When does a non-profit organization become a profit-making one?

This and similarly fundamental questions about ICANN’s institutional character are raised by the high probability that the gTLD project will produce profits for ICANN. How much money those profits will amount to remains in question, but it is increasingly difficult for ICANN to say that there will be no profit at all.

It admits that auctions will produce profits. “[A]ny funds coming from a last resort contention resolution mechanism such as auctions would result (after paying for the auction process) in additional funding.” (Applicant Guidebook at 4-18 n.1). No one will know until next year whether auctions will occur, but a single auction could generate enormous profits if the contestants are deep-pocket applicants pursuing a commercially valuable gTLD. ICANN has placed no upper limit on the final price for a new gTLD: bidding will continue “until there is one remaining bidder at the end-of-round price.” (Id. at 4-22).

Even if no auction occurs, the gTLD application process is highly likely to generate profit. ICANN charges $185,000 per application based on the dubious method of asking staff to estimate the cost of administering 10 previous TLD applications. ICANN’s actual contracted costs for administering potentially 100 times more applications under different circumstances are unknown. Its reasons for charging the $60,000 portion of the application fee for contingencies—one-third of the total—have been openly questioned by members of the Joint SO/AC New gTLD Applicant Support Working Group. Without more information one cannot say for certain whether the application fee includes built-in profit, but it seems very likely.

The likelihood of generating profit from application fees will be increased if, as many observers agree, the number of new gTLD applications exceeds 500 and the supernumerary applications are held pending administration of the first round. Time is money, and the value of millions in application fees held by ICANN for two or three years while the first round of applications is administered and the obligatory review of the gTLD process is completed would be substantial.

In short, ICANN stands to make a profit from the new gTLD project.

Deciding how to use that profit is critical to maintaining ICANN’s non-profit status. The Guidebook assures us that auction profits “will be reserved and earmarked until the uses of funds are determined. Funds must be used in a manner that supports directly ICANN’s mission and Core Values and also allows ICANN to maintain its not for profit status.” (Id. at 4-18 to 4-19 n.1).

ICANN should be applauded for this approach, which should be expanded to include all excess revenues collected from the new gTLD process. Where the profits come from matters less than how they will be used.

The Guidebook goes on to say that “a process can be pre-established to enable community consultation in the event that such funds are collected.” (Id. at 4-19 n.1). For a community consultation to be meaningful, gTLD profits cannot be spent beforehand. A few ideas for accomplishing that result include:

• The ICANN Board of Directors should resolve before the gTLD application process begins that neither gTLD application fees nor auction revenues will be spent on any expense except for the direct costs of administering gTLD applications until the first round is complete
• As part of its review of the gTLD process, the Board should agree to commission an independent audit of gTLD revenues and costs by an internationally reputable firm.
• Any profit identified by the audit should be deposited into a designated account, and no expenditures from that account should be authorized by the Board until the community consultation process is complete.

Implementing these ideas would ensure that gTLD profits are “reserved and earmarked” until the ICANN community has an opportunity to discuss how best to spend them.

During that consultation many worthy projects will be no doubt offered as suitable recipients of funding. Let me make the unorthodox suggestion that we should also discuss what gTLD profits should not be spent on. Expanding the Internet to allow for new gTLDs is supposed to be about competition, innovation, and consumer satisfaction—not empire-building.