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New gTLDs and Their Hidden Costs: Part 1

New generic Top-Level Domains (gTLDs) appear to be headed for introduction next year, finally. That’s a good thing for many ICANN constituents who have been waiting for them to become available. Important questions persist about how new gTLDs will affect ICANN and its constituents, however, despite a lot of effort to resolve concerns. Pressing those questions should not be taken as criticism of the basic wisdom of making new gTLDs available to many constituents under many circumstances. But too much is at stake not to get it right.

Questions center on ICANN’s budgeting and protections for entities holding or claiming rights to particular names. In this post I’ll discuss the budget issues.

ICANN stands to make a lot of money from approving new gTLDs. Estimates range around $92 million (500 applicants at $185,000 each). By itself, a new source of revenue for ICANN isn’t necessarily controversial. But fair questions may be asked of how ICANN is raising that money and how it will be spent.

ICANN claims that the $185,000 application fee covers its projected costs and no more. Yet $60,000—about a third of that fee—is earmarked for a contingency reserve, to cover risks like litigation and administrative costs for greater-than-expected numbers of applications. The Joint Supporting Organizations/Advisory Councils Working Group on New gTLD Applicant Support rightly “questions if ICANN really expects a total of US$30,000,000 (US$60k x 500 applications) in unknown or variable costs to surface.” Even if this figure were a reasonable estimate of unknown or variable costs, no one has adequately explained why insurance can’t cover it. Insurance is how other organizations customarily plan against risk. Why not ICANN?

Digging even deeper, ICANN’s estimate of $92.5 million in projected revenues may be artificially low. Contests over strings like .bank probably will be resolved through auction, and it would not be commercially unreasonable for the final price of such valuable online property to exceed the application fee by orders of magnitude. It’s unclear why the estimated number of first-round applications has stayed at 500 when they will include both commercial and noncommercial applicants like .berlin. Total revenues from the first round of applications will vary widely, depending on how many applications are actually submitted and how much individual applicants end up paying for the rights to especially valuable TLDs. That variability matters because $92 million is a substantial sum by itself—ICANN’s total revenues in 2005 amounted to less than $18 million—and because even that figure may be considerably lower than ICANN actually recovers. With insure.com fetching $16 million last year, it’s anyone’s guess what global dominance of .news will get on the auction block. If revenues can be expected to exceed current estimates, a reduction in application fees ought to be explored.

That brings me to the last point I want to make about the gTLD budget. As a nonprofit corporation, ICANN has always claimed to charge fees on a cost basis. But there is no relation between the value of .news or other unusually valuable TLDs and the cost of administering the application process for that name, much less the cost of facilitating the operation of a single new gTLD. When cost and value become disconnected there is a windfall, and the question is how a multimillion dollar windfall will affect ICANN as an institution. As things now stand, its board of directors has not decided how to handle unused portions of the contingency fund or surplus revenues created from auctions over highly valuable names. The gTLD budget process was designed to stand apart from ICANN’s ordinary operating budget, but that separateness leads one to ask what ICANN will do if the first round of new gTLD applications produces a profit, much less a windfall. An agreement to consult the community if the gTLD application process yields profits is not a commitment to use those profits in a particular way. Nothing prevents ICANN from ultimately pouring its gTLD profits into any project it chooses. Perhaps including in the application a written commitment by ICANN’s board of directors not to use such profits from the gTLD process for ordinary operational expenses would be a helpful assurance to the many constituents that plan to apply for a gTLD during this exciting but uncertain first round.

Tomorrow I discuss protections for entities holding or claiming rights to particular names in the gTLD application process (Click to Read Part 2).

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

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There will be very few auctions Antony Van Couvering  –  Aug 6, 2010 4:04 AM

I doubt there will be many auctions.  Parties will settle between themselves. If you are up against a competitor, it will be much cheaper to pay the opposing party to go away than to complete an auction and pay the money to ICANN.  It’s useful as a tool to force the parties to come to an agreement.  Except in acrimonious cases, I don’t expect it to be used.

It’s worth noting that when the fees for applying were set, the new gTLD program was supposed to go into effect in early 2009.  That means (assuming they go forward early next year) two years of staff costs, studies, and other costs spent on the new gTLD program without any compensation elevation of the fee.  So every day the fee is probably closer to actual costs than it ever was before…

The uncertainties of auctions R. Shawn Gunnarson  –  Aug 6, 2010 2:45 PM

For many competitive applications you could be right. Competition for certain strings can be compromised, or a would-be competitor can be persuaded with enough cash and incentives to give up the fight. What concerns me is the problem of zero-sum competitions among competitors with rough economic parity. The DNS treats each TLD as unique space, and some names at least will be as non-negotiable to each competitor as the world's hotspots are to competing nation states. Dominance, not compromise, will characterize those competitions, and the auctions that result will produce windfalls for ICANN. Even if such auctions happen only once or twice, the profits could be extraordinary and unacknowledged in the current budget. So I don't think we necessarily disagree. You may be pointing to the general rule of compromise, but my special case of the high stakes auction still holds. Your point that waiting to roll out new gTLDs increases ICANN's administrative costs and decreases the excessiveness of the fee is interesting. I would have thought that as a nonprofit ICANN would try to stick to its principle of charging at cost from the beginning and adjust the fee upward if necessary to cover increased out-of-pocket costs for studies and staff costs. But I don't think the increased administrative costs entirely explain the collective sense that the fees are disproportionate to ICANN's costs. Even the SO/AC Working Group questions the necessity of charging $60,000 per application for a contingency reserve. What do you think of my suggestion that the risks of new gTLDs would be more effectively and cheaply addressed through insurance?

Agree Kieren McCarthy  –  Aug 6, 2010 4:14 AM

I usually disagree with you Shawn, but in this case you’re raising a very good point.

There are a number of important financial questions raised here that as far as I’m aware have little or no explanation or information about them. I fear that ICANN’s staff simply hasn’t had time to focus on these issues with the 1,001 other issues they have had to face.

The problem with large sums of money - especially if they haven’t been planned for - is that they distort everything. And it does indeed look like ICANN will have an enormous pot of money within the next year.

I fear that the plans for what to do with that cash will only appear after the money is in place. And at that point - with large sums of money but no agreed plan for it - things are liable to get very peculiar.

I think the solution is for the Board and community to focus heavily on what to do with excess money the moment that the Applicant Guidebook is approved.

To do that though, the organization - Board, staff, SOs, ACs and broader community - will have to overcome a long history of only reacting to crises.

Agree R. Shawn Gunnarson  –  Aug 6, 2010 3:01 PM

I'm glad to hear we agree about something, Kieren. Large sums of money can distort an organization, especially when the disparity between the new-found wealth and previous budgets is high. It isn't just that the number of dollars from the gTLD process will be high, but the effect of such a great amount of wealth on ICANN as an institution could be, as you say, peculiar. Your suggestions to focus on the problem immediately after the Guidebook is approved and to treat the problem as one that deserves an early rather than a last-minute response are both welcome. How do we accomplish that? Would it be helpful to propose the creation of a working group to develop a plan by the end of first quarter 2011, with the aim of avoiding the distorting effects that we both fear?

Need to point out why it's important Kieren McCarthy  –  Aug 10, 2010 11:25 PM

Re: how do we accomplish community discussion of what to do with the money before it's too late. I think the answer is that you have to demonstrate to the community why it is a priority. The ICANN world has 101 different priorities and at least five crises at any given point. To get people to look beyond the tip of their nose, they need to see why something is a priority *now*. How do you do that? I think you find examples of where organizations have been swamped with money (as a percentage increase) and point to examples of where this has caused the organization to fail or go off the rails, and also try to find examples of where careful preparation has enabled an organization to progress well. Just about the only thing that everyone in the ICANN world can agree on is that the organization and its multistakeholder model needs to be protected and preserved. So if you can make a case that says: "By not paying attention to a future influx of money, Organization X was badly damaged." And: "By recognizing that it needed to decide what to do with a wave of income before it arrived, Organization Y thrived". Well then I think you'll get people's attention. In terms of the realities of getting a process going. You need to have an SO or AC specifically request that ICANN staff create an issues paper. That paper will be used to decide whether to start a PDP. And from there the real conversation starts. There was some initial work and comments I believe on what to do with the money but it petered out a while ago and hasn't been picked back up. A good startpoint would be to write a CircleID post outlining real-world examples and showing a real-world timeline so that people in the community recognise that putting this off until it is absolutely necessary is a bad idea and could be very damaging to ICANN. So that's two cents worth.

The Importance of Being Urgent R. Shawn Gunnarson  –  Aug 11, 2010 2:13 PM

I agree that it makes sense to explain why an influx of new-found money without a plan for handling it is crucial and that cautionary examples can be powerful tools for raising awareness and avoiding others’ mistakes.  I’ll see what I can do to put together examples that might be helpful and to plot out the probable timeline for gTLD applications and funding flows.  Meanwhile, do you have any examples of organizations with ICANN’s problem to suggest?

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