ICANN Notes on VeriSign Agreement

[InfoSec News <isn () C4I ORG>]

Forwared by: Richard Forno <rforno () infowarrior org>

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). A portion of the ICANN Public Forum to
be held on 12 March 2001 in Melbourne, Victoria, Australia will be
devoted to this topic. In addition, written public comments are
invited at the web-based public comment forum that may be entered by
clicking below.


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.

 (c) 2001 The Internet Corporation for Assigned Names and Numbers. All
rights reserved.




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