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Impacts of second level domain registration (SLDR) in the .uk domain space

Report to Nominet

Prepared by

November 2013

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Contents Page

London Economics Impacts of second level domain registration (SLDR) in the .uk domain space i

Abbreviations iii

Executive summary iv

1 Background & context 7 1.1 The changing domain landscape 7 1.2 The UK domain 8 1.3 The SLDR proposal 9

2 Study approach 11 2.1 Objective 11 2.2 Methodology 11 2.1 Evidence base 11

3 Impacts of SLDR 13 3.1 Overview 13 3.2 Benefits to business 14 3.3 Benefits for consumers and the general public 19 3.4 Transition costs 20 3.5 Ongoing costs 23

4 Summary 26

Tables, Figures & boxes Page

ii London Economics


Table 1: Potential impacts of SLDR across stakeholder groups 14 Figure 1: Preference ranking for second-level (.uk) and third-level (.co.uk) UK domains 17 Figure 2: The diffusion of innovation 28

Abbreviations

London Economics Impacts of second level domain registration (SLDR) in the .uk domain space iii

Abbreviations

CENTR Council of European National Top Level Domain Registries

CTR Click-through rate

DNS Domain name system

DRS Dispute resolution service

ccSLD

ccTLD

Country code second-level domain

Country code top-level domain

gTLD Generic top-level domain

ICANN Internet Corporation for Assigned Names and Numbers

IP Intellectual property

IPR Intellectual property right

NPV Net present value

ROFR Right of first refusal

SEO Search engine optimisation

SERP Search engine results pages

SLDR Second-level domain registration

TLD Top-level domain

URL Uniform resource locator

Executive summary

iv London Economics


Executive summary

The report

The objective of the study is to provide the Nominet Board with an independent assessment of the likely impacts arising from the introduction of second-level domain registration (SLDR).

The study aims to identify the impacts on the different parties that would be affected by the introduction of the new domain. The study recognises the evolutionary nature of the SLDR proposals as a comparatively minor change to the domain space that would take place in the context of a profound reordering of the domain name system.

For its predictions, the study relies primarily on qualitative evidence from recent market research. The reliance on stated preferences and views about a hypothetical state of the world (the internet with SLDR and a multiplicity of other new TLDs) introduces substantial uncertainty to estimates of scale and timing of some of the impacts we describe. As a consequence, a traditional fully quantified cost-benefit analysis is considered inappropriate and likely misleading as it draws attention to more quantifiable impacts, such as implementation and adjustment costs, while leaving qualitative impacts unspecified, in particular the external benefits that are likely to be decisive for the overall assessment.

Instead, the study posits a SLDR scenario that is a) consistent with theoretical considerations regarding the behaviour of rational economic actors and the diffusion of innovation and b) supported by qualitative evidence from recent (autumn 2013) market research. The study provides an evidence-based characterisation of the market conditions faced by Nominet and the nature and direction of the impacts of SLDR.

Key findings

The SLDR proposals are associated with a range of benefits:

Benefits for consumers and the general public:

Relevance of the UK namespace Continued availability of a variety of trusted domains

Greater choice Users face a wider variety of domain names; SLDR creates scope for more nuanced

brand communication Benefits from Nominet Trust activities

Various programmes to promote social causes and entrepreneurship through the application of information technology that would not take place without the Trust

Benefits for business:

Relevance of the UK namespace Continued wide usage and visibility sends a signal to end-users that .uk is a trusted

resource

Executive summary

London Economics Impacts of second level domain registration (SLDR) in the .uk domain space v

This is also a benefit for those who might continue just with third level .uk domain names

SLDR will be introduced when many new gTLDs are being introduced Better brand signalling

SLDR may assist registrants in presenting their brands more effectively (less noise around the brand name in the domain address, etc.)

Image benefit for the UK’s digital economy Signal of continuing investment, updating of UK domain; presents the UK as a

digital economy that is moving with the times

On the cost side, we find that, aside from the costs of setting up and running the new domain, the net costs associated with the introduction of .uk arise from frictions that are mostly:

transitory (for example, the potential for initial confusion of users seeing a unfamiliar-looking website addresses, thereby reducing spending on those sites); or

incremental (e.g., the cost of IP monitoring may increase, but the increase in actual monitoring costs that can be ascribed to the new .uk domain will be marginal/a small part of the overall cost of monitoring a new domain name landscape that may soon include up to 1,400 TLDs.

50% of current Nominet registrants surveyed in August/September 2013 do not foresee any additional costs associated with switching to a new domain (other than the cost of the domain name itself).

Any attempt to assess the impact of SLDR has to recognise that the benefits identified:

are difficult to quantify; and depend crucially on how consumers and businesses react to the new domain.

Our review of the available evidence leads us to conclude that:

the introduction of SLDR is a relatively minor change in the domain name landscape. Some users will prefer the new domain out of a rational consideration that includes the

effect of a new, shorter domain name on the presentation of their websites to end-users/consumers.

The adoption of the new domain is thus likely to follow the S-shape that is characteristic of markets undergoing a process of innovation:

Initial take-up will be driven by a select group of website owners, who can make use of the added choice presented by a second-level “.uk” address in their overall communication strategy.

The success of the websites in the new domain is likely to erode the familiarity advantage of the incumbent domains over time.

Once familiarity reaches a tipping point, the advantage of third-level domains in the eyes of users disappears (the trust advantage is extended to the entire UK domain), leaving only brand differentiation as a determinant of domain choice.

SLDR would have (external) benefits for the whole UK domain space:

Executive summary

vi London Economics


as new websites proliferate, the product characteristics of the whole domain (trust, UK association) are reinforced and expanded, thereby strengthening the .uk domain in the face of unprecedented competition, while giving “.uk” a head start by transferring some of the trust/familiarity aspects of the third-level domains to “.uk” in return.

Against the background of challenging market conditions and a decline in the growth of the .uk domain, no further innovation in the .uk namespace is likely to put existing .uk registrants at an increasing disadvantage in the absence of changes that ensure its ongoing relevance and attractiveness.

1 │ Background & context

London Economics Impacts of second level domain registration (SLDR) in the .uk domain space 7

1 Background & context

1.1 The changing domain landscape

Several processes are underway that are transforming the way internet users interact with websites, which impact the role TLDs play in the user experience. This in turn affects the function of TLDs for website owners and thus the economic effects of changes to the domain name system.

New gTLDs

In 2008, ICANN adopted plans to introduce new generic top-level domains (gTLDs), resulting in the launch of the New gTLD Program in June 2011. The aims of the New gTLD Program include “enhancing competition and consumer choice, and enabling the benefits of innovation via the introduction of new gTLDs, including both new ASCII and internationalised domain name (IDN) top-level domains”1. Developments thus far include:

12 January 2012: opening of applications for new gTLDs; 1,930 applications for new gTLDs were received.

17 December 2012:, ICANN determines the order in which applications are processed in a draw. Applications are evaluated by expert, independent third-party evaluators according to priority numbers.

22 March 2013: the first set of Initial Evaluation results is released to applicants and the public.

From mid-2013: applications that pass Initial Evaluation and do not face any objections or string contention2 ready to proceed to contracting.

The result of the process will be a profound change in the domain name system (DNS): “there are roughly two dozen <gTLDs> now, but soon, there could be hundreds”3. This is in addition to the 280 or so country code top-level domains (ccTLDs) that already exist.

The role of search engines

Users find websites overwhelmingly through search engines. This means that, while users at present continue to use URLs, including domain names, as markers of relevance and trustworthiness in deciding which websites to actually access, the role of URL recall when navigating the internet has diminished. With the appropriate settings, search engines are moreover able to determine the location and other identifying information (e.g. language) of users and thereby determine country-specific sites that are likely to be of interest to the user. Overall, the effect of the reliance on search is to reduce the importance of URLs, including TLDs, in the user experience.

1 http://bit.ly/A5TB8d [accessed 24 September 2013]. 2 The case of gTLDs using similar-looking strings, potentially leading to confusion (e.g., “.hoteis” and “.hotels”). 3 http://bit.ly/A5TB8d [accessed 24 September 2013].

http://bit.ly/A5TB8d


8 London Economics


User interfaces

A second trend that diminishes the visibility of URLs (and thus TLDs) is the proliferation of mobile devices to access the internet. Due to the reduced screen size, browsers on mobile devices already often do not display full URLs by default, which means that TLDs (of all types) are becoming a less universal part of the experience of internet users. Moreover, the internet is increasingly accessed through mobile phone and tablet “applications” (apps), which remove URLs from the user experience altogether.

In addition, other programmes (security software, script-blockers etc.), often integrated into the internet browser, are increasingly taking on the function of ensuring the trustworthiness of websites in place of the domain name.

Implications for TLDs

The interplay of web search as the primary route to access (even familiar) websites together with the removal of non-essential URL information from graphical user interfaces (browsers, aggregator apps) point towards a changing role of TLDs. Currently, they contribute to branding and also serve the practical function of providing users with information on the provenance, relevance and trustworthiness of websites.

In future the changes to the TLD landscape may mean a more limited, but no less important role for TLDs: while their importance as online signposts for consumers for attributes including relevance (local content) and security may decline, the new TLDs may play an increasing role as a part of websites’ and companies’ overall design, branding and communication approach.

The introduction of new gTLDs provides companies (and individuals) with unprecedented choice when it comes to using TLDs as part of their overall presentation to users. As a result, incumbent domains are facing increasing competition, at a time where their function is changing to one focussed on brand identity.

1.2 The UK domain

The .uk domain is differentiated into various second-level domains, which include the well-known co.uk, as well as org.uk, ac.uk, gov.uk., ltd.uk, me.uk, net.uk, plc.uk, sch.uk, etc. There are over 10 million .uk domain names. New registration levels reached two million in 20124 and registrations are growing at 6% per year5.

However, in the light of the changes outlined above, maintaining confidence, visibility and familiarity, as measured by renewal rates and new registrations is likely to become more challenging. In particular, the advent of gTLDs is expected to have a substantial impact6.

4 http://bit.ly/A5TB8d [accessed 24 September 2013]. 5 As of 2012. See Nominet annual report 2012. Available at: http://bit.ly/15pDUHC [accessed 24 September 2013]. 6 See for example the discussion in CENTR Issue Paper “New gTLDs – impact on ccTLDs: “ccTLDs will be subject to the same market

pressures, as pressure intensifies to be included in popular registrars’ pick-down lists of TLDs (...)”. Available at: entr-paper-new_gtlds-20120531.pdf [accessed 11 October 2013].

http://bit.ly/15pDUHC



On the other hand, there is strong evidence of consumers’ support for the UK domain. A survey undertaken for this study elicited consumers’ preferences and their association with trust in different TLDs. The survey found:

a very pronounced correlation between trust and preference, implying that consumers preferred domain names that they felt signalled a website that they could trust; and

clear evidence that a .uk domain name is both preferred and trusted more by UK consumers when compared with various alternatives (the advantage of a .uk domain is even more pronounced when it is compared with new gTLDs).

1.3 The SLDR proposal

1.3.1 Objectives of the SLDR proposal

Nominet is proposing that in future it will be possible to register second level .uk domain names. For example, it would be possible to register companyname.uk. At present, it is only possible to register third level .uk domain names, for example companyname.co.uk.

Nominet’s objectives for the introduction of second level domain registration (SLDR) in the .uk domain space are to:

provide continued choice to consumers and businesses; and maintain the relevance of .uk against the increased competition presented by the

expanding domain landscape.

Additional choice is intended to stimulate the demand for .uk domain names. This should create renewed interest in .uk domain names at a time of growing gTLD competition and ensure that .uk domain names remain relevant and desirable in a changing market.

Nominet would continue to support existing third level domains recognising that many registrants will wish to keep and use these.

1.3.2 Main features of the SLDR proposal

Rights Protection and release mechanism

Nominet would take a number of measures to ensure a fair and equitable allocation of domains:

Six-month window where existing third-level registrants have Right of First Refusal (ROFR) to register the equivalent second-level .uk domain.

Any third-level domains in dispute during the ROFR period will be blocked from being registered at the second level.

Where registrations exist in more than one third level: the registrant of the earliest registration has primary right to SLDR; registrants of later-dated registrations can register their interest in SLDR during

the ROFR period;


10 London Economics


if the SLDR option is not exercised by the primary registrant, the next registrant can register the new domain immediately at the end of the ROFR period, provided they have registered their interest during the ROFR period.

Nominet will manage any disputes, including IP rights claims and post-delegation using its Dispute Resolution Service (DRS).

Data Verification and Validation

The goal of data verification and validation is to have high-quality data on domain names and contact details as stored in the UK WHOIS (the tool to check registrant details for a domain name). This is likely to have a number of beneficiaries. For example:

Nominet will be better placed to enforce its contracts with registrants; law/trading standards enforcement will be more easily able to use WHOIS data to find

transgressors; businesses/consumers may be able to have a greater degree of trust in online

businesses; and higher data requirements may deter some potential registrants, including fraudsters

away from using a .uk domain name.

Pricing

Nominet propose that the price will reflect additional validation and verification costs as well as potential benefits in terms of better brand signalling and an overall greater attractiveness of the .uk namespace.

2 │ Study approach


2 Study approach

2.1 Objective

The objective of the study is to provide the Nominet Board with an independent assessment of the likely impacts arising from the introduction of second-level domain registration. In particular, the study aims to identify the impacts that can be expected on the different parties that would be affected by the introduction of the new domain.

2.2 Methodology

At the heart of our assessment of the impacts is a comparison between the situation that would arise if the proposals were put into practice (SLDR is introduced) with a plausible status quo scenario in which SLDR is not introduced, while the existing third-level domains remain in place unchanged and other new gTLDs are introduced.

It is difficult to be clear about what the likely future will be, even in the status quo scenario. We have chosen one view, which we believe is a plausible one.

The main features of our status quo scenario are:

SLDR is not introduced and the availability of third level .uk domains remains as at present;

new gTLDs are introduced as currently planned by ICANN; current growth in the .uk domain space falls – possibly to the point where the overall size

of the .uk domain space declines. This is a result of increasing competition from the new gTLDs, since the increase in the number of TLDs provides many more options for registrants.

It is also possible that the effect of competition from gTLDs will be strengthened if consumers begin to perceive third-level .uk domain names as outdated, updated less frequently and generally less attractive.

2.1 Evidence base

This study uses an extensive evidence base. Secondary sources of information about the impacts of SLDR include:

documentation provided by Nominet on the current shape of the proposals; responses to the consultation on Nominet’s initial “direct.uk” proposal; survey evidence collected by Nominet during the initial formulation of the proposals; previous research on the effect of new TLDs, notably work undertaken by ICANN on new

gTLDs; and previous work undertaken by London Economics for Nominet, notably the impact

assessment of the .wales and .london domains.

Primary evidence comes from three sources:

2 │ Study approach

12 London Economics


An online survey of 1,006 consumers (internet users) commissioned by London Economics; this was used to explore user preferences across a variety of TLDs and the determinants of preference for either .uk or .co.uk;

An online survey of 1,049 Digital Natives, including Individuals (621) and Small Business (<50 employees) decision makers (428) to explore attitudes towards .uk, commissioned by Nominet. Digital Natives were screened for characteristics and status as early adopters (tech savvy; entrepreneurial; actively drive online presence; digitally aware; higher interest in gTLDs).

An online survey of 1,000 existing Nominet customers (all owned a .uk domain of some kind. 81% of the sample uses their .uk domain as their primary domain), identified through a proprietary panel. Sample includes individuals (400) and Business decision makers (600), representing micro (1-5 employees), small (<49 employees), medium (50-249 employees) and large (250+ employees) businesses

3 │ Impacts of SLDR


3 Impacts of SLDR

3.1 Overview

Overall, the main benefit of SLDR would be that it provides additional choice for businesses and individuals who own and operate websites as a marketing and sales tool. It gives them a further avenue, if they wish to take it, for portraying their brand identity online. For many who choose to take this route it may not have a transformative effect, but nevertheless could provide additional tangible branding benefits for them. For some who take this route, both new and existing businesses, it could give them a strong competitive edge that transforms their business.

Consumers can also benefit directly from these improved branding effects. A clear brand identity can act as a signal of product quality for consumers – companies who have invested in brands that have a reputation for high quality are less likely to supply low quality products, since this would undermine the value of their investment in the brand. Strong brands can also increase consumer awareness and strengthen product differentiation.

Other longer term, and less direct, benefits from SLDR could be to maintain the relevance of the .uk domain space at a time when the introduction of many new gTLDs increases competition in the provision of domain names. Continued wide usage and visibility, deriving from the introduction of SLDR, could send a signal to end-users that .uk is a trusted and widely used resource. This could benefit existing third-level .uk domain holders as well as new SLDR registrants.

In order to achieve these benefits, costs will need to be incurred. There are transition costs, which include: setting up the new domain; moving online activity onto the new domain; marketing and branding activity; search engine optimisation; IP protection; and increased consumer search costs. There will also be ongoing costs linked to running and paying for the new domain; continuing IP protection and defensive registration.

These impacts of the new “.uk” domain will be experienced in different ways by different parties:

the registry provider, Nominet; registrars; registrants, i.e., businesses and individuals that currently operate websites and those that

may operate website in future; and the general internet-using public: consumers.

The table below illustrates the types of impact that might be experienced by different stakeholders.


14 London Economics


Table 1: Potential impacts of SLDR across stakeholder groups

Benefits Transition costs Ongoing costs

The registry provider (Nominet)

Revenues from SLDR domain name sales to registrars

Setting up the new domain

Marketing/public awareness

Registry services Registrant

verification and validation

Dispute resolution services

TLD registrars Revenues from domain name sales to registrants

Setting up the new domain

Marketing

Fees to Nominet for domain names

Businesses and individuals that own websites (registrants)

More choice Better brand

signalling for those who take up SLDR

Continuing relevance of UK domain space for second and third-level .uk domain holders

Search engine optimisation (SEO)

Website related transition costs

Rebranding costs Consumer confusion IP protection

Fees to registrars for domain names, though these may be offset if registrants choose to use the second level domain as their only/primary domain IP protection

Consumers and the general public

Better brand signalling

Increased choice Increased Nominet

Trust activity

Unfamiliarity with the new domain

Increased search costs

Source: London Economics

The following sections describe in more detail the potential for each of these effects to impact on the different market participants.

3.2 Benefits to business

There are a number of potential benefits to business from the SLDR proposals:

better brand signalling (firm-level benefit); continuing relevance of .uk namespace (external benefit); increased registry competition.

These benefits are most closely associated with website owners (registrants) but there are also potential consequential benefits to registrars - from increases in net revenues that may result from any growth in the .uk domain space and website use in the UK (compared to the status quo scenario where SLDR is not introduced). In a similar way, Nominet would benefit from any increased sales to registrars.



3.2.1 Brand signalling

One of the key benefits of SLDR would be that it provides additional choice for businesses and individuals who own and operate websites as a marketing and sales tool.

It gives them a further avenue, if they wish to take it, for portraying their brand identity online. For many who choose to take this route it may not have a transformative effect, but nevertheless could provide additional tangible branding benefits for them. For some who take this route, both new and existing businesses, it could give them a strong competitive edge that transforms their business.

These stronger brand signalling effects could come about through:

higher generic attractiveness of “snappy and more direct” URLs (as reported by a majority of digital natives in research undertaken by Nominet7); and

certain brands are likely to be able to benefit from synergies with SLDR, for example through a less corporate (“.co”) image, or a more direct association with the UK as a geographic or cultural entity.

3.2.2 Continuing relevance of .uk namespace

The possible introduction of SLDR cannot be seen in isolation from other development in the domain architecture of the World Wide Web, specifically the introduction of up to 1,400 new TLDs in the next few years.

Against the background of challenging market conditions and a decline in the growth of the .uk domain, no further innovation in the .uk namespace is likely to put .uk registrants at an increasing disadvantage in the absence of changes that ensure its ongoing relevance and attractiveness.

A large majority (70%) of current Nominet registrants (and 79% of businesses) react positively to the new domain.

The decentralised, voluntary flow into the new domain8 updates and refreshes the whole namespace, thereby creating an (external) benefit that extends to registrants who continue to use a third-level address.

Survey results show high levels of interest in SLDR from technology savvy registrants (‘digital natives’) that do not currently use a third-level UK domain as their primary domain (61% of businesses and 73% of individuals report interest in SLDR). This suggests that SLDR will attract new, commercially attractive registrants to the UK domain.

7 57% of businesses and 69% of individuals in the digital natives category agree that a “.uk” domain “will allow my domain to be more snappy and more direct”. A majority of individuals in the digital natives category also agree that “it seems more modern than other domains” (67%); “it brings something new and different” (61%); “it is relevant to me / my business” (59%); “it fits well with the image I want to convey online” (56%); and “it will help me / my business to stand out online” (54%). Of current .uk registrants, 65% see it as “relevant to their business” and 60% as “unique/different”.

8 Among current registrants, 67% of businesses and 55% of individuals report being “likely to purchase” a “.uk” domain.


16 London Economics


In addition to the firm-level advantages of SLDR, we expect the introduction of the new domain to create additional (external) benefits to registrants in the entire .uk namespace (including third-level domains) by ensuring that .uk is ‘moving with the times’ and thus continues to be seen as relevant by registrants and consumers alike.

This benefit is impossible to quantify, but potentially crucial in the overall assessment of the Nominet proposal. In particular, it highlights the fact that SLDR has to be seen in the context of changes in the domain name system in the next few years.

A standstill in the .uk namespace is likely to put .uk registrants at an increasing disadvantage in the absence of changes that ensure its ongoing relevance and attractiveness. While SLDR is only one of the possible ways in which relevance can be maintained into the future, it is an attractive option because it is driven by voluntary take-up by registrants who see private benefits (from better signalling etc.). Taken together, the decentralised, voluntary flow into the new domain updates and refreshes the whole namespace, thereby creating an (external) benefit that extends to registrants who continue to use a third-level address.

Consumer preferences for a .uk domain

Our consumer survey clearly shows that, in comparison with gTLDs, UK consumers place a high value on a .uk domain name. They associate it with a range of positive characteristics, including trust, familiarity, and wanting to support British business. This effect has been found in other countries too – in Canada for example, a survey showed Canadian consumers having strong preferences for “.ca” domains in comparison with gTLDs9.

Respondents to our survey were asked to rank website URLs based on their immediate attractiveness. The approach is intended to mimic actual online behaviour, where users are confronted with a variety of URLs (including different TLDs), for example on a search engine results page (SERP).

Average rankings place “.co.uk” on top, followed by “.com” and “.uk” The mean rank of “.uk” is 3.2 on a scale of 1-5 and is shown on the chart below. The difference between “.com” and “.uk” is not statistically significant. In addition, “.co.uk” is chosen most frequently as the top-ranked option, while “.uk” is chosen most frequently as the 2nd-ranked option. These results suggest that consumers have a strong preference for a UK domain name, with “.uk” performing very well even though it does not exist at present.

9 http://www.domainpulse.com/2013/01/22/canadians-prefer-ca/ [Accessed 3 October 2013]. ccTLDs still account for the large majority of TLDs more generally – see http://www.register.be/UK/news/reg-ccTLDs-some-figures.asp [Accessed 3 October 2013]

http://www.domainpulse.com/2013/01/22/canadians-prefer-ca/

http://www.register.be/UK/news/reg-ccTLDs-some-figures.asp



Figure 1: Preference ranking for second-level (.uk) and third-level (.co.uk) UK domains

Source: London Economics

The survey results suggest that the importance of the entire .uk namespace increases in an environment full of unfamiliar TLDs. When comparing the two UK domains with existing TLDs, 38% of respondents put “.co.uk” first and “.uk” second or (less frequently) vice versa. When comparing the two UK domains with potential new TLDs, 62% of respondents put “.co.uk” first and “.uk” second or (less frequently) vice versa.

However, the evidence also suggests that the second-level domain (“.uk”) is likely to face initial difficulties convincing consumers, which, by and large (i.e. with the exception of digital natives), express scepticism towards the new domain. When asked to explain their first choice in the preference ranking, respondents cited a number of factors, listed in the Box below.

Box 1: Respondents’ explanations for their first choices in domain preference ranking

Generic UK preference – a general expression of preference for a UK designation, no

motive or explanation given, for example: “UK address” “Because it indicates that it’s a British firm” “Want to support UK business”

Familiarity – the respondent refers to the fact that he/she is used to seeing and using

the domain, for example: “Because it is the most familiar format” “Most recognisable URL” “I am used to using this format.”

Trust – preference is motivated by trust in the domain or security concerns about the

1.7 1.9 1.9 1.9

2.5 2.6

3.2 3.2

4.7

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

.biz .net .info .eu .me .org .uk .com .co.uk

Aver

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rank

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18 London Economics


alternatives, for example: “Sounds trustworthy” “Do not trust foreign websites” “Seems more reliable - like an actual working company/website”

Practicality – respondents refer to practical issues relating to website use such as

English language content, prices in £, local contact/delivery and familiar laws and regulations, for example:

“Means it's UK-based so will deliver to the UK without extra charges” “Because I assume items will be shipped within the UK and prices are in sterling” “UK-based, so likely to be more relevant to my search”

Source: London Economics survey of consumers

In addition, respondents who did not rank “.uk” in the top 5 were asked to explain the reasons for this. Lack of familiarity is the most frequently cited reason for not choosing a “.uk” website. When comparing “.uk” against new gTLDs, the lack of familiarity is cited proportionally less often. Some examples of respondent’s comments in response to this question are given in the Box below.

Box 2: Respondents’ explanations for why “.uk” not ranked in top 5 domains

Lack of familiarity – the respondent refers to the fact that he/she is not used to seeing

and using the domain, for example: “Not a known format” “Not a web address I am familiar with” “Not a well recognised domain”

Lack of trust – preference is motivated by lack of trust in the domain or security

concerns, for example: “Slight difference makes me suspicious” “Didn’t seem safe” “Didn't sound trustworthy”

Other – for example:

“Because it is unspecific” “Doesn’t sound good”

Source: London Economics survey of consumers

Some respondents indicate that acceptance may grow with familiarity (“because this type of URL isn't as commonplace due to current perceptions - can be changed as people are more aware”,



“I'm not keen on the .co, but I find UK a better predictor of prices in sterling and likelihood of delivery within the UK”).

In addition, survey evidence shows that second-level .uk ranks within the top two domains when compared to new gTLDs (when asked to pick the top five out of ten alternative domain names, including eight new gTLDs, 86% ranked “.co.uk” in first or second place, while 65% ranked “.uk” in first or second place).

Taken together, the evidence suggests that take-up/use of the second-level domain is likely to share the characteristics of many markets for innovative goods and services by following an S-shaped trajectory. Evidence of current doubts about the attractiveness of the new domain is thus unlikely to be conclusive. If, as some evidence suggests, the trust and familiarity advantages are transferrable across the whole .uk domain, this could result in a larger, more differentiated, and more competitive domain.

3.2.3 Increased registry competition

The introduction of SLDR in the .uk domain could enable increases in competition between registries (i.e. between Nominet and other registries). The introduction of greater choice for users through SLDR will increase competitive pressure on all registries now competing on the second-level domain space, with consequent potential benefits for downstream businesses, such as registrars and website owners in increased service choice and quality and/or lower prices.

The introduction of a range of new gTLDs in the near future could also enable increases in competition in the same way, and so it seems unlikely that the introduction of SLDR in the .uk domain will add significantly to the competition benefits to business in this wider context.

3.3 Benefits for consumers and the general public

3.3.1 Brand signalling

To the extent that SLDR enables registrants to present their brands more effectively, consumers will benefit from this stronger brand signalling.

A clear brand identity can act as a signal of product quality for consumers. The economic literature emphasises that there exist significant asymmetries in information between the supplier and the consumer of a product if product quality can only be determined by the customer after purchase. Companies who have invested in brands that have a reputation for high quality are less likely to supply low quality products, since this would undermine the value of their investment in the brand.

Strong brands can also increase consumer awareness of product availability and provide other types of information for consumers. The London Economics survey of consumers, for example, shows how a .uk domain name can send signals about the geographic location of the company/product, about trustworthiness, and about potential currency for any transactions.


20 London Economics


3.3.2 Choice

The London Economics survey of consumers (discussed in Section 3.2.2) shows how UK consumers show a clear preference for a .uk domain name. They associate positive characteristics with it, such as trust, familiarity, practicability and they seem to have a general preference for interacting with a UK company.

Although lack of familiarity with SLDR means that some respondents did not rank SLDR highly in their list of preferences, there are some indications that this negative attitude could be overcome over time, with the positive attitudes to a .uk domain generally being transferred to SLDR. A strong indication of this potential is the very positive attitude of digital natives towards SLDR.

By ensuring the ongoing relevance and attractiveness of the .uk domain space, SLDR ensures that registrants will continue to invest in the domain and so consumers will continue to benefit from the positive characteristics that they associate with the .uk domain space.

3.3.3 Wider effects

Respondents to the London Economics survey have shown how they associate positive characteristics with a .uk domain. Nominet’s survey of digital natives also shows how respondents had strong positive associations with a .uk domain. It is possible that a strong .uk domain, having benefited from positive association with the UK, will in turn have beneficial effects on the reputation of the UK as a digital economy, as other aspects of the digital economy become associated with a vibrant and successful .uk domain space.

Naturally, there are very many factors that shape the UK’s reputation as an advanced digital economy, but a successful .uk domain space may serve to reinforce the many other positive features of the UK’s position in the online world.

3.3.4 Nominet Trust activities

Nominet Trust was established by Nominet in January 2008. In line with Nominet’s public purpose objective, Nominet Trust funds internet-based projects that make a positive difference to the lives of disadvantaged and vulnerable people. Since 2008, Nominet have made a number of donations to the Trust, including a £6m donation reported in Nominet’s 2011-12 Annual Report. To date, the Trust has invested more than £17 million in internet-related projects that improve lives and communities.

If SLDR enables Nominet to make additional profits and some of this is transferred to the Nominet Trust, then there will be benefits from the additional activities that the Nominet Trust is able to undertake as a result.

3.4 Transition costs

3.4.1 Nominet and registrars: Costs of setting up the new domain

Nominet would incur costs in setting up the new domain. It can be expected that these costs, along with ongoing costs, will be passed on to registrars through Nominet fees and that they will



subsequently pass them on to registrants through their own fees, as long as there is sufficient demand for the new domain.

3.4.2 Nominet: Validation and verification

There would be costs to Nominet from implementing the validation and verification process - for example, the extra administration costs associated with processing and filing a surge in domain name verification cases; and the allocation of extra resources to chasing up non respondents and verifying respondent details through e-mails and phone calls.

As holders of third-level domain registrations would also have an option to go through the validation and verification process, this would increase the potential number of cases that need to be processed.

3.4.3 Nominet and registrars: Marketing and public awareness

During the period when SLDR is introduced, Nominet would incur costs associated with any marketing and/or public awareness campaigns designed to limit consumer confusion and facilitate the changeover from third-level to second-level .uk domain names.

These costs are linked to the costs of consumer confusion discussed later. The more effective the public awareness campaign run by Nominet, the less consumers will be confused during the changeover period.

It is also likely that during the transition period registrars will undertake some marketing activity in order to ensure that potential customers are well aware of the possibility of purchasing an SLDR in the .uk domain.

3.4.4 Registrants: SEO costs

Increased search engine optimisation (SEO) cost is one source of additional costs that causes concern among registrants: deterioration in search rankings can be very disruptive to a commercial website. Research repeatedly shows10 the overwhelming advantage of top-ranked sites on Google’s search engine results pages (SERPs) in terms of click-through rates (CTR).

However, a number of factors suggest that severe problems with page ranks are not the most likely outcome of SLDR. Search engines’ service consists in providing users with the links that are most relevant to them, which means they have to adapt constantly to changes in their operating environment, including changes in the domain name structure of the internet. The issue is a particularly prominent one due to the introduction of new gTLDs, which would proceed in parallel with the introduction of SLDR. The fact that Google itself is already committed to using (and has applied for) new gTLDs suggests that work is already under way to minimise disruptions. With specific regard to SLDR, we understand that it may be possible to maintain search rankings through simple measures such as 301 redirects.

10 See http://www.internetmarketingninjas.com/blog/search-engine-optimization/click-through-rate/.

http://www.internetmarketingninjas.com/blog/search-engine-optimization/click-through-rate/


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The adjustment of search algorithms to take into account the availability of new domains is likely to be a fast process. Google, the largest search provider, makes changes to its search algorithm on average more than once a day11.

However, it is plausible that the adjustment process (the end state of which is that the new domain has no negative effect on a website’s search ranking, other things being equal) will not be without frictions, which may result in higher SEO expenditures for some registrants during a limited transition period.

How costly might this be? Since the alternative is keeping the third-level domain, a rational firm will limit its additional expenditure to the price of running two domains in parallel. This can take the form of running two identical websites or redirecting traffic from a new “.uk” landing page to the original site in a third-level domain (or vice versa). Both approaches minimise all disruptions except those that arise from confusion of consumers faced with the new domain for the first time. In this situation, no additional SEO costs arise over and above what the business would spend anyway.

Alternatively, if a company decided to switch completely to the new domain (abandoning the third-level domain), this may require investment in additional SEO. This option will only be taken as long as it is not more costly than the option described above (running two domains in parallel), that is, as long as it costs no more than the registration fee for two domains rather than one in addition to any branding benefits associated with having a “.uk” address.

This suggests that the cost of additional SEO would be transitory and limited in terms of the number of firms affected and the sums involved.

3.4.5 Registrants: Costs of adjusting signage, business cards etc.

The costs associated with adjusting signage, business cards, templates, etc. to reflect the new web addresses of SLDR registrants are likely to show an extremely skewed distribution: for firms with a large amount of display materials (for example in outdoor advertising, or firms running fleets of vehicles, etc.) the costs of transitioning to a new corporate website can be very substantial. At the same time, for most firms costs are likely to be minimal, in particular because they can be amortised over a long period and are unlikely to add substantively to the periodic cost of refreshing of company stationary, rebranding, address changes etc. In fact, three quarters of the sample in a Nominet survey of current registrants said that they would not bring forward the normal costs associated with producing materials containing their website, but would adopt the domain name in line with their normal production timelines.

For firms which would incur large costs, the decision to invest in the new domain will be taken in the light of broader considerations about the firm’s branding strategy and the advantages of a SLDR address for the business. A rational business will incur these costs only if it estimates the benefits to be commensurate with the costs. The benefits in terms of brand attractiveness and effective communication have not been quantified in this study, but their value would represent

11 Google carries out continuous testing to improve the quality of its search results. 665 improvements to the search algorithm were made in 2012. See http://www.google.co.uk/intl/en/insidesearch/howsearchworks/algorithms.html.

http://www.google.co.uk/intl/en/insidesearch/howsearchworks/algorithms.html



the upper limit of the additional costs a firm would be prepared to pay. While this may easily be the largest single cost component, it needs to be remembered that the benefits of having the new domains are at least as large from the perspective of companies that choose to take up SLDR.

3.4.6 Nominet and Registrants: Intellectual Property (IP) protection and disputes

During the transition period it is likely that the Nominet dispute resolution service (DRS) will need to allocate more resources to solving dispute cases as there is a general increase in the number of disputes. The increase is expected because a) despite any publicity campaigns, a certain proportion of registrants with valid IPR claims will miss the ROFR deadline, thus having to resort to the DRS to have their claims validated; and b) the publicity (information campaigns etc.) surrounding the introduction of SLDR is likely to reignite dormant IPR disputes as IPR holders become aware of the (potentially much increased) value of their IPRs in the new domain.

However, we anticipate the increase in the number of disputes to be minimal for the following two reasons: Firstly, due the potential brand damage and legal costs incurred if the right of first refusal (ROFR) is not taken up, the majority of large firms will take up the ROFR regardless of the tangible (or intangible) benefits accrued through the new SLDR domain. Secondly, we anticipate that many small firms may choose not to take up the offer because these firms are less of a target for so-called ‘cybersquatters’12, and thus there is not the same threat of brand damage. Furthermore, any disputes resulting from ROFR refusal are less likely to be taken up by small firms because of the high legal costs relative to expected damages.

There are an additional four components to the overall costs that arise in relation to IPR protection.

Complainants entering the DRS process are potentially losing profits while the DRS process takes its course.

Potential consumer confusion and ‘passing off’ (discussed below in the section on ongoing costs).

There is the ongoing cost of increased monitoring and enforcement actions taken by firms outside the DRS mechanism (discussed below in the section on ongoing costs).

The ongoing cost of defensive registration (discussed below in the section on ongoing costs).

3.5 Ongoing costs

3.5.1 Nominet and registrars: Costs of running the new domain

Nominet will incur the direct costs associated with providing ongoing registry services and registrant validation services. It can be expected that these costs will be passed on to registrars through Nominet fees.

12 This is the pre-emptive registration of knowingly ‘in demand’ domain names, with the sole purpose of purchasing the domain to selling it on for a large profit and/or to use the domain name to tarnish the brand.


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Registrars may also have some incremental costs from offering SLDR alongside other domains and, along with the cost of paying fees to Nominet, it is expected that that they will subsequently pass them on to registrants through their own fees, as long as there is sufficient demand for the new domain.

3.5.2 Registrants: Fees to registrars

Registrants that choose to take up SLDR, either because they see value in the new domain or for the purposes of defensive registration, will need to pay a fee for the domain. In some cases, where SLDR replaces a previous domain, then this payment will be offset, fully or partially, by the reduction in fee payments for the previous domain13.

3.5.3 Nominet and registrants: IP protection and disputes

The costs of IP protection and disputes in the transition period are discussed above. In addition to those costs there are likely to be ongoing costs of IP protection for registrants.

First, there is the cost of increased monitoring and enforcement actions taken by firms outside the DRS mechanism. This is inherently difficult to measure, given the variation in the value of firms’ IPRs and their exposure to risk (e.g. companies with mainly local or national focus, like most off-line retailers and service businesses, have a much reduced need for monitoring infringements from outside their physical area of operation). We would expect the vast majority of firms to spend nothing at all because their websites are not repositories of sufficiently valuable IPRs (brand names etc.), or because they take up SLDR. A few will have substantial expenses on monitoring and (non-DRS) enforcement. For the few, those monitoring costs could be as much as at £9,500 per year or more, the upper limit of annual monitoring costs cited by Katz et al. (2010)14. For companies that take this route, this expense is split across all the domains for which monitoring has to be undertaken, i.e. including all expected 1,000 new gTLDs currently at advanced review stage by ICANN15.

Second, the ongoing cost of defensive registrations that registrants incur in order to protect IPRs against infringements, even though there is no other economic benefit (such as increased sales) of SLDR, has to be counted as a net cost. Estimates of the prevalence of defensive registrations vary very considerably16.

Third, to the extent that IP rights are not fully protected, then additional costs may arise from consumer confusion, and more specifically from ‘passing off’, i.e. misdirection of traffic due to a website with an identical or similar name ‘impersonating’ a legitimate website.

13 Nominet’s survey of digital natives (2013) shows that 17% of businesses and 36% of individuals not using a UK domain as their primary domain but likely to purchase SLDR would switch from their existing domain and adopt “.uk” exclusively.

14 Katz, M. L., Rosston, G. L. and Sullivan, T. (2010). ‘An economic framework for the analysis of the expansion of generic top-level domain names’. Report (Phase I) to ICANN. Available at: http://bit.ly/dp11Xw [accessed 02 September 2011].

15 433 new gTLDs are currently identified as passing ICANN’s assessment: see http://newgtlds.icann.org/en/ [accessed 24 May 2013]. We expect this to rise to 1,000 by the time SLDR would become operational.

16 See an overview of recent estimates in London Economics (2011). ‘Economic benefits of an Internet domain for Wales’, p. 36. Available at http://www.domainforwales.org.uk/system/files/Wales%20Economic%20Study%20-%20FINAL_0_0.pdf [accessed 24 May 2013].

http://newgtlds.icann.org/en/

http://www.domainforwales.org.uk/system/files/Wales%20Economic%20Study%20-%20FINAL_0_0.pdf



Higher data requirements under the SLDR proposal may deter some potential registrants, including fraudsters away from using a .uk domain name.

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26 London Economics


4 Summary

The SLDR proposals are associated with a range of costs and benefits. These include costs and benefits to business (including Nominet, registrars, registrants/website owners, and the wider economy) and to consumers and the general public. On the cost side, a further important distinction is between ongoing costs, and transition costs, which are in many cases one-off adjustments.

Our review, including evidence from primary research carried out specifically for this study, identified the benefits of SLDR outlined in the Box below.

Benefits of SLDR

Benefits for business:

Relevance of the UK namespace Continued wide usage and visibility sends a signal to end-users that .uk is a

trusted resource This is also a benefit for those who might continue just with third-level .uk

domain names SLDR will be introduced when many new gTLDs are being introduced

Better brand signalling SLDR may assist registrants in presenting their brands more effectively (less

noise around the brand name in the domain address, etc.) Image benefit for the UK’s digital economy

Signal of continuing investment, updating of .uk domain; presents the UK as a digital economy that is moving with the times

Benefits for consumers and the general public:

Relevance of the UK namespace Continued availability of a variety of trusted domains

Greater choice Users face a wider variety of domain names; SLDR creates scope for more

nuanced brand communication Benefits from Nominet Trust activities

Various programmes to promote social causes and entrepreneurship through the application of information technology that would not take place without the Trust

On the cost side, we find that, aside from the costs of setting up and running the new domain, the net costs associated with the introduction of “.uk” arise from frictions that are mostly:

transitory (for example, the potential for initial confusion of users seeing a unfamiliar-looking website addresses, thereby reducing spending on those sites); or

4 │ Summary


incremental (e.g., the cost of IP monitoring may increase, but the increase in actual monitoring costs that can be ascribed to the new “.uk” domain will be marginal/a small part of the overall cost of monitoring a new domain name landscape that may soon include up to 1,400 TLDs.

50% of current Nominet registrants surveyed in August/September 2013 do not foresee any additional costs associated with switching to a new domain (other than the cost of the domain name itself).

Our review identified the costs of SLDR outlined in the Box below.

Costs of SLDR

Costs for business:

Costs of setting up and running the new domain: Development & implementation costs incl. marketing and DRS Ongoing incremental costs incl. validation/verification

Costs of transition to the new domain: Cost of additional SEO Cost of additional branding and marketing Cost of consumer confusion

Cost of IP protection: Additional dispute resolution Additional IP monitoring/enforcement Defensive registration Foregone sales due to DRS process

Costs for consumers and the general public:

Costs of transition to the new domain: Cost of consumer confusion Increased search costs due to ‘passing off’

When comparing costs and benefits, it needs to be recognised that the benefits identified are of a more intangible nature and thus inherently difficult to quantify. They also depend crucially on how consumers and businesses react to the new domain.

Against a background of the profound changes represented by the introduction of new gTLDs and internationalised country code top-level domains (IDN ccTLDs), the introduction of SLDR is a relatively minor change in the domain name landscape. Some users (registrants) will prefer the new domain out of a rational consideration that includes the effect of a new, shorter domain name on the presentation of their websites to end-users/consumers.

Internet users will become accustomed to the new domain at the speed with which popular websites (including both established websites and websites representing new businesses) adopt it. The adoption of the new domain is thus likely to follow the S-shape that is characteristic of

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28 London Economics


markets undergoing a process of innovation. A depiction of the process, including a stylised distribution of take-up rates over time, is shown in Figure 2 below.

Figure 2: The diffusion of innovation

Source: http://bit.ly/10wPHam [accessed 3 October 2013].

The private benefits that firms and individuals derive from using the new domain are likely to create an additional (external) benefit for the whole .uk domain space: as new websites proliferate, the product characteristics of the whole domain (trust, UK association) are reinforced and expanded, thereby strengthening the .uk domain in the face of unprecedented competition, while giving “.uk” a head start by transferring some of the trust/familiarity aspects of the third-level domains to “.uk” in return.

The potential for private and external benefits from SLDR is supported by survey evidence: the key insights from the primary research undertaken by Nominet can be summarised as follows:

UK consumers overwhelmingly support the .uk domain: as a signal of genuine association between a website and the UK; as a guarantor of safety and reliability, borne of experience; as an indicator of convenience (relevant content, familiar procedures, local

shipping, subject to consumer protection laws). However, it must be acknowledged that, from the perspective of internet (end-)

users/consumers, the introduction of a “.uk” domain does not address a pre-existing demand.

http://bit.ly/10wPHam

4 │ Summary


However, individuals (digital natives) and businesses that use websites report substantial levels of interest in the new domain:

Nearly three quarters of individual website-owners and half of businesses in the digital natives category report interest in shorter domains, with approximately one in five reporting the intention to purchase a second level only .uk domain.

A majority of individuals and businesses in the digital natives category associated the “.uk” domain with branding benefits (”it will allow my domain to be more snappy and more direct”) and see it as “a credible alternative to other domains like .co.uk and .com”.

This suggests that initial take-up would be driven by a select group of website owners, who can make use of the added choice presented by a second-level “.uk” address in their overall communication strategy. The success of the websites in the new domain, together with any supporting measures by Nominet (such as an information campaign to overcome the unfamiliarity that attaches to any new domain) is likely to erode the familiarity advantage of the incumbent domains over time, potentially very quickly (i.e., if a number of iconic/high-visibility UK businesses adopt the domain). This effect will be supported by search engines, which determine page rank primarily based on the relevance of site content, so that “good” websites with “.uk” addresses will achieve a high SERP position and thereby attract traffic.

Once familiarity reaches a tipping point, the advantage of “co.uk” in the eyes of users disappears (the trust advantage is extended to the entire .uk domain), leaving only brand differentiation as a determinant of domain choice.

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