Earlier this week the domain name industry was rocked by a shill bidding scandal at SnapNames. The company made the right early moves by admitting the problem and promising refunds, plus interest, to customers. Now, though, they are forcing customers to release them from liability to get the refund. We think this this is a mistake.
SnapNames acquires expiring domain names from registries and then auctions them off to interested buyers. When everything goes well people are happy. SnapNames gets a good return on investment, and the domains go to the buyer who values them the highest.
But it turns out things most certainly have not gone well. Since 2005 a substantial number of domain auctions had shill bidding by a SnapNames employee.
This isn’t run of the mill eBay shill bidding. On eBay a seller may try to participate in the auction to drive overall bidding higher. But for the most part pricing doesn’t get out of control because most stuff sold on eBay isn’t particularly unique and price boundaries are well established.
What happened at SnapNames is much worse. The company is the seller and has the most to gain by shill bidding. And the company is also in control of all auction information. Sometimes an auction may have two bidders, with one bidder putting in a maximum bid of $100,000 (yes, they go this high sometimes). Another may bid just $10,000, and so the winning buyer would just pay some small amount over $10k. From SnapNames perspective that isn’t a $10k gain. It’s a $90k loss.
So SnapNames “fixed” the problem. An executive with the company simply bid on those domains. He could bid up to, say, $90,000 with full certainty that he wouldn’t be burdened with actually winning the auction and having to pay up. SnapNames made lots of extra money. And if the top bidder backed out and the executive accidentally won, SnapNames was secretly reimbursing him on the back end. Zero risk.
SnapNames said only about 5% of total auctions were affected, but this is misleading. The top domains make up a substantial proportion of total revenue. So that 5% could easily have accounted for, say, much more than 50% of revenue. SnapNames was careful not to disclose the total dollar amounts involved, or even what percentage of overall auction revenue was affected.
That was their first mistake. Not being open and honest.
Now they’re demanding that customers sign an agreement waiving any rights they may have to sue SnapNames in exchange for the refund. That’s a big problem – some customers are complaining that auction data has been erased from their accounts, so they don’t even really know how much they were affected. And SnapNames isn’t making any promises that the reimbursement offers are complete. Once a customer signs the release, even if the settlement amount was calculated incorrectly, they have no further recourse against the company.
A typical comment from a customer: ““Please be prepared to provide detailed information and data regarding your bidding and purchase activity to the extent that it differs from the information we have provided to you.”Pretty hard to do since Snap took down a large portion of bid history!”
SnapNames is making exactly the wrong moves here. They need to return this money to customers immediately with no conditions attached. And they need to provide full and accurate reports to those customers along with the refund. Anything short of that is just shady.