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    Highlights of the ICANNWatch Archive
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    Budget and Expenditures Registrars
    Appeal to ICANN Finance Committee
    posted by michael on Wednesday May 19 2004, @04:41PM

    Bhavin Turakhia writes "ICANN released a new budget for year 2004-2005. This budget significantly changes the funding model of ICANN, and threatens the existence of a large number of Registrars. This budget will also not achieve ICANN's funding goals.

    I have setup a website at http://www.icannbudget.org to petition to ICANN to modify their budget. All of you are encouraged to visit this website and read our thread of communication with ICANN, as well as contribute your feedback. Below is a copy of our first email to ICANN."

    [Editor's note: I have taken the liberty of appending ICANN's reply to Mr. Turakhia's original request to them. Please note in reading ICANN's reply that its proposed discretionary system of lowering registry fees will give the ICANN staff yet another type of leverage over registrars... -mf]



    "Dear Members of the ICANN Finance committee and Board

    I represent a medium sized Registrar based out of India operating under the name of Directi. I would like to offer my comments on the ICANN 2004-05 budget posted on the ICANN website, as I do believe it negatively impacts the business of a large number of Registrars and breaks down this entire structure that ICANN has created over the last several years.

    Due to the lack of a public forum on ICANN's website I am having to send this email directly to you. I would appreciate it if ICANN could put up an online forum to allow public comment on this budget proposal. I detail out below in a structured format the reasons why I believe the budget in its current proposed form would negatively impact the entire domain name industry and ICANN itself

    Impact of the new ICANN Budget on Registrars

    In very simple terms the new ICANN budget will have one primary impact on Registrars - "the SMALLER ones will DIE and newer ones will stop entering the field"

    Lets investigate each of the effects on Registrars -

    Effect 1: Larger Registrars will not have to change their Selling price while smaller Registrars will have to increase their selling price

    The $19000 per annum additional fee increases the per domain name cost of large Registrars such as Netsol, Tucows, Godaddy etc by a meagre 0.5 cents or lesser. Infact the $19000 per annum additional fee increases the cost price of the top 20 Registrars by a meagre 10 cents per domain name

    The $19000 per annum fee however increases the cost per domain of smaller and mid-sized Registrars by a large component. Check the below table which shows how much the Registrar per domain cost would increase if a Registrar is in any of the brackets below

    Registrar Size Increase in per Domain Cost 1000 domains 19 dollars 2000 domains 9.5 dollars 5000 domains 3.8 dollars 10000 domains 1.9 dollars 20000 domains 95 cents 50000 domains 38 cents

    There are over 120 Registrars who fit in the above set. This means that over 120 Registrars will find themselves in a situation where they have to significantly change their selling price. This is no easy task. Customers and Resellers will never accept a pricing modification of this magnitude.

    I have also attached an excel sheet showing the ENTIRE LIST of Registrars (the list is 3 months old) and the direct increase they will perceive in their DOMAIN PURCHASE cost as well as the percentage increase they will see in their budget contribution. It is clearly visible from this list that the smaller and mid-sized Registrars (well over 120 in number) will be significantly impacted by the current budget as proposed.


    Effect 2: Larger Registrars will Save a HUGE amount of money while smaller Registrars will be footing that bill

    Until now the variable component of ICANN's budget was divided amongst all Registrars in the ratio of the number of Domains that they managed. This resulted in a per domain fee of 12 cents. In the new budget if the same model had been adopted then the per domain fee would be around 37.5 cents. Instead by passing on a $19000 per Registrar fee, this has been reduced from 37.5 cents to 25 cents. This results in significant savings of money for the larger Registrars at the cost of the smaller Registrars. For instance lets compute the savings of the top five Registrars (Note the market share figures are over 3 months old and therefore give only an approximate idea. The actual savings are higher than the below figures)

    Registrar Savings [(Domains x 12.5 cents) - $19000] Enom $302,215 Register.com $332,531 GoDaddy $339,507 Tucows $435,358 Netsol $904,208

    As you can see from the above table in the earlier variable model fee Netsol would have to pay $900,000 (or 1 million dollars) extra, which it is saving now by that cost being passed on in the form of a fixed $19000 fee to the other smaller Registrars. While netsol makes money on every one of those domains it sells, the variable component of that is being borne by the tinier Registrars.


    Effect 3: Smaller Registrars and startup Registrars will be unable to sustain operations

    Smaller Registrars and Startup Registrars will not be able to sustain operations. As such they already have to compete in a market where the larger Registrars have had a head start. Now think about the fact that they have to additionally start at a disadvantage as compared to the larger Registrars - namely a higher per domain Cost. This means a new Registrar who does not currently have the capability to offer the features that an existing old large Registrar does, now also buys the commodity at a higher cost. This will completely stifle competition and put many a startup Registrars out of business.


    Effect 4: Several international Registrars in other countries will DIE, and new potential applicants will be discouraged

    A large chunk of the internet as everyone knows is still concentrated in the United States. A large number of the world's domain names are concentrated in the United States. Other countries have a relatively small share in the Domain Name market. There were still however many Registrars in various countries who had started operations and managed to sustain them since the ICANN fee so far was primarily variable and based on the size of the Registrar. This allowed a startup Registrar to begin operations without a significant working capital overhead, and bring it to a sustainance level.

    Now with the new budget process, Registrars in other countries and emerging markets will not have the ability to gain as many domain names as to be able to make operational profits. This will reduce international participation in the ICANN process.

     

    Impact of the new ICANN Budget on ICANN

    In short and simple words the new budget proposal "violates ICANN's core principles and does not foster healthy competition and international participation"

    Lets investigate this impact in more detail

    Effect 1: The new Budget destroys smaller Registrars and reduces Registrar competition, creating monopolies

    As detailed already above in the previous section, the current budget favours larger Registrars and will actually put the smaller and the mid-sized ones out of business.


    Effect 2: The new budget goes against a few principles stated in the ICANN Registrar Accreditation Agreement

    The new budget in its spirit is against certain statements in the Registrar Accreditation Agreement as follows -

    "Clause 2.3 General Obligations of ICANN. With respect to all matters that impact the rights, obligations, or role of Registrar, ICANN shall during the Term of this Agreement:

    2.3.2 not unreasonably restrain competition and, to the extent feasible, promote and encourage robust competition;"

    The new budget DOES NOT promote and encourage robust competition thus not maintaining the spirit of the above clause

     

    "Clause 3.9.2 Variable Accreditation Fee. Registrar shall pay the variable accreditation fees established by the ICANN Board of Directors, in conformity with ICANN's bylaws and articles of incorporation, provided that in each case such fees are reasonably allocated among all registrars that contract with ICANN and that any such fees must be expressly approved by registrars accounting, in the aggregate, for payment of two-thirds of all registrar-level fees."

    The above paragraph explicitly states - "provided that in each case such fees are reasonably allocated among all registrars". The new budget does NOT reasonably allocate the variable fees amongst all Registrars.


    Effect 3: The new budget will not meet the ICANN budget objectives

    At a few places in the budget document ICANN states how the new budget is supposed to be heavily reliant on Registrant fees paid to Registrars. One of the objectives of ICANN's new budget was to try and work a way whereby the final stakeholders, ie the Registrants, participate in the process of paying for the ICANN budget. However this current budget allocation mechanism does not do that. This is because the top ten Registrars will not even bother to change their selling price to the Registrants since their cost does not change dramatically in the new budget allocation process. These top ten set represent over 25 million Domain Names.

    This means over 25 million Registrants will not even contribute towards the increased budget. Rather their contribution will actually come from the smaller and mid-sized Registrars who will suffer in the bargain.
     

    Effect 4: The new budget proposal will not meet the ICANN budget targets and is essentially flawed

    The new budget will directly result in a large number of Registrars going out of business and additionally discourage a large number of new potential applicants who were looking at applying for accreditation. This will result in reduced revenues to ICANN if ICANN chooses to charge a $19000 + $4000 per Registrar fee, since every Registrar who ceases to exist, or any potential applicant who gets discouraged will result in one less participant paying this $23000 fee.

    If however ICANN instead does not charge a fixed fee per Registrar but charges a variable fee per domain name only, ICANN will NEVER be impacted even if certain Registrars cease to exist. Since ICANN will continue to be funded on a per domain name basis, it will not matter as to the number of Registrars who exist. I do believe this was the intent of ICANN - ie to have its budget dependant largely on the end Customers (ie Registrants) as directly as possible. The best way to achieve this would be to charge ONLY A PER domain year fee (37.5 cents instead of 25 cents). This way smaller and mid sized Registrars continue to survive and continue to pay their $4000 per annum fee, and additionally ICANN does not bear the risk of not meeting its targets since the revenue is not dependant on the number of Registrars, but on the number of domains.
     

    Effect 5: The new budget does not comply with the MoU signed between DoC and ICANN

    The Memorandum of Understanding between ICANN and DoC starts of with

    "On July 1, 1997, as part of the Administration's Framework for Global Electronic Commerce, the President directed the Secretary of Commerce to privatize the management of the domain name system (DNS) in a manner that increases competition and facilitates international participation in its management."

    This budget move will unfortunately REDUCE competition and REDUCE international participation, violating the principles laid out in this MoU
     

    Effect 6: The new budget is partial to a set of Registrars

    The New budget is partial to a certain set of Registrars in two ways. Firstly it is partial to the larger Registrars since it does not increase their per domain cost.

    Secondly it is partial to a set of Registrars who will fall under the criteria of reducing their annual fees. The budget mentions the ability for Registrars to apply for waiving of 2/3rds of their $19000 fee component. Since the criteria for evaluating this are not objective it may result in differences and partiality


     

    In light of all of the above points I request the finance committee and all other participants to modify the current budget proposal by making two simple changes -

    (1) eradicating the fixed per Registrar fee and replacing the same with a reasonable per domain (per transaction) fee only so that all Registrars are treated equally.

    (2) change the Registry share of fees from a fixed fee to a per domain fee so that the Registries end up funding an amount proportional to their size and profits as opposed to a fixed small fee irrespective of whether the Registry is managing over 25 million domain names

    Thanking you

    Yours sincerely
    Bhavin Turakhia
    Founder, CEO and Chairman
    DirectI
    --------------------------------------
    http://www.directi.com
    Direct Line: +91 (22) 5679 7600
    Direct Fax: +91 (22) 5679 7510
    Board Line (USA): +1 (415) 240 4172
    Board Line (India): +91 (22) 5679 7500
    --------------------------------------"


    Editor's note: Here is the text of ICANN's reply which was cc'd to ICANNWatch by ICANN's Kurt Pritz:

    Bhavin Turakin, Chairman & CEO
    Directi.com

    [in plain text and pdf formats]


    Dear Bhavin:

    Thank you for your letter outlining the concerns you have with the proposed ICANN Budget. It is clear and well thought out. I know that your letter was addressed to Vint Cerf. Vint and I communicated to determine an appropriate response and he has contributed to the composition of this letter.

    Please know that the ICANN staff put a great deal of thought and work into the proposed budget model. That effort included considerable discussion of the effects of rate increases on large and small registrars, barriers to entry, and the DNS marketplace.

    Please take this response to your paper as constructive discussion and not argument. The ICANN staff, board and various constituencies discussed several finance models and their effects on the ICANN budget and on the community. Many hours were spent in this activity - just as are you doing now. Many of the arguments you make were considered - most were adopted as part of the plan.

    First, the lack of public forum you mentioned has been cured. It was under construction when ICANN received your letter. It will be posted.

    On the more important issues:

    As you probably recognized from the budget document, the per annum fee was developed in recognition of the fact that while some of ICANN's effort resulting from relationships with registrars is proportional to the size of the registrar, significant other effort expended on behalf of registrars is fixed for each registrar regardless of the number of names registered.

    An example of this latter activity is ICANN addressing issues with contractual compliance. There are costs related to consumer protection and compliance activities that do not vary with the number of names under registration. ICANN invests to maintain linkages with various government agencies to protect consumers and help ICANN do a better job of assuring that all registrars follow the rules of the road in fair fashion. As ICANN adopts a more proactive contractual compliance program during the next fiscal year, activities will incur per registrar, rather than per name expenses.

    Other activities include administration of various databases and responses to business and technical queries.

    So while ICANN proposed that some of the costs be allocated on a per registrar basis and that some form of such an allocation is fair, I take your queries to center around the question of whether the allocation methodology in the budget is fair. ICANN submits that it is fair, asks that you consider the following, and then asks that we continue the dialogue so that a consensus is reached.

    EFFECTS ON SMALLER REGISTRARS
    ICANN believes that smaller registrars will not be forced to leave the market place for two reasons:

    1) Many or most of the smaller registrars can easily afford the fee due to revenues received by use of access to the batch pool, and

    2) The fee will be mostly forgiven for those registrars that do not employ their right to access the batch pool and for whom the fee would severely affect the ability to carry on.

    To the first point, it has been estimated by others that over 110 registrars presently derive revenue from using or selling their contractual right to access the batch pool in an effort to register deleted names. That revenue has been estimated at $20,000 to $30,000 per month for, in the words of one registrar, sitting and doing nothing. (These activities should be contrasted with the business models of registrars conducting standard marketing and registration operations where margins and revenue streams are tighter.)

    There are a number of accreditation applications in the pipeline, including several with clear indications that the accreditation is to be used to gain access to the batch pool. ICANN anticipated none of those applicants will withdraw their application based upon the new fee structure. As stated in an earlier registrar posting concerning the budget, none of the existing registrars earning over $240,000 annually should protest the fee.

    ICANN does not condone the use of accreditations that are used strictly for access to secure deleted names. In fact, when faced with an abnormally large spate of accreditation applications, ICANN temporarily halted the accreditation process and convened an emergency session of the ICANN Board to discuss whether large number of accreditations should be granted in an environment where so many new accreditations were intended solely to access the batch pool.

    With regard to the second point, forgiving fees in certain circumstances will avoid situations forcing smaller registrars out of the market.

    One registrar posting inferred that smaller registrars might be better off as resellers rather than have to bear the burden of fees as an accredited registrar. While this may be true in some cases, ICANN also recognizes that several small registrars, especially those outside the United States, play a meaningful role in the DNS community.

    As soon as the per annum fee was postulated, ICANN staff began discussing alternatives for fair, bright line rules for establishing forgiveness. One registrar posting suggested that ICANN developed the theory in a knee jerk reaction to comments made during the Budget Advisory Group meeting and had no ideas for creating the rules for such a procedure.

    This is not true. As stated above, ICANN considered the issue ever since the per annum fees were suggested. Forgiveness was not included in an earlier version of the budget because many in the community stated that it was too difficult to develop a fair method that could not be "gamed." After discussion before and during the Budget Advisory group meeting, ICANN worked on developing a model that is fair and predictable.

    The model was not included in the budget posting because it is still being tested with the opinions of various technical and business experts in the community. That testing continues. The model will first be built around determining which registrars are realizing revenues through use of the batch pool. At this point, it can be said that the model will require those receiving substantial revenue by hitting the batch pool to pay the per annum fee and that those registrars can be clearly and easily identified through the numbers and types of transactions incurred.

    The second part of the model, will judge whether the financial status and business model of the registrar require some relief. I believe through interactions such as these exchanges of information, the best model will be devised. In any case, it is ICANN's position that deserving registrars should retain their accreditation.

    The fees suggested in the budget indicate that qualifying registrars would pay approximately $10,000 annually (the $4,000 accreditation fee plus a per annum fee of approximately $6,000) and be granted the ability to sell names from all registries, including anticipated new sTLDs.

    EFFECTS ON LARGER REGISTRARS
    I understand your viewpoint that under the present scenario, larger registrars will save a huge amount of money compared to a budget where they would be paying 37 cents a transaction instead of 25 cents.

    Looking at the other side of the same coin, the larger registrars (and all registrars) are paying at least 7 cents per transaction more than in the present budget year. Using the numbers developed on your spreadsheet, NSI is being asked to pay $536K more than last year, Tucows $273K more, GoDaddy $253K more and so on. It is true that these amounts are smaller percentage increases than paid by smaller registrars, but these amounts can materially affect the business model of the larger registrars.

    The fairness argument applies equally to these registrars. The larger registrars are paying 40-50% increases in fees and that increase is applied to a numerically large base. Your model suggests it is fairer that the larger registry fee increase should be as high as $1.4MM or 108%.

    In the cases of smaller registries, the six-figure increases heads asymptotically to the $20-$30K range in fairly rapid order. As discussed above, most of these registrars derive significant revenue from sources other than the straight registration of domain names and can afford the fee. Many others can be forgiven a large portion of the fee.

    As in all fairness discussions, the topic of a judging the percentage of a big number against a percentage of a small number must be considered. In the ICANN proposed model it was thought that the larger registrars were paying a considerable increase by any standard while the smaller registrars' payments were increased by amounts consistent with their business models.

    EFFECTS ON THE ICANN BUDGET
    If the programs described in the ICANN budget are effectively implemented, many registrars should not abandon their accreditation. In fact, and based upon the number of accreditation applications in queue, ICANN expects the number of accreditations to increase significantly between now and the start of the fiscal year. There are indications in these applications that most of these new registrars will derive significant income through their access to the batch pool. As stated above, ICANN does not condone this business model but a special meeting of the board concluded that applications could not be denied based upon apparent business model absent substantial more study into this subject matter. As I stated earlier, ICANN estimates that none of the existing applications for this purpose will be withdrawn given the new fee structure.

    Similarly, new registrars will not be precluded from forgiveness at the time of the first quarterly invoicing. ICANN does stand for promotion of competition. It is also understood however, that potential registrars should have robust financing and a solid business pan before entering the field. (As counterpoint to your discussion, when larger registrars discussed potential resources, it was offered that a $17-$19K fee should be reasonable to an ongoing, robust registrar operation.)

    Given all this, it is anticipated that ICANN will have over 250 accredited registrars by the start of the fiscal year. The increased numbers should ensure the planned for revenue stream while allowing some reductions in rates to the smaller registrars.

    Effects of new sources of revenue
    ICANN agrees with every registrar posting regarding the generation of new sources of revenue. ICANN's business model should not be based on sole or few sources of revenue. It is not sound practice. New sources of revenue are intended to limit any increases to the registrar fees and to reduce them. Those revenues will be realized in time for or before the following fiscal year.

    Where the budget ascribed to holding the 25 cent fee constant, it should also be taken as making the same commitment to the per annum fee.

    CONCLUSION
    I realize this writing does not address all your concerns. However, there is a basis from which to work. The fact that many small registrars have significant revenue streams means that there are not as many registrars adversely impacted by the fee structure as some may have thought. Also, I believe we can develop a method for waiver of a portion of the fees that is objective and does not result in differences and partiality.

    Given the above two conditions above, a fair model can be created in a budget that: significantly increases cash fees from large registrars, charges registrars availing themselves of the batch pool a very reasonable fee, moves to forgives the debt of smaller registrars, adjusts to significant changes in the marketplace and plans for other sources of revenue.

    Having written this document, I know the work that went into yours. Everyone at ICANN appreciates the passion that went into your effort and we all generally agree with your principles. As stated above, this document is not intended as an end. We are looking forward to your comments and those from the community.

    Sincerely,

    Kurt Pritz
    ICANN
    4676 Admiralty Way, #330
    Marina del Rey, CA 90292

    +1.310.301.5809 (office)

     
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      Related Links  
    · Register.com
    · Vinton G. Cerf
    · CORE
    · Tucows
    · ICANN
    · I have also attached an excel sheet showing the ENTIRE LIST of Registrars
    · http://www.directi.com
    · Kurt Pritz
    · Bhavin Turakhia
    · http://www.icannbudget.org
    · More Budget and Expenditures stories
    · Also by michael
     
    This discussion has been archived. No new comments can be posted.
    Appeal to ICANN Finance Committee | Log in/Create an Account | Top | 2 comments | Search Discussion
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    When were these board meetings?
    by KarlAuerbach on Wednesday May 19 2004, @07:14PM (#13619)
    User #3243 Info | http://www.cavebear.com/
    ICANN's person says:
    In fact, when faced with an abnormally large spate of accreditation applications, ICANN temporarily halted the accreditation process and convened an emergency session of the ICANN Board to discuss whether large number of accreditations should be granted in an environment where so many new accreditations were intended solely to access the batch pool.

    No such meeting was held during my term (which ended in June of last year.) I don't remember reading in the minutes of any meeting since then in which such a matter was discussed. Perhaps the minutes do not reflect the actual content of board meetings? (When I was on the Board, Louis Touton did a pretty good job of writing things up, albeit sometimes rather late.)
    [ Reply to This | Parent ]
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