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When It Comes to gTLDs, Follow the Money (Part 2)

In my previous article I showed that ICANN expects to recover a lot of money from the first round of applications for new generic Top-Level Domains (gTLDs)—$92.5 million, to be exact—and that even that dramatic figure is probably substantially underestimated. For that reason, I argued that ICANN probably will recoup a windfall from the first round of gTLD applications and pointed out that ICANN’s promise to consult with the Internet community before spending such a windfall is unsatisfactory because it has failed to say beforehand what surplus revenues might be spent for.

Quite apart from the high cost of an individual application fee—$185,000 is hardly chump change for any but the wealthiest applicants—the important thing to notice is the aggregate effect of adding $92.5 million in revenue to ICANN’s budget from an entirely fresh source. Consider how $92.5 million compares with ICANN’s total revenues for the past three years. In 2006 ICANN posted total revenue of $29.8 million. In 2007 it was $43.4 million. And in 2008 it was $51.4 million. By ICANN’s own questionably low estimates, then, the first round of gTLD applications, not counting a single potentially bank-breaking auction, will bring in nearly twice as much revenue as all of ICANN’s receipts last year alone.

ICANN assures us that any surplus revenues from the first round of gTLD applications, whether from application fees or auction payments, will not be spent on ordinary budget items and that expenditure will follow consultation with the Internet community. Unfortunately, there is good reason to question whether ICANN will spend potentially millions of dollars in the interest of the Internet community and not in its own self-interest. During the past three years, as the world economy has suffered a massive setback and millions of people have been thrown out of work, executive pay at ICANN has skyrocketed. In 2006 compensation for the top five highest paid employees, besides officers and directors, as listed in ICANN’s Form 990, totaled $566,292, for an average salary of $113,258 per year; in 2007 the top five were paid $985,568, for an average salary of $197,113; and in 2008 their compensation totaled $1,094,308, for an average salary of $218,861. Between 2006 and 2008, then, salaries for ICANN’s executive salaries rose by 93%. It is hard not to ask whether executives whose pay is doubled in three short years should be entrusted with free rein over potentially millions of dollars in windfall revenues.

To clarify, my concern lies not with executive compensation, per se, but with the power that ICANN appears set to acquire as a consequence of increasing its net revenues so dramatically and with the likelihood that such power will be abused. Potential abuses come in various forms, of which unjustified increases in executive pay would be the least objectionable. More problematic would be using gTLD-generated revenues to pursue litigation seeking the dissolution of the Joint Project Agreement (JPA), even over the NTIA’s objections, or a court order granting ICANN custody of the root-A server. Perhaps most troubling of all, ICANN could use windfall revenues from the gTLD application process as a war chest to litigate its way into seizing control of the IANA function itself. A small organization on a tight budget does not have the leisure of such high stakes litigation; dramatically increasing its budget would give ICANN alternatives that its past budgets have not previously afforded.

Although these possibilities seem remote, it would be unwise for Internet stakeholders to ignore them. Out of caution, we should consider setting limits on how the gTLD-related revenues can be collected and spent. Two ideas come to mind.

First, ICANN might be persuaded to charge less to dispose of gTLD applications and to administer new gTLDs. Stakeholders might, for example, urge ICANN in the strongest terms to conduct a study of the actual out-of-pocket costs of the gTLD application process and administration. If held to international accounting standards, a study like this would give some assurance to the Internet community that gTLD revenues are tailored more precisely in line with actual costs.

Second, excess profits produced by the gTLD application process could be redirected away from ICANN toward purposes supported by the Internet community at large. One idea would be to require that such surplus revenues be distributed to national CERTs or similar authorities on a proportional basis, in order of total number of DNS addresses or households with Internet use or some other neutral measure, so that the new-found wealth of the Internet can be reinvested to strengthen its security.

Whatever proposal is best, it would be a shame if ICANN were allowed to use the gTLD application process as an exercise in raw profiteering or, worse, as a means of achieving autonomy at the expense of accountability.

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

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Continuing on the discussion from the first part Kieren McCarthy  –  Aug 4, 2009 11:15 PM

So, as per your suggestion to bring this over from the discussion on “Part 1” of this issue.

I’m disappointed that none of our apparent agreement on important points in that discussion has led through to this post, but I suspect you wrote both shortly after one another and so were not able to revise this post.

First, it is important to reiterate again that no one knows what the demand for new gTLDs will be, and so no one knows how much potential surplus - or any potential surplus there will be.

And, again, some crucial facts:

* The new gTLD program will have its own broken-out budget so people can follow the money
* The financial approach taken was developed by the community and with significant public comment and input (annual registry fees, for example, have been reduced from one applicant guidebook version to another)
* ICANN has stated publicly several times that it will consult with the community about what to do with any surplus funds

Where we left off in the last discussion, the nub of the issue was: shouldn’t there be agreement about what to do with a potential surplus *before* ICANN deposits application fee cheques?

If that is what the community wants, then the ideal time to have that discussion, I argued, was after all the details have been settled and the final Applicant Guidebook is posted for review.

I’m not sure this post adds much to that conversation and conclusion, although there are some figures that are worth commenting on.

You point to executive pay, taking the top five executives and providing percentage increase year-on-year. What your figures do not account for however is the introduction of new executives. The 2006 figures do not include either the Chief Operating Officer or the Chief Financial Officer or the Vice President for Corporate Affairs - and I think it very unlikely that you would find the community arguing against the introduction of these three roles and individuals because they have had an enormous positive impact on the effective running of the organization.

What your figures show is that ICANN hired in some top talent three years ago. Yes it did. No one is ashamed to say so.

I could go through the reasons why your worst-case scenarios for what any funds could be spent on are not realistic but I don’t think that’s your point - your point is to highlight the risk that can come from any organization receiving a large comparative sum of money without previous consideration of what to do with it. Again, ICANN as an organization can easily have that conversation - but the community will need to make a point of saying it wants that conversation if it wants it before the application process begins (there are many in the community who will be impatient for it to start without further discussion).

As for your suggestions on where to spend the money - well, some good ideas and I’m sure many other community members will have many more good ideas. This is why it is so important to have an open discussion through the normal procedures and processes.

When that happens and when the community defines the use of possible funds, I hope that your concerns and fears outlined here will ring hollow.


Kieren McCarthy
General manager of public participation, ICANN

Kieren,You may be exaggerating how far we R. Shawn Gunnarson  –  Aug 5, 2009 8:14 PM

Kieren, You may be exaggerating how far we agree, so let me restate my central points and your responses, as I understand them. I argue that that ICANN probably will receive a lot more money--millions of dollars more--than the actual costs of administering the gTLD application process. My reasons for saying so, among others, are the $60,000 per application fee for risk management and the revenues from tie-breaking auctions. You reply that no one knows exactly how much demand there will be for new gTLDs and that demand will be clear only after the process begins, which unavoidably entails some educated guesses. We agree that the process entails uncertainty while apparently disagreeing that ICANN has done all it can to mitigate that uncertainty for the benefit of individual applicants. Annual registry fees have been reduced, but the application fee has remained unchanged. Why did ICANN ignore substantial calls to reduce the application fee when there might be other ways to manage the risk of greater-than-anticipated demand? I also argue that the amount of potential surplus revenues dwarfs any budget ICANN has had in the past and, for that reason, may fundamentally alter ICANN's institutional power. Again, you reply that no one can tell exactly how much surplus there will be. We agree on the fact of uncertainty, but I'm not sure you acknowledge how greatly surplus revenues have the potential to change ICANN by dramatically augmenting its economic power. I argue that ICANN should be required to commit surplus revenues to projects that benefit the entire Internet community, rather than using the money for self-interested purposes. You reply that the community can express its opinion when the guidebook is completed and posted for public comment. As I said yesterday, my chief concern is with the power to decide, not the power to discuss. ICANN may or may not invite public comment, but it has the power to decide how to spend surplus revenues that may run into the millions of dollars. Until that power is limited, it could be abused. Finally, I question (somewhat impolitely) whether it is wise to entrust the expenditure of millions of dollars in new wealth to a company whose executive pay has doubled in the past three years. You reply that new corporate officers and fresh talent have been worth the additional cost. If that's the explanation for the increase in executive pay that I described, please explain why Dr. Twomey's compensation and contributions to benefit plans have increased from a total of $478,444 in 2006 to $947,259 in 2008. That's a 100% increase in three years for a person who represents neither a new corporate officer nor fresh talent. Besides, my point was not the amount of executive compensation, per se; it's the more serious point of corporate trustworthiness. A corporation that doubles its executive compensation in a three-year period bears watching when it has an opportunity to spend millions of dollars in windfall revenues. In a nutshell, I think our most basic disagreement is over whether ICANN's willingness to discuss with the Internet community what to do with windfall revenues generated during the gTLD process provides sufficient assurance that ICANN will not use those revenues in ways that could reduce its own accountability or, worse, pose genuine threats to the safety and security of the network. You believe it is, I do not. A willingness to talk is no substitute for actual limits on power. ICANN should voluntarily take steps during the development of the final version of the guidebook and during its implementation to limit the money it will acquire during the gTLD process and to propose how it will spend any surplus. Even with the need to satisfy multiple stakeholders, these voluntary measures--entirely in ICANN's control--would offer some much needed assurances of its sense of institutional responsibility. Would ICANN consider such measures? Best, R. Shawn Gunnarson

Sorry to be helpful but we're saying the same thing Kieren McCarthy  –  Aug 5, 2009 10:04 PM

This can all be boiled down to a few simple points and a solution. * ICANN may receive large sums of money from the new gTLD process * If it does, that's a concern for some because there is no agreement as yet on what to do with that money Q. So what is the solution? A. The community needs to say it wants to discuss what to do with any extra money when the Applicant Guidebook is finalised but before the application process begins. That's it. Everything else at the moment is just speculation and/or scaremongering. [Re: Paul Twomey's compensation - the answer is: currency fluctuation. The US dollar fell massively compared to the Australian dollar (Dr Twomey is based in Australia and is an Australian citizen). If the Australian dollar fell against the US dollar, the US dollar value of his wage would have fallen.) Kieren McCarthy General manager of public participation, ICANN

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