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Clash over new gTLD risk fund

Kevin Murphy, December 4, 2011, 21:21:39 (UTC), Domain Policy

The ICANN community is split along predictable lines – domain registries versus intellectual property interests – in the latest controversy to hit the new top-level domains policy-making.

ICANN’s board of directors will meet this week to decide the fate of its new gTLD failure risk fund, an expensive buffer designed to protect registrants if new gTLD registries go bust.

The current plan is to ask each new gTLD applicant to front the entire cost of three years’ operation with a Continuing Operations Instrument – either a letter of credit or cash in escrow.

The idea is that if they go out of business, funds will be available to pay an emergency registry operator to, in the worst case scenario, gracefully wind down the gTLD.

Registries and some potential applicants are not happy about this idea. They say that the COI imposes too great a cost on start-up registries, which could lead to more failed businesses.

Since smaller businesses may not be able to secure letters of credit, they’ll have to escrow hundreds of thousands of dollars, rather than using the money to make sure they don’t fail in the first place.

Registries have proposed an alternative – a Continued Operations Fund – which would see all applicants deposit a flat fee of $50,000 into a central risk pool that ICANN would manage.

An ICANN public comment period on the COF that closed on Friday revealed the anticipated level of opposition from business and IP interests.

The main concern is that the COF represents a transfer of wealth from rich companies, which would easily and cheaply qualify for a letter of credit, to less well-funded applicants.

The COF “seeks to subsidize certain registry operators instead of allowing the market itself (via letter of credit based upon applicant viability) to determine the level of risk for each applicant”, Claudio DiGangi of the International Trademark Association wrote.

Steve Metalitz, president of ICANN’s Intellectual Property Constituency, echoed INTA’s concerns, adding the IPC’s suspicions about why the COF has been proposed:

[The COF] allows more underfunded applicants into the application pool which will in turn lead to more registry failures, cost to ICANN, and poor outcomes for registrants. While this may be good in the short term for members of the Registry Stakeholder Group (RySG) who desire to provide backend services to such underfunded applicants, the short term economic gain of members of one SG should not be prioritized over the risks to registrants and ICANN that the COF represents

One member of the IPC has suggested that if ICANN were to introduce a COF now, it would give opponents of the new gTLD program grounds to sue, under California insurance law, to put it to a halt.

On the pro-COF side, .org manger the Public Interest Registry said that the current COI plan discourages companies for applying for new gTLDs, which is at odds with ICANN’s goals of increasing competition in the registry space.

PIR’s director of policy Paul Diaz also points out that letters of credit will be hard to come by for companies in certain countries, which may lead to less geographically diverse applicants.

Somewhat surprisingly, Minds + Machines CEO Antony Van Couvering, perhaps sensing which way the wind is blowing at ICANN, has reluctantly backed the original COI model, but suggests a “simple short-term fix” to reduce the cost to applicants.

When determining the amount of the COI, applicants should be free to base it on their own “worst case scenario” registration volume projections, rather than their “most likely” models, on the basis that registries are unlikely to go out of business if they meet their revenue targets:

Presumably if you’re hitting your numbers you’re in good shape financially. It’s the low numbers you have to worry about. Setting the amount of the COI at this more reasonable and likely threshold will take care of the vast majority of failures.

ICANN only received comments from eight people on the COF proposal, and unsurprisingly they’re all (with one possible exception) looking out for their own financial interests.

Without a crystal ball, deciding which model will be “best” for the new gTLD program is a very tough call, but ICANN’s board of directors is expected to do so on Thursday.

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Comments (3)

  1. Kevin – In truth, I have no idea which way the wind is blowing at ICANN.

    The reason for my suggestion is that the COI needs a major overhaul and we’re not going to get it done prior to the start of the application window, so something that *can* get done is preferable. Sadly, I think the registry proposal, which is not a bad one, is DOA because of opposition from the IP side.

    Also, I sympathize with the IP position, because while the registry proposal solves an overall problem, it is not a problem for them, but it makes liberal use of their money. Sure, they have plenty of it, but that’s not equitable.

    The real problem is ICANN’s idea of what the risks are, which they have arrived at without any survey of the history of TLD failures, or transitions, and what they cost. Nor, as Ron Andruff points out in his comment (as do I), do they even consider the most likely scenario (by far), which is that the outsourced registry services provider will simply continue to run the failed registry without any transition or cost at all.

    At this late stage in the game, I don’t believe ICANN is capable of doing the work to come up with an equitable and realistic COI based on empirical evidence. Therefore my suggestion is to come up with something that approaches a reasonable result, from a different direction.

    Antony

  2. Paul Keating says:

    It would seem to me that this matter could well be handled by ICANN itself allocating a large chunk of its fees to such a fund. After all, it is a non-profit entity and is charging not insubstantial fees for the application process. The fund could be augmented with an insurance policy. The cost of the policy could be greatly reduced by having it kick in only after a portion of the ICANN fund is exhausted.

    Further, the financial risk is I believe, an issue determined during the application process and the applicant is responsible for proposing sufficient ability and dedicated cash-reserves to meet contingencies.

  3. I would take out Q50 all together. Relook at the whole issue once the initial evaluations are complete.
    Surely applicant business models that dont stack will not get through the IE and EE anyway and if they do will not typically “fail” until year 3 ie 2016 . Why should Q50 apply to dot brand applicants anyway ?
    As it is it will lock up substantial funds which could be used for working capital – so making more registries viable.

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