31 August 2013 marked a historic day for Internet users worldwide. It marked a very key day in the introduction of new gTLDs. On that day ICANN, who oversees the gTLD programme, six years in the making, announced the completion of gTLD Initial Evaluation (IE) results based applicant’s ability to demonstrate their financial, technical and operational capability to operate and manage a TLD Registry.

What did the IE results reveal?

Back in January 2012 these 1930 applicants, made a key corporate decision and applied to contract with ICANN (who have key responsibilities associated with the Internet DNS Domain Name System) root zone management such as gTLDs, to operate a new TLD Registry, each paid $185,000 to apply and some have already incurred sunk costs to date of up to $2M including an unconditional LOC to ICANN to support a continued operations instrument, in the event that the TLD Registry back-end operator fails. Many of the applicants also have negotiated contracts with one of the three backend providers, with the capability and with a track record of running the existing 22 TLDs. Some applicants have chosen back-end operators not part of the Big Three.

Initial Evaluation Passes: 1749
Going to Extended Evaluation: 37
Still in Initial Evaluation: 20
Not Approved: 3
Withdrawn: 121

Key takeaways:

This was the first key step for the 1930 applications to ICANN, made by 1000 separate applicant companies, led by new expectant TLD Registry Operators such as Donuts Inc a team of seasoned DNS experts, with 307 applications, Google with 110 applications Amazon with 76 applications, Microsoft 11 among many others.

So now this DNS 2 (as we will terms it) virtual landgrab can begin. High Risk. High Reward. Good Luck to all the players.

Key strategic decisions need to be made by the successful applicants now. The IE results offers all successful applicants, the opportunity to step back, take stock, reassess their strategies, review funding requirements, (particularly those that find themselves involved in the resolution of 232 contention sets) and crucially consider the next steps.

Step 1 – IE Results Winners and Losers

Step 2 – Strategic review and further investment

Step 3 – COI Outreach and Recalculation, Contracting Info Request in Priority Draw Order

Step 4 – Contracting

Step 5 – Transitions to Delegation to the Root Zone, via IANA

Step 6 – Access, registration of trademarks into the TMCH Database by Brand Owners

Step 7 –  Full front and back end integration + operational readiness

Step 8 – Launch, shortly followed by sunrise, land rush and general availability registrations

Only one applicant failed to pass the technical evaluation score of 22 and therefore goes to Extended Evaluation (EE). The remaining failed to achieve a points score of 8 (or scored a 0 on any question) on the financial section. If the applicant’s elect to continue to EE this will result in a launch delay of nearly a year (with any other application in the same contention set having to wait for completion of EE).

Many applicants scraped past the financial capability pass score of 8. Key assumptions, costings, revenue forecasting on which IE results were points scored are now nearly two years old. As further Registry costs come to light, a registry’s financial viability becomes more questionable. A strategic review will be required Some applicants now find their business requires further investment in order to compete to win the TLD string.

Hundreds of applicants only achieved a score 1 out of 3 on Q50 (COI/LOC) and will likely be issued with a COI outreach notice. Those applications may require a complete strategic review. ICANN will perform due diligence on these resubmitted LOCs. Any material change to this key financial number will require a change request, therefore causing further delays for the applicant.

669 Applications found themselves in 232 contention sets. A contention set is where there are multiple applicants for a same or similar string. Applicants will need to put together a contention set strategy and valuations to resolve these amongst the other applicants For instance, there were 13 applications for .app, including Google, Amazon, and Donuts etc. So what is this particular string worth? Is it $2 million or $50 million? There are many TLD Registry business valuation and resolution models that need to be calculated prior to going to any type of auction. Private auctions are an option, assuming all parties can agree to participate. An ICANN auction is the method of last resort. Only after these issues are resolved can the winners proceed to step 2.

187 Applications have GAC (Government Advisory Committee) advice pending, so cannot proceed.

204 have legal objections, raised by applicants’ competitors for the same string. Many have now been decided, some of the decisions are controversial and contradictory.

Over 500 applications are affected by GAC Safeguards (Category 1 & 2 ) A six month delay is likely for these applications.

20% of the applications are classified as high risk in Interisle Name Collision report, with a likely six month delay for those applicants. Two application strings .home and .corp will not be allowed to proceed for the time being.

Over 100 applications still have not completed PICs.

Therefore about 1400 applications will be delayed. This will impact their business models, draining cash on a daily basis and substantially delaying their launch plans.

So the remaining 250 closed restrictive brand TLD Registries and a further 250 open generic, geographic and IDN applicants will be unaffected by outstanding issues referred to above. They can take the shortest number of days and fulfil the steps along the gTLD’s critical path to launch.

For the 250 open generic TLD Registries, reaching out through ICANN accredited registrars to the Registrants, into what is going to be a very crowded marketplace, an early successful launch is absolutely paramount. One should not forfeit this early mover advantage that one has especially those prioritised IDN applicants, in order to have long term success.

To take advantage of this unique opportunity and to reap the huge rewards, these 250 open TLD Registries need to immediately decide on building a operational, financial, marketing and sales channels team. They have to consider whether to build it internally right away or outsource this task to seasoned experts who have successfully launched TLDs before and have been tried and tested in this area. If one tries to build it internally, they have to look at tying up the capital in long term fixed overhead, time consuming hiring process since being a nascent industry experienced talents are hard to come by instead of focusing on potential registrants and marketing channels including registrars and re-sellers.

Outsourcing this service initially, would free up capital and time that would be better spent in marketing and customer outreach. This provides flexibility going forward as to what the right choice is for the registry whether to have the capabilities in-house or outsource it. The decision becomes easier if the launch is successful. The important thing to remember is that for many of the new applicants, running a TLD registry is not their core competence.

When are the first Round 1 TLD launches likely to happen?

ICANN is now likely to announce the introduction of new TLDs before Christmas 2013. The overriding requirements in rolling out TLDs are that only 1000 (at 20 per week max.) new TLD Registries are placed in the DNS root in one calendar year in order to ensure the DNS remains technically stable and secure.

What additional regulatory obligations are there on the front end Registry operations?

ICANN has a requirement and obligation as part of its Affirmation of Commitment with the US Government to put in place metrics to track the launch and first year of operational activity of each new TLD Registry. It has to report back on the success or failure of Round 1. If deemed successful then a Round 2 will then be activated. Round 2 in 2015 seems likely if this round is successful.

ICANN has stipulated in the Registry Agreement that it will conduct at least two compliance audits per year for each new TLD registry. This will result in additional costs for a Registry as well as additional front end financial and administration reporting and analytical tools with supporting infrastructure to ensure compliance.

What is the key change in the Registry / Registrar / Registrant corporate and market structure?

The vertically separated market used that is in vogue now is to be replaced by a vertical integrated market. Understanding and exploiting the resulting changes in corporate registry structure, ownership and control up and down the vertical by applicants will be absolutely key to a TLD Registry’s success or failure.

Start building key relationship with ICANN, Registry back-end operator, Registrars, Registrants and Stakeholders:

ICANN. To ensure compliance with the Registry Agreement, production of quarterly registration and financial reporting, financial statements, participation in the policy development compliance with the ICANN community starting with the Registry constituency

Backend Operator. To integrate with the backend registry operator in terms of database and directory of the registrants, implementation of Uniform Rapid Suspension System (URS), cash flow management of registrations, among other things.

Registrars. To identify the registrars to carry the message and follow up on the outreach to potential registrants Note all Registries must use an ICANN accredited registrar who has signed the new RAA 2013 agreement. Registrar shelf space with be limited. They can pick and choose which TLD Registries to sell through their channels. Therefore, early action in this regard is critical.

Registrants. To develop a comprehensive plan to have the most effective outreach campaign to yield maximum registrations in the shortest period. If there is not registration momentum in the first 2 years the possibility that TLD being a success is quite tough.

Stakeholders. To engage with stakeholders, namely investors and shareholders, who need to courted on a regular basis to apprise them of activities and strategies and meet the performance metrics.

Key Business Structures

All closed brand TLD applicant will require a 2013 RAA ICANN accredited registrar for its sunrise period. With the new vertically integrated model the Registry will need to consider whether or not to set up, own, control (by definition) and operate its own ICANN 2013 accredited registrar.

In Conclusion, the time to make these critical decisions is now. Relying on the Registry back-end operator, or the consultant who drafted the TLD application to set up and run the Registry would be short-sighted. The new applicant has to develop resources to address the operational readiness and thereby the successful launch of the TLD. In this connection, they have the option to build it by themselves or rely on third parties with proven expertise and track record in developing and launching a new TLD.

The success of a TLD will be determined in the initial launch if the history of TLDs is to be any guide in this matter. Winning the TLD Registry rights is very different from acquiring a valuable second level domain name in a well known TLD. My experience in discussing with some of the new applicants, many of whom think and act as if the backend operator is the be all and end all for launching the Registry and acquiring their favourite name as a TLD is akin to winning a valuable second level domain name. I hope many of the applicants who are still mired in this thought process will have a rethink and start to take the key steps suggested for operational readiness and a successful launch.