Non-executive director Andrew Pinder told the AGM that the board carefully considers any new commercial contract under two main criteria: is it profitable, and does it help our core business?
He then, however, talked about profitability being arrived at through economies of scale – in other words, an expectation that as more and more domains are registered, the cost of each new domain to Nominet will fall while the amount it charges remains the same.
That approach is, at best, guesswork given that no one is able to predict what will happen to registration figures among the 1,000+ new internet extensions. New top-level domains have sold in far fewer numbers than anyone in the industry expected and have already caused a number of companies to close down.
The decision by Minds and Machines to put its contract out to tender in the first place is thought to have stemmed from disappointing domain sales. So what is the growth rate the Nominet is assuming will make its contract profitable by the end of its term? It won't tell anyone.
In a related argument, Pinder noted that since the growth in .uk domains was slowing and "starting to flatten off," grabbing new contracts in growth markets would "keep costs down for everyone."
That argument is also suspect: the cost of maintaining large registry databases has gone down every year for a decade due to ever-lower hardware costs. So if Nominet's .uk registry stopped where it is at 10.7 million domains, it should actually get cheaper each year.
On the question of cross-subsidising its commercial efforts with income from .uk domains, Nominet's chair Rennie Fritchie suggested that there was a degree of "ring fencing" of the money.
But that turned out not to be true when Hawarth provided his explanation of what that term meant: that Nominet would not enter into a contract if he didn't think it would make a profit, and that each commercial contract was given a risk assessment.
That is a very different approach to what most people will consider ring-fencing, where money made from the .uk registry is kept separate from Nominet's other business activities.
In truth, Nominet has decided to embark on an aggressive commercial push and is finding ways to justify undercutting the market in order to build up business.
Forgetting who you are
Of course this sort of guesswork and financial modeling is perfectly normal in commercial settings.
The issue is that Nominet is not a typical commercial organization – it is a non-profit with a public benefit requirement – and it has a dominant market position thanks to its control of the .uk registry. What it should do if it wishes to enter the commercial market is change its status to a for-profit corporation and compete on equal terms.
But the company will not do that because such a status change would almost certainly require a rebidding of the .uk registry, and that could result in the company losing its annual $29m in guaranteed income.
There are other solutions: Nominet could be required to create separate legal and reporting structures – including accounting – so funds from its domain registry services could only be used solely to market that service.
Nominet could also – as it was recommended to do in the Lyons Report into its structure – remove the automatic discount on domains that Nominet members receive and which has in part led to a distorted membership model in which a very few commercial companies are effectively in control.
Either way, Nominet has no intention of changing the current situation, where it can raise prices on .uk domains with almost no loss in customers and win contracts by offering the lowest per-domain price through creative accounting.
The company's board and staff have clearly persuaded themselves that they are not abusing their dominant position in the market, and thanks to Nominet's corporate structure, no one else is in a position to force a reconsideration of that view.
What is concerning however – and why it is important for the competition authorities to take a long, hard look at Nominet – is that the company's commercial drive is very likely having a significant and damaging impact on the overall market.
There was a good reason why Nominet was created as a non-profit member organization. And there is a good reason why we have laws that enable the authorities to investigate and intervene where dominant market players exist. It time for both to be enacted. ®