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When It Comes to gTLDs, Follow the Money (Part 1)

Introducing new generic Top-Level Domains represents, as ICANN says, “the biggest change in the Internet since its inception 40 years ago.” Among the least understood aspects of this change is its potential to alter the economic power of ICANN as an institution. To see how that might happen, let’s follow the money as it is expected to flow from the gTLD application process.

ICANN expects to get a lot of money from gTLD applications: $92,500,000, to be exact. That figure is a product of an estimated 500 applications for new gTLDs in the first round (other rounds are expected to follow) and a generally nonrefundable processing fee of $185,000 per application.

ICANN justifies the high price of applying for a new gTLD by arguing that the total is intended to reflect its out-of-pocket cost for processing applications. That assurance is hard to credit when one understands how ICANN arrived at its fee of $185,000 per application. Nearly one-third of that fee—$60,000—is attributable to costs that are difficult to forecast, based on a study by Willis Inc. Such hard-to-predict costs supposedly include the unusual expenses of personnel and resources necessary to administer significantly more applications than estimated. One-third of the application fee, then, follows from the estimated number of applications—a figure over which ICANN itself has complete control. It nowhere explains why it does not cover the risk of significantly greater applications by adjusting its estimate or covering this risk through conditional contracts with outside vendors.

Nor does ICANN’s estimate of 500 applications during the crucial first round strike one as reasonably accurate. That number seems substantially low, given how many entities are expected to file applications to protect well-known trademarks, much less those that have publicly expressed interest in commercially desirable gTLDs. Remember that it is the number of applications, not the number of gTLDs that generates the total revenue for ICANN.

Beyond uncertainty over the number of first-round applications, the amount of revenue to be collected by ICANN during that process is also uncertain because ICANN has said it will use auctions as a tie-breaking mechanism for deciding contests among otherwise qualified applicants for the most valuable and popular gTLDs. ICANN says that there will be few tie-breaking auctions, because “agreement among the parties ... is a more economical solution to contention than auction. Assuming that cooperation will prevail over competition in determining control of new and valuable space on the Net is touchingly hopeful, if not naïve. One would expect organizations like Rupert Murdoch’s News Corporation and Bertelsmann AG, for example, to compete vigorously for dominance of .news. Perhaps surprisingly, ICANN has published no guidance for how it would structure such a battle between billion-dollar international corporations. It has not said whether auction participants would know each others’ identities nor whether there would be an upper limit on the amount of money collected from ICANN for ownership of a particularly coveted domain. While any estimate of the revenues that ICANN may get from auctions could be only speculative, that total could easily exceed the $92.5 million in estimated application fees given the economic power of likely competitors and the high stakes involved in the battle for dominance of new TLDs.

In short, ICANN most likely will recover a windfall from the first round of applications for new gTLDs. For that not to happen, only about 500 applications will be filed and the $185,000 fee per application will just cover the out-of-pocket cost of evaluating those applications. Since both assumptions are doubtful, the question arises what ICANN will do with the resulting windfall. It says it will wait two or three years before determining whether the first round of applications produced a deficit or a surplus. If the latter, “ICANN will engage the community in how that excess is to be used.” A similar answer is given regarding the possibility of surplus revenues collected from tie-breaking auctions: “Proceeds from auctions will be returned to the community via a foundation that has a clear mission and a transparent way to allocate funds to projects that are of interest to the greater Internet community.” In both instances ICANN promises to consult with the Internet community before spending any windfall but fails to say for what purposes such money would be spent beforehand.

In my next installment I will show how dramatically the revenues that ICANN expects to recover from the gTLD application process could increase its economic power, raise some questions about that power, and suggest two possible responses for the Internet community to consider as checks on the power that ICANN is about to acquire.

Update Aug.4.2009: Part 2 published

By R. Shawn Gunnarson, Attorney at Law, Kirton & McConkie

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Certainty and uncertainty Kieren McCarthy  –  Jul 30, 2009 6:21 PM

I think you’re are being more than a little unfair to ICANN here. Of course, it is logical to look at the organization that will receive money and question its motives, but you are missing several important aspects here.

For one, you point out the uncertainty that exists around the fee - how does ICANN know there will be 500 applications? The answer is that it doesn’t. It is a best-guess. And a best-guess that had to be made in order to allow to arrive at a figure for the application fee.

You also point out the uncertainty surrounding the costs calculated by Willis Inc.

But when there is so much uncertainty, how can you be certain that ICANN stands to make significant sums of money from the process?

The fact is that if ICANN receives far fewer applications than 500 - and there is no reason to suggest otherwise - then it will likely be substantially out of pocket. After all, the process can’t be put on hold unless a certain number of applications are received. Likewise it is possible that if there is a huge number of applications - say, 5,000 - that there will lots of new costs associated with working through those applications, and it is likely that there will be more conflicts, which can also cause mounting costs.

Re: the rationale for the fee. The policy was drawn up by the Internet community that the whole process should be revenue-neutral. So that is what ICANN is working toward in the program’s implementation. The *aim* of the process is to not make money. What’s more, ICANN has very clearly and publicly stated several times that *if* there is excess revenue then it will go to the community to decide what to do with the funds.

You say that ICANN hasn’t said what it will do with the funds - but that’s the point, isn’t it? How can ICANN say what it will do without first consulting with the community? If there is excess and it is $5 million, then one conversation will be had; if it is $50,000 then quite a different conversation will result.

It is worth nothing that the whole new gTLD program is being broken out as a separate budget item just so everyone can see what is coming in, what is going out and whether there is a surplus or a shortfall of funds.

The reality is that in order to move forward ICANN had to make some decisions based on best guesses as no one knows exactly what will happen when the application process is opened. We already know that this is not going to be a perfect system. The problem is that there is no way to know at the moment where it will work well and where it will not.

So, the community should keep a careful eye on this process - that is vital. But keeping a careful eye is very different from assuming that there is anything but an honest and best-effort approach being taken here.

ICANN is being an open as possible about its plans and its assumptions in an effort to show that there is no hidden agenda. Where the community would be right in assuming a more critical stance is if, after the process has begun, ICANN did not maintain that open approach.

Skepticism when you are talking about potentially huge sums of money is only logical; but I hope that you will find in 12-24 months’ time that such skepticism was unnecessary.

Kieren McCarthy
General manager of public participation, ICANN

Criticism and Fairness R. Shawn Gunnarson  –  Aug 3, 2009 8:58 PM

Kieren, Thank you for your reply. It's nice to know that the people at ICANN are listening. You say that the gTLD process is filled with uncertainties, but uncertainty comes in different forms. Although the number of applications that will be filed with ICANN during the first round is uncertain, the effect of choosing an estimate of 500 is not. The lower the estimate, the greater the gain for ICANN because of the size of the fee component attributable to the risk mitigation. Also, while no one knows how much money tie-breaking auctions will produce, ICANN's silence on a bidding cap and on procedural rules suggest that such auctions will produce a large figure. In short, I don't question the need to make "best guesses" to move the gTLD process forward. I just point out that ICANN stands to recover what could be a sizeable windfall, since a third of the application fee and the amount recovered from auction bids bear little if any relation to ICANN's actual costs. ICANN has set the estimate, computed the fee (including the one-third risk management component and the 500 application estimate on which it rests), and established auctions at the tie-breaking mechanism. Under those circumstances, I think it's entirely fair to point out that ICANN probably will recover a large windfall and to ask what should be done with that money before it lands in ICANN's accounts. Or is that openness that ICANN prides itself on purely cosmetic? Sincerely, R. Shawn Gunnarson

The issue of how Kieren McCarthy  –  Aug 4, 2009 12:10 AM

It strikes me that your big concern here is not the fee, or the approach, or the methodology wrt the financial aspects of the new gTLD process, but more a legitimate worry about where a potentially huge sum of money will go and what will be done with it. You ask why it is that ICANN hasn't said what it will do with any potential surplus. I've given two reasons: one, no one has any idea if there will even be one, let alone how big it is; and two, because ICANN has said it will go the community to decide, and so to say where any money would be spent now would be to pre-empt that discussion and cause widespread ill-feeling. There is also a third reason: ICANN as an organization is concentrating and focussing on getting the guidebook in place first of all. The money issue will need to come later, and I'll explain why: What happens with the trademark protection issue, for example, will have a huge effect on how much money is received and also what the community's views are of that money and its potential uses. If, for the sake of argument, everyone agreed that there were to be no built-in protections for trademark (that won't happen but just as an example), then you would most likely see large numbers of trademark holders investing heavily in protecting their names. That would mean a surplus of money. But also a surplus of money provided largely by trademark holders. If you went the other way, and there were very heavy trademark protections, you would see far less money and nearly all of it contributed by parties other than trademark holders. The conversation about what to do with the money would be vastly different in these two cases. Trademark protection is just one of the four "overarching issues" that will significantly impact the application process. And then there are other issues, such as: governments' approach to new gTLDs; the state of the economy; whether there is a sudden increase or decrease in demand for new domains (celebrity endorsement is all too possible); and so on. So, broadly, not only does ICANN as an organization not have time at the moment to reflect on how to spend potential surplus funds (because it is working on issues that will have a significant impact on the amount and the type of money); but also it is not the right time to decide what to do with any potential surplus funds because those same issues aren't settled yet. What your major concern is, I believe - and one which I can understand - is that currently no one has any idea what's going to happen with the money *before* ICANN deposits application fee cheques. Why not decide some principles now when the money is a concept rather than a reality? So, fortunately, there is a clear and very simple system for the community to raise that concern and have it dealt with - you just ask for the discussion once the final(ish) Applicant Guidebook is put out for public comment. The reason we have the ongoing overarching issues discussion - which has been a significant tangent in the new gTLD process - is because the community effectively asked for it. It responded in large numbers to the Applicant Guidebook raising a number of big concerns. ICANN's staff heard that, pulled out four overarching issues, and went back to the community to find solutions. So if, when the Applicant Guidebook is finalized (and also when I think it will be much easier to judge real demand for new gTLDs at that point) the community speaks loudly and clearly and asks for the discussion that ICANN has promised re: the potential surplus of funds, then that conversation will be had. For that to happen though - especially considering the likely impatience once the guidebook is actually finalized - you need to have a big section of the community ask for the conversation. Or, at least, more of a section than those that wish to progress without having the conversation about how and where to spend any surplus funds. I hope that gives a clear response and explanation and also provides you with a useful action point for something that is clearly of concern to you. Cheers, Kieren McCarthy General manager of public participation, ICANN

Conversations and the Power to Decide R. Shawn Gunnarson  –  Aug 4, 2009 4:07 PM

Kieren, I sincerely appreciate your explanation. You rightly identify as my chief concern the problem of what a large windfall could mean to ICANN as an institution and to internet governance in general. I have more things to say about those matters in the second part of my two-part post, which gets published today. Let me suggest that we defer most of our interesting conversation about the details of the gTLD finances until the rest of my post comes up, so that you can respond to the whole of my thinking. One point does seem worth making now, however. I am not especially concerned with the capacity of the internet community to engage the ICANN staff in an administrative-like conversation about matters like the guidebook and finances. Perhaps it's my training as a lawyer, but my concern is with the power to decide. Specifically, ICANN's willingness to invite public comment and to respond to it, at least when the volume and importance of the comments reach a certain critical mass, is one thing. Its power to make the ultimate decisions with or without the support of the internet community is quite another. And it's the latter that concerns me more than the former. As for the rest of your comments, including the all-important question of trademark protection, let's defer our conversation until you have an opportunity to read the second part of my post. Best, R. Shawn Gunnarson

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