Vertical Integration

This article is neutral, but is sponsored by Verisign, the registry for .com, .net, & other TLDs. You can learn more about their services here.

ICANNWiki Platinum Sponsor

Vertical Integration (VI) 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; 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) as Registry Operator and Registrar for the .com, .net and .org TLDs form 1993-1999. 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 SRSShared 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 names.

In addition, ICANN encouraged registry and registrar business separation to promote competition by stipulating in the agreement that NSI will only be allowed to renew its registry agreement with ICANN for 4 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 is 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."

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 on 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 of 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-negotiation 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 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 the 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 ante determination" overlooks the fact that competition authorities have limited powers in implementing rules, which is based on a case to case market analysis. ICANN did not clearly identify specific laws that will serve as basis of its jurisdiction to determine if there are concerns regarding competition. Referral to competition authorities depends on ICANN's discretion.

Thus, The EC encouraged ICANN to reconsider 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.