Who Should Bear
Domain Name Risk?
September 28, 2008
Domain owners are bearing tremendous
risk that someone else is better equipped to absorb. In
this post, I outline the motivation of risk ownership,
the sources of risk associated with owning a domain name,
and the ways by which some of these risks have been transferred
to institutions that are better equipped to handle them.
I close by pointing out that we would be better served
by having a trademark risk-management entity.
What is risk ownership?
Risk ownership1 involves
choosing which risks to bear and which to transfer or
sell to another party. You should bear a risk only when
you have the competency to mitigate it or when there is
no viable mechanism for transferring the risk. In general,
the motivation for transferring risk is to reduce the
overall risk for an individual or a business2 and free up cash that would otherwise be needed as a cushion.
Risk management3 is very
important. Corporate success cannot be attributed solely
to one person, but a single person or source of risk can
indeed bring an established institution down. Nevertheless,
risk management depends on the manager's appetite for
Sources of Domain Name
1. Domain Specific:
a. Renewal. This includes forgetting
to renew, not having the money to renew, and incorrectly
deciding to renew4 all domains in a large
portfolio. The risk of forgetting to renew was initially
born by the domain owner. Registrars soon realized they
could make money by providing auto-renew services and
encouraging discounts for multiperiod registrations.
Registrar are better suited for owning this risk, as
they can spread management cost over a large number
of clients. Thus, the domain owner is willing to pay
a fee for transferring the risk to a registrar.
c. Trademark. Currently, a domain
name is registered with prayers that no costly legal
action will be taken against them. However, some of
the new registrants take advantage of the system, while
others innocently include brand names in their domain
names. For the former, the cost of the illegal action
is generally minimal, as they either surrender the domain
name to the brand owner, don't pay for it before the
end of the five-day grace period,6 or possibly
sell it at a high price at one of the prominent marketplaces.7 On the other hand, the innocent group can be bullied
into surrendering the domain name even when it does
not legally infringe on someone else's IP, or they can
incur uncessary shut down and legal costs. Hence, to
manage this risk, the latter group should set aside
cash to fight any potential legal action or if possible,
transfer the risk to an entity that is better suited
to absorb it.
It makes sense that independent entities
or registrars should sell trademark insurance policies.
Such an intermediary must have legal expertise and the
ability to spread risk management cost over a large
number of clients. Currently there is no such institution,
which implies that this risk is under-valued and thus
represents inefficiency in domain name markets.8
For trademark issues associating
with existing domain names, a cooperative IP regime
mitigates this risk and creates value to domain name
owners and IP claimants.9
d. Price risk10
e. Parking Income11
2. Industry Wide
a. General market price drop12
b. Industry reputation risk requires
domain activism,13 lobbying by the Internet
Commerce Association (ICA), and cooperation of domain
name and trademark owners.
c. Loss of privacy through public
access to Whois information.
3. Sub-industry risk is due to front
running,14 potential bankruptcy and/or de-accreditation
of registrars and resellers, and the risk of default of
a secondary market player. Both these sources can disrupt
activities for a segment of the market.
4. Transaction Risk
a. Waiting too long to buy and/or
sell. Thus, the risk of lost opportunities.
b. Risk of money and ownership transfer,
which can be mitigated by engaging an escrow agent.
c. Ineffective domain-name valuation.15
5. Infrastructure risk16
a. Spam and phishing
b. Cyber security
c. Lack of technology policy
Robert C. Merton, "You
Have More Capital than You Think
," Harvard Business
83, no. 11 (November 2005): 84-94.
Alex Tajirian (October 2005), "Domain
Name Protection: A Risk-Analytic Framework
Risk management competency is one of the
factors that should drive industry merger and acquisition
See Alex Tajirian (July 2008), "To
Renew or Not to Renew Your Domain Name?
See, for example, Bruce Tonkin (January 2005),
Look at Domain Name Transfer Policy and the Hijacking
See Alex Tajirian (August 2007), "Domain
Tasting: A Solution
In such a case, the marketplace is an accomplice
in infringing on the trademark, and thus the industry
must take appropriate action against the marketplace.
For marketplace inefficiencies, see Alex
Tajirian (January 2006), "Price
Inefficiencies in Domain Name Markets: An Empirical Investigation
See Alex Tajirian (April 2008), "Brand
Complementors: Implementing a Cooperative Domain-Name
See Alex Tajirian (February 2006), "Toward
Large Domain Name Portfolios
See Alex Tajirian (February 2008), "Thoughts
on Hedging Domain-Name Price Risk
See Alex Tajirian (July 2008), "Take
Action: Your Domain Names Are Losing More Than You Realize!
See, for example, "Network
Solutions Responds to Front Running Accusations
See Alex Tajirian (December 2007), "Effective
Domain Name Appraisals