the existing agreement, but with VeriSign having only the option of rapid arbitration rather than litigation (as in the existing agreement) to review an ICANN decision to select someone else to operate the registry, should that occur.

4. The existing agreement would be amended to provide that (1) it applies only to the .com registry; (2) to conform it in many but not all respects to the template of the registry agreements that will be entered into by the new global TLD registry operators; (3) to extend its term to 2007 (the four year extension provided by Section 23 of the existing Agreement); and (4) to provide a presumption favoring renewal of VeriSign's right to operate the .com registry (but only pursuant to a Registry Agreement that conforms to the standards 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 $200 million in research and development activities, and resulting improvements, in order to increase the efficiency and stability of the .com registry. The net effect of these changes is to grant the four-year extension already contemplated by Section 23, to encourage investments aimed at improving the operational functionality and stability of the .com registry, to create a presumption (but not a certainty) favoring renewal of VeriSign following that extension, and (by 2007) otherwise to conform the .com Registry Agreement to the standard of all other global registry agreements.

5. The requirement in Section 23 for the separation of legal ownership of the VeriSign registry and registrar businesses would be eliminated, but VeriSign would agree to continue the structural separation described above for the term of the Agreements. The present structural separation would be reinforced by the requirement that VeriSign's operations be placed in a separate subsidiary company. The rationale is that ownership separation is no longer necessary or useful in promoting competition, so long as the structural separation is effective in accomplishing the basic purpose. A relevant fact in this regard is that the registry agreement that has been developed for other global TLDs requires only structural, not ownership, separation of registrar functions from registry functions. This reflects ICANN's belief that there is little if any additional competitive value under today's market circumstances in forbidding the registry operator from also being a registrar, so long as it is done is such a way so as not to discriminate against other competitive registrars.

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

7. In all three of these new registry agreements, the existing limits on VeriSign's responsibility to share in the cost recovery efforts of ICANN would be amended to conform to the relevant provisions of the registry agreements with the other registry operators that have been negotiated. This would have the practical effect of generally eliminating special treatment of Verisign in the cost recovery process, and placing it on the same footing as all other registry operators with respect to ICANN fees.

E. CONCLUSION

ICANN and VeriSign management believe this proposal offers many significant benefits to the community=8Bnot the least of which is that it would lead to regularizing the contractual and financial relationship between VeriSign and ICANN so that it is in most respects the same as that of any other registry operator or registrar. The elimination of special rules or provisions dealing with VeriSign is an important step forward in the ICANN process.

In addition, the return of the .org registry to its original intended use, especially with a financial structure that ensures its cost-effective operation, and the separation of the arrangements for .net from those for .com by opening up .net to competitive proposals two years before that would happen under the existing agreement, also are benefits to the community. Finally, the commitment to make significant investments in the more efficient and effective performance of these registries are clearly important community benefits, since the stability and performance of those registries and particularly that of .com, by far the largest domain name registry are of great 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 on the same terms as all other registry operators, and have the presumptive (but not absolute) right to continue as the .com registry operator. On the first point, in today's market conditions there is no significant benefit to the community in prohibiting VeriSign from doing what every other generic TLD registry operator will be permitted to do operate as a registrar so long as that business operation remains appropriately separate from the registry business, and there is non-discriminatory treatment by the registry of all accredited registrars.

With respect to the presumptive renewal of the right to operate the .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 changes of a registry operator. In addition, a significant chance of losing the right to operate the registry after a short period creates adverse incentives to favor short term gain over long term investment. On the other hand, the community, acting through ICANN, must have the ability to replace a registry operator that is not adequately serving the community in the operation of a registry.

The registry agreements for the new TLDs try to balance these objectives 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 operator for the future revenue streams properly traceable to investments by the former operator. With respect to the .com registry, its size make a change in the registry operator more significant than for smaller registries, and potentially more disruptive. Therefore, a presumption of renewal for this registry, assuming that the stated criteria of service to the community have been met and can reasonably be predicted to be met during the renewal period, is more appropriate. This leaves the ICANN Board the ability to change the operator if necessary, but only if it can demonstrate that such a change would better serve the community. This seems an appropriate balance in these particular circumstances.

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

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