Vertical Integration

Vertical Integration (VI, or Cross Ownership) is a business structure in which the various functions of the Registry Operator and the Registrar are handled by a single body. This single body is either owned or is under supervision of the same company that supports the specific gTLD; alternatively, the controlling body can be a partnered company that is given the contract of the gTLD. The Registry Operator is not required to provide equivalent access and non-discriminatory access to non-affiliated registrars to sell names under its gTLD.

Related policies are developed by ICANN's Vertical Integration Working Group (VIWG). Vertical Integration was banned by ICANN for much of its history, requiring instead Vertical Separation; but in November 2010, the ICANN Board changed its position on Vertical Separation and moved to implement Vertical Integration to foster greater innovation, competition, and presumably provide the consumer with differentiated and lower-priced options.

Background

History of Vertical Separation

The National Science Foundation signed a Cooperative Agreement with Network Solutions (NSI) to be Registry Operator and Registrar for the .com, .net and .org TLDs from 1993 to 1999. The registry agreement was renewed by ICANN in November 1999. Under the new agreement, NSI agreed to create a multiple registrar system, also known as the Shared Registration System (SRS), which allows independent registrars to access the system. Independent registrars were to pay NSI $6.00 for every registered or renewed domain name.

In addition, ICANN encouraged competition through registry and registrar business separation, by stipulating in the agreement that NSI will only be allowed to renew its registry agreement with ICANN for four years if it sells its registrar business. In 2000, Verisign purchased NSI and re-negotiated its registry agreement for the .com, .net and .org TLDs with ICANN. ICANN did not require ownership separation but implemented structural separation. ICANN explained, "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 in such a way so as not to discriminate against other competitive registrars."

In 2000, ICANN introduced new generic top level domain names, which included .biz, .info, .name and .pro. On February 26, 2001, ICANN proposed a new registry agreement stipulating the legal separation between registry and registrar under section 3.5 Fair Treatment of ICANN-Accredited Registrars, wherein Registry Operators are not allowed to act as registrars with respect to the Registry TLD.

In 2005, ICANN implemented the registry-registrar separation of ownership in the registry agreement for the .jobs and .travel sponsored TLDs. Under Section 7.1, clause b and c in the registry agreement states the following provisions: (b) Registry Operator Shall Not Act as Own Registrar. Registry Operator shall not act as a registrar with respect to the TLD. This shall not preclude Registry Operator from registering names within the TLD to itself through a request made to an ICANN-accredited registrar. (c) Restrictions on Acquisition of Ownership or Controlling Interest in Registrar. Registry Operator shall not acquire, directly or indirectly, control of, or a greater than fifteen percent ownership interest in, any ICANN-accredited registrar.

At present, these provisions are included in the registry agreements for all sponsored and unsponsored TLDs.

Separation to Integration

Some believe that vertical separation is one of the most important methods used by ICANN to maintain its commitment to promote competition, which is one of the founding principles of the organization. On March 12, 2002, the ICANN Board passed a resolution stating the organization's strong position for the implementation of "strict separation" of registries and registrars for new gTLDs. The ICANN Board also stated that co-ownership will be prohibited. However, the ICANN Board also indicated, "if a policy becomes available from the GNSO, and approved by the Board prior to the launch of the new gTLD program, that policy will be considered by the Board for adoption as part of the New gTLD Program."

Many of the initial steps that ICANN took to introduce competition in the marketplace, including vertical separation, were directed at working to expand the number of registry and registrar companies beyond the single entity, Network Solutions, that managed most major TLDs before the introduction of ICANN. After contract negotiations allowed that market control to be broken up, the case for reversal of the vertical separation became stronger. In 2008, ICANN commissioned an independent assessment of the separation/integration issue; the findings suggested that ICANN move "slowly, but deliberately and in consultation with the industry, towards permitting integration of registry and registrar services under many, but not all, circumstances." This resulted in two years of Working Groups, workshops PDPs, where the ICANN Board deferred the issue to the GNSO. In that time, the GNSO was unable to come to a consensus, and as a result, the Board considered many other reports, recommendations, and inputs, and came to its own decision. According to .nxt, "In adopting its resolution, the Board concluded that - so long as certain restrictions were put into place on the conduct of registries and registrars, specifically as they relate to data, and so long as competition review remained available in the event of concerns regarding market power - there was no economic or competition rationale to prohibit, on an across-the-board basis, registries from holding ownership interests in registrars, and vice versa."

During a Special Meeting on Novemer 5, 2010, the ICANN Board changed its position regarding the vertical separation of registries and registrars. The Board removed the restriction on cross ownership in the Registry Agreements and replaced it with "requirements and restrictions on any inappropriate or abusive conduct arising out of registry-registrar cross ownership..." These abusive conducts are not limited to misuse of data and violations of a registry code of conduct. In addition, ICANN also stated that it will include additional enforcement mechanisms such as self-auditing requirements, contractual termination and punitive damages. Moreover, it also emphasized that "it will have the ability to refer issues to relevant competition authorities."

10 Justifications for Integration

The ICANN Board enumerated ten reasons to support its policy change on vertical separation:

1. None of the proposals submitted by the GNSO reflected a consensus opinion; as a result, the Board supported a model based on its own factual investigation, expert analysis, and concerns expressed by stakeholders and community.
2. ICANN's position and mission must be focused on creating more competition as opposed to having rules that restrict competition and innovation.
3. Rules permitting cross-ownership foster greater diversity in business models and enhance opportunities offered by new TLDs.
4. Rules prohibiting cross-ownership require more enforcement and can easily be circumvented.
5. Preventing cross-ownership would create more exposure to ICANN via lawsuits, including anti-trust lawsuits, which are costly to defend even if ICANN believes (as it does) that it has no proper exposure to such litigation.
6. Rules permitting cross-ownership enhance efficiency and almost certainly will result in benefits to consumers in the form of lower prices and enhanced services.
7. The Rules of Conduct, which is to be part of the base agreement for all new gTLDs, include adequate protections designed to address behavior the Board wants to discourage, including abuses of data and market power.
8. Case-by-case re-negotiations of existing contracts to reflect the new cross ownership rules will permit ICANN to address the risk of abuse of market power contractually.
9. In the event ICANN has competition concerns, ICANN will have the ability to refer those concerns to relevant antitrust authorities.
10. ICANN can amend contracts to address harms that may arise as a direct or indirect result of the new cross-ownership rules.

EC Concerns Over the Full Removal of Vertical Separation

On June 17, 2011, the Information Society and Media Directorate General of the European Commission (EC) submitted a non-paper regarding ICANN's proposed full removal of vertical separation to the ICANN Board. Copies were furnished to NTIA Assistant Secretary Larry Strickling and to Assistant Attorney General Christine Varney of the Department of Justice Antitrust Division. The EC cited some issues and recommendations, which include:

• Vertical separation provides a balanced playing field for competition between registrars. The absence of expert advice to remove vertical separation and stakeholders consensus shows that the move may be premature and might result in negative market output for consumers.
• Vertical integration might harm competition. The European Commission cited the CRA International Report of 2008, which emphasized the risk of vertical integration wherein registries may discriminate independent registrars by lowering prices and providing better registry services to their affiliate registrars.
• ICANN does not have sufficient data to support the full removal of vertical separation.
• A consensus on the issue within the GNSO and internet stakeholders is lacking.
• The procedural approach of ICANN to refer an application to relevant antitrust authorities for "expert analysis and post ante determination" overlooks the fact that competition authorities have limited powers in implementing rules, which is based on a case-by-case market analysis. ICANN did not clearly identify specific laws that will serve as basis of its jurisdiction, in order to determine if there are concerns regarding competition. Referral to competition authorities depends on ICANN's discretion.

Thus, the EC encouraged ICANN to reconsider their decision to implement the full removal of vertical separation of registries and registrars and to follow these suggestions:

1. Conduct independent economic and legal expert studies regarding the present situation of the domain name market and evaluate the impact of the existing restrictions on vertical integration. The impact of partially or totally removing the restriction on innovation and to consumers.
2. Provide new market data on the current degree of competition and cross-ownership at the registry and registrar level.
3. Provide data and documents supporting ICANN's decision to fully remove vertical separation.
4. Provide comments regarding the procedural concerns raised by EC.

Update in Response to RySG Memorandum

In March 2012, ICANN released an update on that status of vertical integration, following an inquiry from the GNSO's Registry Stakeholder Group. The update stated that ICANN had pursued the topic of vertical integration with two competition authorities, the United States Department of Justice Antitrust Division and the European Commission (EC). The United States Department of Justice Antitrust Division confirmed that it was conducting no active investigation into the topic at this time. The EC stated that although it was supportive of vertical integration in theory, it was concerned about the full removal of vertical separation, especially for existing TLD registries like for .com. ICANN stated that as a result of these correspondences, it would move forward with its previously proposed vertical separation plans, and develop a process which would allow existing registries to request an amendment to their existing contracts, permitting vertical integration and cross-ownership. The full text of the reply can be read here.

As a continuation of ICANN's June 2011 decision to remove cross-ownership restrictions on existing gTLDs, the ICANN Board revised in October 2012 the policies by allowing registry operators to own and become affiliated with registrars selling domains in their own gTLDs.

Such a change in policy would allow incumbent registry operators, such as Verisign, Neustar, and Afilias, to do so with .com, .biz, and .info, respectively. In order to qualify for these new policies, each company would need to either sign the standard new gTLD registry agreement, which includes Uniform Rapid Suspension (URS) and Trademark Clearinghouse provisions as Rights Protection Mechanisms (RPMs), or submit a contract renegotiation which contains additional provisions to ensure fair competition and adherence to the new gTLD Registry Code of Conduct. In all cases, contract changes will be shown to competition authorities for comment prior to ICANN's approval.