CADNA Report on Domain Drop Catching

CADNA has just issues a report on domain name Drop Catching titled "A study on the fate of expiring domains and how the Add Grace Period is leveraged to avert domain name investment risks."

The cyberspace real estate market is booming and domain names are now registered at a faster pace than ever before. One core reason for the expanding marketplace is that domain names can produce monthly cash flow much like rent does in the traditional real estate market. Domainers will tell you that even “bad” names can generate income of $100/year, which is more than 10 times the cost. The ability to monetize domain investments has created increased competition for available and expiring domain names. The reports conclusions are set forth below:

The practice of drop-catching, combined with domain tasting and kiting, has created a landscape of abuse and unfair business practices where consumer choice is limited and fraudulent behavior including illegal cybersquatting are rampant. We believe that the unfair and unjust speculation enabled by abuse of the AGP has led to many of the problems seen on the Internet today. Drop-catching alone is not what has led to this problematic environment, but rather it is the abuse of the AGP in connection with drop-catching that appears to be the cause.

While the original purpose of the AGP was well intentioned, it has become a means for blatant abuse of the domain name system. Revaluating the AGP could go a long way in addressing many of the issues faced by brand owners and consumers on the Internet today.

While ICANN is currently examining the AGP and contemplating potential changes in order to address some of the concerns associated with domain name tasting, many are fearful that ICANN will decide on a solution that has little impact. For example, if the GNSO council were to recommend making ICANN’s $0.20 fee non-refundable, the measure may not be enough. Not only would it fail to eliminate the practice completely, but there would be pressure by the constituencies within ICANN to give the new change time and thus it could ultimately slow down the process of bringing about positive change.

Beyond just making ICANN’s domain name fee non-refundable, ICANN might opt to levy a restocking fee – or a similar fee – that would be charged for every domain name immediately upon registration. When considering the implementation of a restocking fee, it is important to remember that unless a restocking fee is significant (in the range of 50% of the cost of a name or more), it will not do enough to curb Dot-COM domain tasting and therefore will not sufficiently protect consumers and the integrity of the Internet. Because monetizing domain name traffic is such a profitable business, having the option to return non-profitable assets for a fee and re-coup some of the cost of domains will still make domain tasting an appealing option. An insufficient fee will simply slow the pace of the practice.

While .CN did not institute a restocking fee, their 2007 price drop in the cost of a domain name registration could be indicative of the lack of effectiveness associated with a low price restocking fee. The .CN registry’s decision to drop their registration price to roughly $0.12 per year per domain name in early 2007 spurred a dramatic increase in domain registrations in China and a fivefold increase in the number of Web sites using the .CN suffix. After examining the economics of traffic monetization, it becomes apparent that .CN in China is very similar to the most popular TLDs in countries around the world (such as .COM both in the U.S. and globally,.CO.UK in the United Kingdom, or .DE in Germany.) Ultimately the only way a restocking fee could work is if it was high enough to influence registrant behavior. While the intent was not to create a restocking fee, the fact that a low price actually encouraged “test” registrations for a period of one year suggests that a similar low-cost restocking fee in Dot-COM will not necessarily work to curb the ill effects of domain tasting.

Comments

[Domain Attorney]

A restocking fee, a penalty fee, and even the withholding the registration fee are all possible ways to curb the abusive use of the AGP. Raising the initial registration fee could also serve as the barrier to new domainers who do not have the capital necessary to "get into the game." Regardless, registrations seem inevitable. The solution appears to be on the shoulders of trademark holders. Protecting your trademark from unauthorized registration as part of a domain name can drive the domain names' values down. You need to know which domains to register (i.e. a practice known as defensive registrations) and which ones may harm your trademark. Domains are yet another possible use of trademarks that need to be protected like all other uses.

[Drop Catching Domain Names]

With ICANN about to impose a $0.20 non-refundable fee for registering a domain, domain drop catching (randomly registering domain names and using the AGP to taste them) will soon be a they of the past. I agree with the above comment that defensive domain registration continues to be extremely important. Not only is it a great way to increase your own traffic, but it is critical if you are seeking any value out of your trademarks or service marks. Trade names are becoming more important in the global economy especially for companies that have an ecommerce website (what companies don’t these days?). A good attorney can help you better understand the nuances of online business protection services.