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With 86 days to go, the cost of new gTLDs is still unknown

Kevin Murphy, October 18, 2011, 08:57:31 (UTC), Domain Policy

If you’re planning to apply for a new generic top-level domain or two, wouldn’t it be nice to know how much it’s going to cost you?

It’s less than three months before ICANN opens the floodgates to new gTLD applicants, but you’re probably not going to find out how big your bank account needs to be until the last minute.

With 86 days on the clock until the application window opens, and 177 until it closes, there are still at least two huge pricing policies that have yet to be finalized by ICANN.

The first relates to reduced application fees and/or financial support handouts for worthy applicants from developing nations. I’ll get to that in a separate piece before Dakar.

The second is the controversial Continued Operations Instrument, a cash reserve designed to ensure that new gTLDs continue to operate even if the registry manager goes out of business.

In the current Applicant Guidebook, prospective registries are told to prove that they have enough money – either with a letter of credit or in a cash escrow – to keep their gTLD alive for three years.

To be clear, the COI money doesn’t go into ICANN’s coffers; applicants just need to show that the cash exists, somewhere.

The funds would be used to pay the Emergency Back-End Registry Operator (whichever company that turns out to be) in the event of a catastrophic gTLD business failure.

With hundreds of new gTLDs predicted, many of them likely to be laughably naive, we’re likely to see plenty of such failures.

With that in mind, ICANN wants to make sure that registrants and end users are not impacted by too much downtime if they put their faith in incompetent or unlucky registries.

It is estimated that the COI will amount to a six-figure sum for almost all commercial registries. For generics with a higher projected registration volume it could easily run into the millions.

It’s controversial for a number of reasons.

First, it raises the financial bar to applying considerably.

Forget the $185,000 application fee. Under the COI provision, applicants need to be flush enough to be able to leave millions of dollars dormant in escrow for at least five years.

It’s been sensibly argued that this money would be better devoted to making sure the registry doesn’t fail in the first place.

Second, even though the Guidebook gives .brand applicants the ability to shut down their gTLDs without the risk of another provider taking them over, it also expects them to create a COI.

This appears to be an unnecessary waste of cash. If a single-registrant .brand gTLD fails, the registry itself is the only registrant affected and the COI is essentially redundant.

Third, some applicants are thinking about low-balling their business model projections in order to keep their COI to a manageable amount.

This, as the better new gTLD consultants will tell you, could be a bad idea. When applications are reviewed the evaluators will be looking for discrepancies like this.

If you’re making one set of financial projections to investors and another to ICANN, you risk losing points on and possibly failing the evaluation.

Anyway, with all this in mind (and with apologies for burying the lead) ICANN has just said that it’s thinking about completely revamping the COI policy before applications are accepted.

Seriously.

ICANN’s Registry Stakeholder Group community has made a proposal – which appears to be utterly sensible on the face of it – that would reduce costs by pooling the risk among successful applicants.

The RySG said it that the COI “should not be so burdensome as to actually become a roadblock to the success of new registries by causing capital to be tied up unduly.”

Rather than putting up enough cash to cover its own failure, each successful applicant would pay $50,000 up-front into a Continued Operations Fund that would cover all potential registry failures.

The COF would be administered by ICANN (or possibly a third party), and would be capped at $20 million. In a round of 400 new gTLDs, that target would be reached immediately.

If the COF fell short of $20 million, each registry would have to pay $0.05 per domain name per year into the fund until the cap was reached.

It’s a shared-risk insurance model, essentially.

While ICANN’s COI policy is ultra-cautious, implicitly assuming that ALL new gTLDs could simultaneously fail, the COF proposal assumes that only a small subset will.

Reverse-engineering the RySG’s numbers, the COF appears to cover the risk of failure for registries representing some 10 million domain-years.

ICANN has opened up the proposal to public comments until December 2.

This means we’re unlikely to see any concrete action to approve or reject the COF alternative until, at the earliest, about a month before the first round application window opens.

ICANN likes cutting things fine, doesn’t it?

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Comments (5)

  1. Excellent proposal !
    I estimate it could mean 50- 100 new registries being financially viable ,rather than failing and activating the COI
    and more applicants now been able to justify their business plans to investors / backers .

  2. Richard Tindal says:

    I dont think its fair to say COI requirements are an unknown. Question 50 is pretty clear about what’s required (and has been for several iterations of the Guidebook). ICANN has taken the most conservative approach to COI – which is to require every applicant to fully fund their own instrument. Applicants need to make reasonable estimates about what it will cost them to transfer their TLD to a new operator, and have that TLD technically operated for 3 years. Its not a hard a number to estimate. Whether or not a risk-pool (insurance) type approach would be better is a separate question. My point is that the existing requirement is not unclear.

    • Kevin Murphy says:

      If it’s as clear to all applicants, that’s good.

      The notes to question 50 do say specifically that the amount of the COI will be tied to the costs of the EBERO, rather than the applicant’s own costs.

      It also says “guidelines for determining the appropriate amount for the COI will be available to the applicant” after an EBERO is selected. Note: “will be”.

      I’m not saying that applicants can’t make a reasonable guess today, but you have to admit that this guess is going to be far better-informed when these guidelines are released.

      If money is tight — perhaps if an applicant needs third-party investors — I’d say it’s unclear enough to cause difficulties.

  3. Richard Tindal says:

    I agree the guidelines will probably give additional clarity. That said, the same companies that are bidding on the EBERO (and giving this eventual guidance) will pick up a call from an applicant right now and advise much the same information.
    I don’t think ICANN will provide precise guidance on this issue. There are too many application-specific variables to have a pro-forma approach (e.g. a TLD with special business rules will be harder to transition than one with COM-like business rules). I believe ICANN will provide general and broad guidance, and I think that’s appropriate R

  4. Eric Doerr says:

    http://www.icann.org/en/announcements/announcement-17oct11-en.htm

    If you want clarification, place positive comments on the alternative COI proposal on ICANN.org This proposal creates an emergency pool of $20 million and costs each gTLD $50,000 plus .05 per registered domain per year. This is the fair and reasonable thing to incorporate.

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