Studies & Opinions
Toward A Three-Regime Domain Registration: Generic,
November 10, 2007
The current first-come, first-served approach
to domain name registration has been the only viable mechanism to
date and has served its purpose. However, with the current trend
in domain-tasting registrations, it is time to move to a more efficient
allocation mechanism via auctions.
Auctions, when combined with elimination of the
five-day registration grace period, would increase market thickness and reduce bad tasting. Implementation can be financed
through a small portion of the proceeds from ICANN’s proposed sale
of single-character domain names.
We divide domain names into three classes and
examine their registration viability via auctions. We conclude with
a recommendation for an integrated allocation venue of auctions
for generic names, the implementation of an alternative IP ownership
regime, and the retention of the first-come, first served venue
for “idea” domains.
Sources of Domain Value
To a registrant, the value of a new domain name
has two components: a creative idea and intrinsic value. Intrinsic
value reflects the domain name’s expected economic benefits from
its best use, which is driven in part by the idea. The value of
the idea component is significant when a name is hard to duplicate
by an automated system. When such a name is registered, the registrant
must be able to keep the name secret or else get compensation if
it is revealed.
The current registration mechanism does not allow
for dynamic pricing. Prices are fixed in the range of $6-8 per year,
with the registration rights granted on a first-come, first-served
basis. The fixed-price approach does not necessarily make for efficient
allocation, but using auctions instead would cause problems for
certain classes of domain names because registrants of such names
would not be able to capture the value of the idea component. Yet
auctions are a natural mechanism for matching well-defined assets
with their best use. The fixed pricing mechanism has worked well
so far, but given the current domain-tasting transactions that dominate
the market, it is time to move to a more efficient allocation.
Proposed Three-Regime Allocation Mechanism
We divide domain names into three mutually exclusive
classes based on the viability of the registration mechanism: generic
dictionary words (including single-letter and single-digit names),
IP-related words (trademarks and brand names), and creative ideas.
Idea domains will have to be registered on
a first-come, first served basis because otherwise there would
be no incentive to register such a domain name. The failure
of auctions for this class is due to the fact that, when using
them, the registrant would have to make the idea public before
having an ownership guarantee, hence losing its private information
Using auctions for IP-related names has two
major obstacles. First, without properly defined IP ownership
rights with regard to domain names, it is difficult to a
priori determine the legitimacy of an IP violation claim.
Thus, it is difficult to automatically block the use of such
words in a domain name. Second, the IP claimant has no idea
for what purpose the registrant might use the domain name, making
it hard to estimate potential damage from its use and leaving
the claimant unable to devise a viable bidding strategy. Moreover, when a claimant
loses the auction, we would be back to square one in terms of
protection of IP-dilution risk. Thus, under this class, an auction would not be a viable
A necessary condition for a viable mechanism
under this class is that the IP claimants can control the use
of domain names. Control can be achieved through designing a
new IP-protection regime, whereby the registrant is obligated
to monetize the domain name through preapproved service providers or forfeit the rights to the domain name. Moreover, this regime
should not encompass registrations when multiple entities have
a trademark on words being used in the domain name. This would
maintain the class’ first-come, first-served principle and minimize
the risk of IP abuse.
To reduce the risk of potential IP violations,
the registration process should automatically check for IP ownership.
This is a benefit for legitimate IP-conscious registrants, as
well as the IP owners. Nevertheless, for such a regime to be
effective it must be sanctioned by ICANN and enforced at the
- Generic names can be more efficiently registered
through auctions, as they are driven by automated bootstrap methods
that do not involve ideas or IP issues.
It can be argued that, even with generic domain
names, the registrant incurs cost associated with predicting the
domain name’s revenue potential. Thus, under this argument, the
registrant would face the same private information problem as
with idea domains. However, this potential problem can be corrected
by compensating the registrant if outbid. The compensation can
be a fixed amount or based on a more complicated valuation model.
Such a valuation is a much easier task than estimating potential
damage under the IP class. Moreover, this complexity in the auction
design is not significant enough to kill the viability of auctions,
as the tasters are sophisticated and also have the option to increase
We demonstrate that although auctions are not
viable for all classes of domain names, they are viable for generic
names, which account for most of today’s domain registration volume.
Besides being a more efficient allocation mechanism, auctions act
to curb domain tasting and increase market thickness.
The proposed registration process integrates
the three classes. Thus, when a user inputs a domain name for registration,
the system parses it into words (which is not a trivial task but
is technically feasible), determines its class, and provides the
appropriate registration venue.
 Use of the domain to promote pornography, to disseminate
false information about the associated products, or to sell
fake brands and dilute brand value.
 To prevent riskless arbitrage, the bid over that of the
first applicant has to incorporate the compensation.