Michael A. O’Byrne,
245 5th Avenue,
Suite 1103,
New York,
NY, 10001
U.S. Department of Commerce,
1401 Constitution Avenue,
NW Washington,
DC 20230
January 6th, 2016.
RE: The anti-competitive nature of the Verisign contract
To whom it may concern,
I would like to like to bring to the attention of the
Department of Commerce, the anti-competitive nature of the contract signed
between Verisign, a publicly listed U.S. company, and the U.S. government for
the right to provide .COM domain extensions.
Before elaborating on why I believe this arrangement
goes against the principals of competitiveness and democracy that we should be
engendering in our country, I would like to put on the record the following
facts:
·
ICANN has been performing the Internet Assigned
Numbers Authority (IANA) services since 2000;
·
ICANN is a non-profit organization which lobbied US
politicians to the tune of $2.5 million in 2015;
·
Verisign issues generic top-level domains (“gTLDs”) on
behalf of ICANN. The price of each of the .com domains has been arbitrarily set
to $7.85;
·
Verisign is a publicly listed company; it has a
fiduciary duty to act in the interests of its shareholders – and not the general public of the United
States;
·
The contract between Verisign and ICANN has
‘presumptive right of renewal’ meaning that it rolls over every six year into a
new six-year period;
·
In March 2004, Verisign (acting in the interests of
its shareholders) launched a lawsuit against ICANN (an organization supposed to
be acting in the public interest);
·
Verisign signs a contract every six years with ICANN.
In 2006, Verisign’s lobbying expenses reached $6.98 million. The average
lobbying expenses for Verisign in the three years previous to 2006 were
$393,000;
·
By virtue of the nature of the ICANN and Verisign
contracts outlined above, Verisign controls a 100% monopoly on the issuance of
gTLDs using .com and .net;
·
The 2014 Annual Report for Verisign shows the
following results for the firm:
o
2014 revenue of $1.01 billion; 130.6 million gTLDs at 12/31/2014
o
2013 revenue of $965 million; 127.2 million gTLDs at
12/31/2013.
·
In 2014, Verisign’s gross profit was $821 million (Verisign
2014 Annual Report, p. 51) and in 2013, its gross profit was $778 million (Verisign
2014 Annual Report, p. 51). Its operating income for the same periods was
$564.2 million and $528.2 million, respectively.
·
The performance of Verisign stock (NASDAQ:VRSN)
outperformed the S&P 500 Index and the S&P 500 Inforation Technology
Index in each of the years between 2009 and 2014 (Verisign 2014 Annual Report,
p. 36).
The monopolistic nature of the Verisign deal
On the issue of Verisign’s monopoly, The Federal Trade
Commission[1]
states: “The antitrust laws prohibit conduct by a single firm that unreasonably
restrains competition by creating or maintaining monopoly power. Most Section 2
claims involve the conduct of a firm with a leading market position, although
Section 2 of the Sherman Act also bans attempts to monopolize and conspiracies
to monopolize.” In light of this, I would suggest that Verisign is also in
breach of antitrust laws, or at least operating in a grey area that allows it
to maintain a price of $7.85 for each .com registration.
The “right of presumptive renewal’ that Verisign holds
for the .com registry is a monopoly in all but name. As Tom Ruiz, VP of GoDaddy
stated in an e-mail to ICANN on November 28th 2005: “under the
current.COM agreement, Versign is granted a one-time presumptive renewal of
four years. The conditions for renewal are carried forward from one renewal to
the next. In the proposed new agreement, Verisign is granted this presumptive
renewal on a perpetual basis. The difference is subtle, but as a result, there
will be no future opportunity to re-bid (for ).COM unless Verisign breaches
the agreement AND fails to cure the breach within the allotted timeframe,
regardless of how many breaches should occur. The result is that this would
effectively establish Verisign as the owner of the .COM namespace.”
It’s also worth noting on the issue of monopolies that
none other than Warren Buffett found the Verisign monopoly sufficiently
attractive to break his no-technology stocks rule. On technology stocks,
Buffett told Berkshire Hathaway shareholders in 2000: “technology is just
something we don’t understand, so we don’t invest in it.” However,
one thing Mr. Buffett certainly does understand is a monopoly: In 2007, he told
students at the University of Florida: “I don’t want a business that’s easy for
competitors. I want a business with a moat around it. I want a very valuable
castle in the middle. And then I want…the Duke who’s in charge of that castle
to be honest and hard working and able. And then I want a big moat around the
castle, and that moat can be various things.”
In the case of Verisign, the moat that Mr. Buffett
refers to is the lack of open competition. Berkshire Hathaway currently owns
approximately 11.5% of Verisign’s shares. The reason, clearly, is Verisign’s
ability as a monopoly – like most good monopolies – to generate free cash flow.
From the NASDAQ website: “Verisign has a very profitable business which
generates a tremendous amount of cash,” and “over the trailing twelve months,
Verisign generated $437 million in free cash flow. That puts its free cash flow
yield just above 6%, which is right in-line with the cash flow generating giant
Apple.”
Let us put this in context for a moment: Apple is the
world’s most valuable brand, one of America’s greatest innovators of the last
decade (and before) and sitting on the largest cash pile of any publicly-listed
corporation in the world. Its free cash flow yield “is in-line” with that of
Verisign. In case there is any doubt, the annual reports of Verisign will
confirm that this is not because it is a valuable globally-recognized brand,
nor because it is one of America’s greatest innovators. The reason behind the
extraordinary wealth of Verisign (and thus its attraction to individuals like
Warren Buffett) is its ability to charge $7.85 for each .COM domain, which
essentially costs nothing to ‘produce.’
The
economics of the Verisign deal
A number of experts on the topic – from technology,
policy and economic fields - have argued
convincingly that the $7.85 price charged by Verisign should be reduced (see
Appendix). In many cases, the reduction called for by these experts was by just
$2. As the figures on the previous page clearly show, reducing the cost by $4 is
not unreasonable and still provides for a return for Verisign’s stock holders.
Bear in mind also, that these figures – by the very nature of the online
industry – will continue to grow, providing an ongoing dividend to these same
stock holders.
The Verisign website (see:VerisignInc.com/zone)
maintains a running total of the .com and .net registrations. As of 01/04/2016,
the division between .com and .net domains is 88.7% to 11.3% respectively.
Conservatively assuming that all of Verisign’s 2014 revenues derived from .com
and .net account for 100% of its revenue and that 88.7% of these registrations
were .com domains, this assumption leaves us with $878[2]
million in revenue derived from .com domains, and the remaining $132 million
coming from .net registrations.
In such a scenario:
·
If Verisign were to lower the cost of .com
registrations from the current $7.85 to $3.85, its revenue from .com
registrations alone would still be $430 milion[3];
·
The combined revenues of .com and .net would be $562
million;
·
These revenues would sufficiently cover Verisign’s
2014 total costs and expenses (p.65 of 2014 annual report) of $445 million, to
give an operating margin in excess of 26%
·
A 26% operating margin would still comfortably be in
excess of the average operating margin on firms on the S&P 500, which are
currently running at less than 15%[4].
On this basis, a reduction in the price of a .COM
domain from $7.85 to $4.85 would seem justifiable. Instead, a situation exists
where the most successful investor in the history of the United States, deems
Verisign – a company which should be operating in the public interest – enough
of a cash cow to hold over 11% of its stock. And that stock has performed
remarkably well by all standards. As the 10-year stock chart below shows,
Verisign (in blue) has achieved a return of approximately 229% since the
beginning of 2006, considerably outperforming both the NASDAQ (in green) and
the S&P 500 (in pink), who grew by 102% and 49% respectively.
Figure 1. Verisign (VRSN) stock performance v. NASDAQ, S&P 500
Again, it bears repeating here that NASDAQ and the
S&P 500 are composed of profit-making companies, and yet they didn’t
perform as well as Verisign, which was awarded the .COM domain registry in
the public interest.
The context for Verisign’s stock market performance is
clear: ramping up prices on .COM (and to a lesser extent, .NET) domains over a
period in which technology costs (storage, speed, etc.) have fallen
considerably. The graph below, adapated from Deloitte findings on the falling
price of technology over a seven year
period, shows this discrepancy; while the relevant technology costs have fallen
by over 90% in this period. It is also worth bearing in mind that US inflation,
as measured by the CPI Index, only surpassed 3% twice in this period and
reached an accumulated total of just under 14% - still significantly below the price
inflation in .COM domains.
Figure 2. Relative prices of .COM domains and technology, 2006-2012
It can be no wonder then that Verisign’s management
has deemed it appropriate to authorize so many share buybacks in the past five
years – a de facto admission by any
company that its stock is undervalued based on its future earning potential. As
if Warren Buffett’s intent to purchase over 11% of the stock wasn’t sufficient
indication of the company’s profit-making potential, the company’s management themselves
decided to underline it. Between 2010 and 2014, the firm embarked on what can
only be described as a spree of buybacks (see figure 3 below). As of the Q3
earnings report, the company noted that they had a remaining $605 million set
aside to purchase outstanding stock. Someone is certainly benefitting from the
verisign deal with ICANN – regrettably, it’s just not the average US consumer.
Figure 3. Verisign share buybacks, 2010-2014
As a relevant aside to all of the above, Senator Jay
Rockefeller (D), in a letter to the Senate Commerce Committee in March 2014,
that the proposed introduction of a .SUCKS internet domain name by ICANN was:
“little more than a predatory shakedown scheme.” That is to say, the same
organization that has stood behind a monopoly and $7.85 for a .COM domain name
is now proposing to introduce a .SUCKS
internet domain name. Sir, I ask you firstly, should anyone really be
surprised that they have deemed a .SUCKS domain suitable? And secondly, how can
the Department of Commerce stand by such an organization?
The U.S. economy is based on principals of democracy
and economic competitiveness. I believe that the contract signed with Verisign
by the U.S. Government is in gross negligence of these principals and thus,
should be rescinded immediately.
Kindest Regards,
Michael A. O’Byrne
Appendix: Opinion on the Verisign deal
“Registry operation services consist of commodity technical
services that are widely available from a large number of well-qualified
potential providers. It is widely acknowledged that the price of
commodity technical services tends to fall, not rise, over time – particularly
in the database management field, given that prices for data storage continue
to decrease dramatically in accordance with Moore’s Law – so there is no reason
for the DOC to permit unjustified price hikes for such services.”
Philip S. Corwin, Counsel, Internet Commerce
Association
“Would you think it a fair exchange if you gave someone $15 and they said,
here I’m repaying you with this nice shiny one cent piece?” Well, that’s
roughly the same ratio of the benefit that ICANN confers unto Verisign every
year and the amount of Verisign’s “sponsorship” amount, i.e. about 1500:1. Basically,
the munificence of this event reminds me less of words like “dignified” and more
of words like “ostentatious.” Perhaps “corrupt”; certainly “for sale”. We of
the internet community are paying for all of this… I do find ICANN’s
expenditures to be entirely out of line with its mission and its status as a
non-profit, tax exempt, public-benefit organization.”
"The actual cost to VeriSign of providing the service of registering
a domain name and publishing it via VeriSign's DNS servers is probably on the
order of $0.03 per year per name, or less."
Karl Auerbach, Former ICANN
Board member
“But after the dispute with VeriSign, it is clear that an equal threat
facing the network is unbridled commercialisation.”
The Economist, October 13,
2013
“The economics lesson starts here. It’s important to first realize that it
costs VeriSign, the .COM registry operator, next to nothing to add each new
.COM name to the registry, because unlike registrars, VeriSign has everything
handled by an automated process. The costs of operating these automated
processes (i.e. bandwidth, storage, etc.) have been and are expected to
continue to decline.”
The Economist, October 13,
2013
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