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Nominet shakes up system for expiring .uk domains, just happens to choose one that will make it £millions. Again
Wednesday, 22 July 2020 18:56

Analysis UK internet registry operator Nominet has decided to reform the way in which expired .uk domains are released and, to no one's surprise, has decided that the best solution is one that will result in it receiving millions of pounds in profit.

Last week, the organisation published [PDF] what it says is a "consultation" on the process of making expired domains available, though industry insiders soon discovered that a decision had already been made.

Rather than let domains expire and be picked up by registered Nominet members who then market and sell the domains to you and I – a vital revenue source for many of those members – Nominet has decided it should run an auction process where the highest bidder wins and the registry keeps all the money.

The justification for this approach, which is almost the opposite of today's system, is thick and varied yet falls apart under basic scrutiny. One of its goals in proposing the reform was to use an industry-standard approach, the registry operator said. But it was only able to find a single other registry that uses its proposed system: Estonia.

"Auctions are common in sunrise processes for gTLDs and to manage the release of premium names," Nominet argued in its report, ignoring the fact that the system they are proposing is specifically for expired domains that have already been registered and then dropped. It goes on: "We are aware of one other ccTLD that releases domains through auctions, Estonia."

Most registries use wait lists where the general public can register an interest in a domain before it is due to expire and once it expires, they get first preference to register it themselves. In this case, the netizen chooses which company they want to register the domain with and typically pays around £10 a year, of which Nominet receives £4.

But Nominet worries that this approach will "result in a rush to enter a wait list" and "would be challenging to ensure intent and contact details are still correct between the point of entering the waiting list and receiving the opportunity to register the domain."

It also worries that if it introduced a wait list fee "then setting the wait list fee is not straightforward given the huge range of value of domains." It's not exactly a huge problem, but one that Nominet feels is a big enough hurdle to discard as an option.

Nope and nope

Other options are similarly discarded for equally weak reasons. What about a ballot where a random person from those that register interest for a specific name is chosen and gets the name? "There are legal challenges in allocating domain names in an expression of interest lottery basis," claims the registry.

What about a webpage for the expiring domain that says when it will expire if not renewed, and a link to one of Nominet's members that specialize in picking up expired domains – so-called drop-catchers – that would solve both issues: greater transparency and save disrupting the existing system. Nope.

"We consider landing pages to be an interesting suggestion but not a solution to the issues raised and dependent on transparent information on the expiry of domains," Nominet says without going into any more details, adding: "There is nothing in our current consultation that would preclude us from considering landing pages for expiring domains at a later date."

Illustration of .UK and the British flagREAD MORE

All these solutions get crosses next to them in Nominet's document. The only one with ticks all the way through is also the one that sees Nominet take over the entire process and sell expiring domains for the maximum amount of money by running an auction and then keeping all the proceeds.

But there are different types of auction, you say. Nominet has thought of that too: "We considered several different types of auctions, including a 'Dutch Auction' of descending value and premium pricing auctions determined by the registry."

But it decided the best solution was the one where it gets the most money. "Ultimately, we decided Nominet is not well placed to determine the exact price point of contested domains and any auction model should rely on multiple interested parties to determine price."

Are there any downsides to its approach? Nominet identifies two: "Significant change to the current first come, first registered policy" and "perception of profit raising." But it's going to push ahead with it regardless.

Some context

How big a problem is this, and how much money are we talking about? Well, each year between one and two million of the roughly 12 million .uk domains are left to expire. About 20 per cent of them – for example, 330,000 in 2018 – are picked up again within a year.

The entire system overhaul, however, is due to a very small number of those expired names – roughly 10,000 a year – that are fiercely fought over because of their inherent value. These are picked up within seconds or fractions of a second of being released by drop-catching Nominet members, who have developed sophisticated automated systems and effectively signed up repeatedly as a Nominet member, paying £100 a year, plus £25, at a time to access the system for picking up expiring names. More memberships means more bites at the cherry.

The £125 cost is easily paid off if they manage to capture even one good name that year because it can then be sold for anything from several hundred pounds to tens of thousand of pounds. For example, pictureframers.co.uk is available for £395, and picturedeck.co.uk for £2,000.

What Nominet is proposing, however, is taking over the entire system and running its own auction process that will net it potentially several million pounds a year: money that would have gone into the pockets of its members.

It doesn't want people to think badly of it, though. "One of our concerns with implementing an auction model is that there will be a perception that this is merely a way of raising funds for Nominet," it notes further on in the document. "We have therefore set out our intention on how we think any additional profit should be spent to best benefit the .UK namespace and invited stakeholder comment."

So members will be able to suggest to Nominet how it should spend the money it will take away from them, which is, you must agree, very considerate. Although, to be fair, Nominet has also consistently ignored its members' feedback, so they shouldn't get their hopes up. They have until August 14 to let their views be known.

So why is Nominet, which remains a nonprofit member organization, pushing this approach to the detriment of its own members and other, arguably better, solutions?

Been here before

The answer is the same one that has driven many of Nominet's policy decisions over the past few years, including: the approval of second-level .uk domains (upending its tradition of third-level .co.uk and org.uk names); the decision to mislead owners of .co.uk domains that they need to register their corresponding .uk names; repeat price rises in the cost of .uk names; and the extraordinary decision to create a special one-week registration process for valuable .uk names that resulted in a payday worth as much as £100m for its largest members to the cost of smaller members and the British public.

Some suggest it's because Nominet is milking the .uk registry for every penny so it can then spend the money on an assorted of misconceived commercial enterprises favored by its CEO, Russell Haworth, a former acquisitions and ventures specialist.

During his time in charge, Haworth has moved the organization from one that put its public benefit remit first and foremost – to the extent that most of its excess revenue was handed over to a charitable trust to be disbursed – to one that, in his own words, have become "a 'profit with a purpose' company."

The purpose appears to be to allow Nominet's executives to play at being businesspeople without taking any of the commercial risks, because the UK registry – which is an effective monopoly – provides a massive financial cushion.

Every one of the commercial market entries that Nominet has attempted has seemingly or arguably been a failure. When Nominet branched into the commercial side of its internet registry world, it managed to win contracts to run the back-end systems for various dot-word TLDs by undercutting the market price, effectively running them at a loss and betting that it would make a profit when registrations picked up. That doesn't appear to have happened, and Nominet likely continues to make a loss on each contract.

Loss-making

We can't know for sure. But it does currently has £35.7m on its books in "deferred income" which it defines as "consideration received in advance of the meeting of performance obligations, primarily domain registration and renewal fees that relate to future accounting periods."

In its annual report for 2019 [PDF], Nominet noted that it "has a medium risk appetite for strategic matters including diversification activity in adjacent and new markets, and is willing to accept higher losses in the pursuit of higher returns in these diversified market areas." But that pursuit continues five years on with no success, even with a new office opened up in Washington DC that doesn't appear to have pulled in any business several years later.

It has attempted to enter the TV whitespace market. And failed. It has attempted to enter the highly competitive cybersecurity market – even purchasing existing business CyGlass – and made little or no headway. The company's annual report is a catalogue of excuses, weakly disguised in management speak.

On its failure in the cybersecurity market, it says: "We are committed to expanding our products and services offering in the cyber market by building on our skills and reputation to deliver our strategic diversification objectives."

To explain away its other failures, it notes: "We are operating in a maturing market and are facing all the associated challenges; highly competitive environment, consumer behaviour changes, consolidation of industry players and emerging technology threats. To remain competitive and relevant we must innovate and adapt."

Hidden figures

Nominet goes to some lengths to hide the financial well-being of its various offshoots. All its three different companies are rolled into one set of accounts. "All transactions and balances between group companies are eliminated on consolidation," it noted in its most recent annual report.

And it's not even possible to get a side-by-side comparison of its annual accounts because Nominet decided in 2017 that it was going to change its financial year, and hence reporting, from September to April, so 2018's figures are for 18 months, rather than 12. It may not be a coincidence that 2017 was also a year of large investment in new markets.

It may also explain why, in January 2018, Nominet announced it was shutting down its charitable foundation, to which it had donated £5m to £10m every year for over a decade. All the money went in-house. And it raised .uk domain prices for a second time.

In 2019, the financial moves continue with a shift to a new accounting structure, that makes financial comparisons even harder. But despite the level of opacity, the results still show a clear drop in profit, a massive increase in marketing and advertising spend and, propping up the whole enterprise, the .uk registry cash cow.

If Nominet does go through with its plan to overhaul the expiring domain market with an auction approach, and so squeeze more millions out of the UK's key internet asset and into its coffers, no doubt next year will be the one where Haworth's brave business bets will finally pay off.

But then again, what about the COVID-19 coronavirus? Bad market conditions. It may need to rise .uk domain prices to, er, "reflect some of the increased costs of running the registry business." ®

Source: https://bit.ly/3hnawgX