This partial information and delay from ICANN is creating consternation and confusion among the many applicants and those watching the new gTLD scene. Therefore some analysis, however imperfect, will help. What follows is what we at Minds + Machines consider a likely scenario based on the facts we have, along with some estimates and calculations that we think are reasonable. This is back-of-the-envelope stuff, but it shows how we see the new landscape forming.

First, let’s start with what we know for sure:

• There are 1,268 total applicant profiles in ICANN’s system (the TAS), each of which allows 1-50 applications
• There were 2,091 applications in the TAS as of April 12, 2012
• There were 214 unpaid applications

Given that the application window was suspended with just twelve hours to go, we believe that anyone who hasn’t paid yet isn’t going to, and that people who are paying for their applications aren’t leaving any unpaid. In other words, we don’t think the 214 unpaid applications are ever going to happen, and that there’s a rough one-to-one correspondence between unpaid apps and number of applicants with unpaid apps. Therefore there are roughly 200 applicants who are not actually going to submit 214 apps.

This leaves us with about 1,000 bona fide applicants and 2100 applications, or roughly 2 TLDs for every applicant. But we can break down these numbers a little further based on industry information.

Categorizing 2100 new gTLD applications

We can divide up the applicant groups into five buckets:

1. Geographical applicants, applying for cities, states or regions.
2. Applicants applying for a specific individual project: one or in some cases two names.
3. IDN applications, applying for generic names in a non-Latin script.
4. Portfolio applicants, applying for 20 TLDs or more.
5. Brand applicants, applying for their trademarked names.

There will be exceptions to these generalizations, but overall these categories are clear. But how many of each? The breakdown is important, because it will determine how the competition for high-value generic names will play out. We assume that geos, IDNs and brands are going to face little or no competition because of the favorable ICANN rules in (for geos and brands) or language specificity (IDNs). Therefore the contention is most like to occur among and between the smaller applicants and portfolio applicants who are applying for English-language generic-word TLDs. Looking at each category, we can identify some further characteristics:

Geo Domains

We estimate 50 geographic domains. Some of these have been in the news, but many others have not. This category includes US cities such as Las Vegas and NYC to European cities such as London, Paris, Berlin and Madrid, states such as Bavaria and NRW, and Japanese cities such as Tokyo and Osaka, and of course the entire continent of Africa. Altogether we do not predict more than 50 geo domains. We are estimating one application per applicant (for these purposes, we consider the geographic entity to be the applicant, even if the official “applicant” is another entity with a letter of support).

Niche Applicants

These are individual non-IDN applicants, applying for just one or two generic-word names such as .KIWI, .MUSIC, .HIV and .RADIO. We estimate that these probably represent another 100 applicants and 150 total applications. This is a very rough estimate based on who has been present at ICANN, or .NXT, or other industry meetings. These applicants will compete with one another and often, but not always with portfolio investors for generic terms — as the projects, such as .HIV, may serve a very specific purpose.

IDNs

IDN applicants, in our calculation, represent another 100+ applicants. We know already of applicants for Russian, Chinese and Arabic strings. While we don’t have very good knowledge about these applicants, our cloudy crystal ball says that the number of IDN applications will be around 10% of the total, or 200, and that on average IDN applicants will have 2 applications each. We foresee limited competition between IDNs, and by definition little competition with Latin-characters gTLds. Note that IDNs could represent brands as well as generic terms and niche products, this is factored into our estimate of 100 applicants, 200 apps.

Portfolio Applicants

Portfolio applicants will be few. With the high cost of applications, there are probably no more than 20 portfolio applicants (such as ourselves) applying for more than 10 TLDs. We will know better when ICANN provides definitive information, but that is our estimate. By estimating 25 apps (on average) per portfolio, we predict a total of 500 applications from portfolio applicants. TLDH is applying for significantly more than the average for its own account; we don’t think that ours is the highest number, but we believe it is in the top five.

Brands

Brands will, with some exceptions, apply just for their trademarks. Based on our previous analysis, anything that isn’t a geo, niche project, IDN or portfolio app is an english language brand app. This gives us a total of 1,200 brand apps, and 730 brands. This implies about 1.65 applications per brand — which is in the general ballpark of the earlier estimate by Fairwinds of 2.2 applications per brand. Verisign has announced 220 applications, the vast majority of which we assume to be brands, many of them from Melbourne IT. We assume that other major registry service providers, particularly Neustar with their loss-leader $10,000 application consulting fee, but also non-U.S. providers like GMO, will have the rest of the brands.

Note that the biggest variable in our analysis is the number of portfolio applications. The number is not likely to be significantly larger than 500, however, as it would reduce the number of applications per brand below credible levels. For example, if there were 1,000 portfolio apps done by the small number of portfolio players, then it would imply 700 brands with 700 apps — not a likely ratio in our opinion. It seems more likely to us that the number of portfolio apps are in the 300-600 range.

Conclusion

The foregoing gives us the following view:

• Geos: 50 applicants – 50 apps (3%)
• Niche applicants: 100 applicants – 150 apps (7%)
• IDNs: 100 applicants – 200 apps (10%)
• Portfolio: 20 applicants: 500 apps (25%)
• Brands: 730 applicants: 1,200 apps (60%)

Total: 1000 applicants, 2100 apps

We therefore see about 700 applications being likely candidates for contention (niche plus portfolio apps). Some strings (.WEB, .MUSIC) are known to have multiple applicants. Others, such as .KIWI, are likely to face no competition. Overall we think that about two thirds (466) of our 700 of these will end up in contention, and of those 466 about half (233) will have more than two contenders.

So, our very rough back-of-the-envelope calculation says that of the 2100 applications, about 233 will have exactly two parties in contention, and these have a much higher likelihood of being settled without an auction. Another 233 will have more than two contenders, which makes a deal more difficult, but by no means impossible. At the end of the day, then, we estimate that ICANN is going to have about 100-125 auctions.

Batching

A word about batching. This is a very difficult area because ICANN hasn’t released much information about how it’s going to happen (which by the way makes any “digital archery” service somewhat suspect). ICANN has said they will pay attention to geographic diversity as well as to “skill” in the digital archery game, but they have also said that applications in contention sets will go in the first batch, which would mean that brands, geos, and IDNs would be sparsely represented in the first batch.

But it is also not at all clear to us that the batches cannot be staggered instead of back-to-back; work on a subsequent batch can begin even before the previous one is finished. Concluding that 2000 apps will take until 2014 is by no means a given if ICANN uses their new-found $350 million windfall wisely. The evaluations should go quickly, particularly since the estimate of how long it will take is based on the fiction that evaluators will be looking at 500 unique applications per batch. They won’t: there are perhaps 15 qualified registry service providers in the world, and therefore ICANN will not be faced with more than that number of unique tech sections — the great majority of the application — in the submissions they receive. Even though ICANN is headquartered at what has become known as “Marina Delay,” it is difficult to imagine that with resources at its disposal, ICANN will not be able evaluate 2000 applications in 12 months.

Summary

Even though information is spotty, there’s enough to start understanding what the post-application landscape will look like. The analysis above is our broad prediction.

The FIBA press release quotes FIBA Secretary General and IOC Member Patrick Baumann: “The decision to apply for .BASKETBALL is fully aligned with FIBA’s mission to unify the basketball community, along with the promotion and development of our sport. This domain name concerns our 213 National Federations as well as all other basketball stakeholders worldwide.” The TLDH press release is here.

FIBA is an independent association formed by 213 National Basketball Federations throughout the world. It is recognized as the sole competent authority in basketball by the International Olympic Committee.

The IRB informed the press yesterday, and TLDH followed this morning with its own press release. Rugby is a huge sport in the world (in some parts, the only sport), so we’re very pleased at our selection.

The IRB is committed to letting only valid registrants use .RUGBY, but they take a wide view of who that entails. Robert Brophy, acting CEO of the IRB, said: “If we are successful in our application we propose to work in partnership with our national federations to make the .RUGBY domain name available to the global Rugby family at all levels, including, players, from amateur to professional, tournament owners, organisers and, of course, fans.”

We’re looking forward to serving those same stakeholders. Dot RUGBY, with the IRB behind it, is a marquee gTLD with a built-in fan base that has every potential of being recognized as the home of rugby on the Internet. We’re happy to be a part of this effort.

The full press release can be found on the TLDH site, and is reproduced below:

Placing to raise approximately £9.0 million
February 10, 2012

The Directors of Top Level Domain Holdings Limited (AIM:TLDH.L), the only publicly traded company focused exclusively on acquiring and operating new generic top-level domains (“gTLDs”), are delighted to announce that the Company has today conditionally placed 109,468,353 new ordinary shares (the “Ordinary Shares”) at a placing price of 8.25p per Ordinary Share (the “Placing Price”) with institutional and other investors to raise £9,031,139 before expenses (equivalent to approximately US$14.2 million at current exchange rates) subject to admission (the “Placing”).

As previously announced, the Internet Corporation for Assigned Names and Numbers (“ICANN”) has formally opened the application window under which organisations can apply for the right to own and operate a new generic top level domain. The application window will remain open until 12 April 2012. Under ICANN’s rules, applicants for new gTLDs must first purchase an application slot, or placeholder, for each application for US$5,000 each, which will then be deducted from each US$185,000 gTLD application fee.

The Company intends to use the Placing proceeds to provide additional working capital and in particular, to fund the application slots and subsequent fees for new gTLDs on behalf of itself and clients of Minds + Machines. The Company expects to submit multiple batches for application slots during the application window having already submitted for its first twenty application slots. In January, TLDH announced that Minds+Machines will also be providing the back-end registry services for the proposed new .BAYERN domain.

Antony Van Couvering, CEO of TLDH, commented:

“We are delighted that both existing and new investors have responded so positively to our plan. With a new cash balance of approximately US$25 million, no debt, and a public stock, we believe that TLDH is ideally positioned to participate in the new gTLD opportunity.”

Peter Dengate Thrush, Chairman of TLDH, added:

“TLDH management believes that the increased capital will allow it to increase significantly the number of applications it is able to make, allowing it to develop a wider, more diversified portfolio of names in multiple languages and scripts.”

The new Ordinary Shares being issued pursuant to the Placing will, on issue, rank pari passu with the existing Ordinary Shares in issue and application will be made for the new Ordinary Shares to be admitted to trading on AIM. Trading in the new Ordinary Shares on AIM is expected to commence on or around 17 February 2012.

Meanwhile, across town, the Association of National Advertisers (ANA), who a few months ago decided to become the public face of opposition to new gTLDs after years of only desultory interest, had managed to convince the Senate Commerce Committee to hold a hearing on the matter. It was supposed to be a great party, but nobody came. The most powerful group of public-opinion changers in the United States barely got a quorum at their public event on how awful new gTLDs would be for the 1%.

Space in People’s Heads

The Senators that did appear were somewhat cool to the New Luddite message being peddled by the ANA and Esther Dyson, ANA’s star performer. Esther, fully inhabiting her new role of grumpy ex-Chair of ICANN, said:

“The rationale is that there’s a shortage of domain names… but actually, there’s a shortage of space in people’s heads… So was that Marriott.com or Marriott.hotel, or dyson.com or dyson.hotel if I decide to rent out my apartment?”

Of course Esther doesn’t own dyson.com, that’s owned by a vacuum cleaner company in the UK. And “.com” doesn’t indicate whether the site is about renting your apartment or sucking up loose dirt — but never mind….

Apparently there was enough space in the head of Senator Rockefeller, Chair of the Commerce Committee. He said,

I think we have to get used to .hotel…. I think we have to get used to .auto… I start from that position, but I listen…. I think a surge of new names and addresses can create opportunities: whether they will or not, I do not yet know…

A Principled Defense

Larry Strickling’s speech was the opposite of the low comedy in the Senate. His principled and passionate defense of ICANN’s model of Internet governance is worth quoting at some length (emphases mine):

This year has been a very active one for NTIA in the area of Internet governance as well as in privacy policy. In fact, the Senate Commerce Committee had a hearing this morning on the new top level domain program that Internet Corporation for Assigned Names and Numbers (ICANN) will be starting in January. Our work at NTIA in this area has focused on how we can preserve and expand the marvelous economic and job creation engine that the Internet has become. As we address these issues, we are guided by two principles.

First is trust. It is imperative for the sustainability and continued growth of the Internet that we preserve the trust of all actors on the Internet. For example, if users do not trust that their personal information is safe on the Internet, they may not use it to its full potential. If content providers do not trust that their content will be protected, they may be reluctant to put it online.

Second, as we find ways to address Internet policy challenges, we want to preserve the flexibility companies need to innovate. Our view at NTIA is that multistakeholder processes are best suited for striking this balance. By engaging all interested parties, multistakeholder processes encourage broader and more creative problem solving, which is essential when markets and technology are changing as rapidly as they are. They promote speedier, more flexible decision making than is common under traditional, top-down regulatory models which can too easily fall prey to rigid procedures, bureaucracy, and stalemate.

The United States strongly supports the use of a multistakeholder process as the preferred means of addressing Internet policy issues. We have been active in promoting the multistakeholder model in the international arena through our work at ICANN and the Organization for Economic Cooperation and Development (OECD).

…we are now seeing parties that did not like the outcome of that multistakeholder process trying to collaterally attack the outcome and seek unilateral action by the U.S. government to overturn or delay the product of a six-year multistakeholder process that engaged folks from all over the world. The multistakeholder process does not guarantee that everyone will be satisfied with the outcome. But it is critical to preserving the model of Internet governance that has been so successful to date that all parties respect and work through the process and accept the outcome once a decision is reached. When parties ask us to overturn the outcomes of these processes, no matter how well-intentioned the request, they are providing “ammunition” to other countries who attempt to justify their unilateral actions to deny their citizens the free flow of information on the Internet. This we will not do. There is too much at stake here.

We all know the Internet for its technological achievements. What is less understood, but possibly just as important, is that it has pioneered a global decision-making model that involves the people who are interested in and affected by the decisions, irrespective of status or geography, and de-emphasizes the power of moneyed interests. Going forward, if the ANA or some other group cares about an issue, they may have to rub shoulders with the hoi polloi, listen to other viewpoints, and reach a compromise that can attract wide acceptance.

With the speech by Larry Strickling (and, in a different context, similar remarks by Hillary Clinton), the U.S. government has now stated unequivocally that it won’t open a new door to censorship in order to placate the ANA, and for this defense of the right of free speech they should be applauded. With rights come responsibilities: now it’s up to the operators of top-level domains, and ICANN, to vindicate this faith in consensus decision-making.

The ANA sprang up in August to “vigorously oppose” the new gTLD program. Recently it has morphed into a larger group called CRIDO, and this group (which, ironically, counts among its membership companies that are actively pursuing new gTLDs) is picking up the pace by issuing more threats at ICANN, telling them that they must abandon the new gTLD program or — something. There are vague murmurs of a lawsuit, which I’ll discuss below. Their number one cause of complaint? New gTLDs will cost “the industry” money.

ICANN has seen fit to allow this opposition to go unanswered for nearly two months. It might therefore be useful to review why the CRIDO effort is doomed to failure, and why it deserves its doom. While the companies behind CRIDO and the ANA are powerful, in this case the 1% is not going to frustrate innovation in the name of keeping a small blip in “industry” costs. This article explains why they won’t succeed.

“Facts”

The ANA and CRIDO may control 99% of the money, but they have about 1% of the facts. Facts may not matter that much when you’re running a FUD (fear, uncertainty, and doubt) campaign, but for completeness’ sake it is worth pointing out that the figures being presented by the ANA and CRIDO have as tenuous a relationship with reality as Somalia does with law and order.

As Jeff Ernst of Forrester Research points out in a recent article, the ANA claims that new gTLDs will cost their members “billions of dollars” without once providing any verifiable basis for this claim.

Minds + Machines, by contrast, put together a study, “What Cost New gTLD Trademark Infringements to Brands?” that is easily replicable by anyone. Completely fact-based, relying on publicly available data, our study shows that infringements are correlated very highly with volume, and that if new gTLDs increase the number of names in the market by 15%, there would be an additional 316 UDRP filings per year, or an average of ten cents cost per trademark. If the domain name market grew more (which indicates greater public benefit), there would undoubtedly be more UDRPs, but the costs would remain very low.

GoDaddy has also done a study, which concludes that UDRPs have gone up in volume due as much to the ease of filing as to any increase in cybersquatting:

Although there is little doubt that the ongoing practice of cybersquatting factors into the tide of arbitration cases, the ease of filing, along with more vigilance on the part of IP holders, undoubtedly influenced the measurable increase in cases.

In addition ICANN has hired numerous economists, who all reach the same conclusion: yes, there will be costs to brands, and even though the public benefits are not yet clear, there are some obvious benefits that can be predicted. In general (the economists say) competition is in general a good thing, and there is certainly no compelling case to be made that the introduction of new gTLDs will cause harms that will outweigh the public good.

Last Come, First Served?

The ANA and CRIDO face a credibility problem. After 5 years (or 10 years, depending on how you count) of very public, noisy, open debate about these issues, these groups show up (or are formed) at the 13th hour, after the gTLD policy was approved and the ship had left the harbor. Where were they all these years? The ANA published some comments on the 2nd Draft of the Applicant Guidebook, but otherwise, in face of the program that they now claim is the worst thing since unsliced bread, they were completely silent. Although their absence wouldn’t matter much if they had some compelling evidence, they don’t. In effect, what they are saying is that we never gave it much thought, but now that they’ve woken up, they want everything changed. Try going to GoDaddy and telling them that you’ve suddenly realized that sex.com is valuable, and they need to overturn all their procedures and give it to you because you want it. The ANA is receiving a distinct lack of sympathy around their timing.

Congressional Hearings to Protect the 1%?

It appears that there is no appetite in Congress for hearings on this subject, even leaving aside the questions of whether the U.S. can or should act unilaterally. Of course appetites in Congress can be created, and that is what CRIDO is trying to do. But “Protect the 1%!” is hardly a rallying cry in the U.S. these days.

What Does the U.S. Government Think?

The NTIA, an arm of the Department of Commerce that oversees ICANN, has been lobbied intensively by interests opposed to the new gTLD program for the better part of a decade. The extensive new protections for trademarks are one result, as is the the Early Warning System for governments worried about TLDs that might threaten law and order. Another indication of the view of the U.S. Administration comes from the modified IANA contract specification. The IANA is the largely technical function, now in ICANN’s hands, that would actually enter new gTLDs into the root zone. The IANA contract comes up for bid periodically, and it would be a disaster for ICANN to have IANA’s technical function changed into a technical + policy function — effectively adding another layer of policy development on top of ICANN’s, outside and separate from the multistakeholder model and controlled exclusively by the U.S. Government. There was some fear of this when the bid specifications first came out. The initial Notice of Inquiry said:

For delegation requests for new generic TLDS (gTLDs), the Contractor shall include documentation to demonstrate how the proposed string has received consensus support from relevant stakeholders and is supported by the global public interest.

But the amended notice says:

The contractor shall verify all requests related to the delegation and redelegation of gTLDs are consistent with the procedures developed by ICANN. In making a delegation or redelegation request, the Contractor must provide documentation verifying that ICANN followed its policy framework including specific documentation demonstrating how the process provided the opportunity for input from relevant stakeholders and was supportive of the global public interest.

In other words, the US Government has removed the policy-making component from the IANA contract. Instead of IANA making a decision about whether the application is in the public interest, IANA is now asked only whether ICANN policy was followed. This is very a much of vote of confidence in ICANN policies, and a turning away from setting up any alternate source of authority. Asking the U.S. Government to overturn a process it initiated, participated in, and supports seems forlorn — especially when just two days ago they received the blessing of the European Union, who said in a press release, “the new IANA tender is a clear step forward for global internet governance.”

Overturning 10 Years of Global Consensus Based on a Lobbying Campaign

Even if ICANN really wanted to be ordered around by trade associations, it really doesn’t have the power to just overturn policy that’s been developed through its processes. The Board does have a lot of power, but overturning the new gTLD program, with its hundreds of thousands of volunteer hours, its votes of consensus on provisions, its carefully tuned compromises, is tantamount to throwing away its entire governance model. If CRIDO really expects ICANN to abandon the gTLD program, it needs to provide a rationale of why the multi-stakeholder process is a mistake and should be jettisoned. Until it can do that convincingly, ICANN can’t cancel or even much modify the gTLD program — and the governments who have lined up behind ICANN’s governance model (including the U.S.) will have a hard time supporting any initiative that vitiates it.

ICANN Has Been Preparing for This

ICANN fully expects to be sued over the new gTLD program. They believe this for the same reason that it took them ten years to come up with the new gTLD program — there are huge number of affected people, and you won’t make all of them happy. That’s why ICANN has fully examined the legality of their program, and has set aside a lot of money to fight any challenges. Where do you think a big portion of that $185,000 fee is going to be spent? ICANN has budgeted a large amount to be spent in court. I can guarantee that ICANN has spent a lot more time thinking about this than the ANA has.

On What Grounds Would an Injunction Be Granted?

If the ANA or CRIDO were to sue ICANN, on what grounds would they succeed in getting a judge to enjoin ICANN from continuing the program? I’m not a lawyer, but I invite those who are to comment and present an compelling rationale. I haven’t heard any.

Why Are They Doing This?

The effort of ANA and CRIDO has been pretty substantial. They have already spent more in lobbying and marketing than any introduction of new gTLDs could cost them. So the question is, why? Why are they putting all this effort, so late in the day, into a cause that seems quixotic at best? The answer has nothing to do with defensive registrations, or cybersquatting. Instead, it’s because new gTLDs will change the face of advertising and branding, and like a lot entrenched industries, they’re terrified of change. Here’s what Thom Kennon, SVP and Director of Strategy at Y&R says:

Shame on the ANA for taking such a misinformed and myopic view of one of the most significant changes in how brands and consumers find each other since the birth of the commercial Web.

Although none of us have any idea of the broad, deep implications of this re-architecting of the interwebs, it doesn’t take much of a creative bent to see the powerful opportunities this will likely afford every brand — and organization, and industry and even cities, states and towns.

Unlike the ANA – whose argument here seems to be nothing more than a repetitive loop of “ICANN’s wrong, it doesn’t add up…”- some of us are working to explore what this change might offer for the future of the brands and businesses we represent.

As the ANA (and sadly any of its members who take this Luddite advice) sit on the sidelines, some of us are exploring how the early brand movers – in the right category with the right architectural strategy – can reap huge, long-term rewards and competitive advantage from leading instead of lagging.

Here’s some better advice: every single brand manager, marketing strategist, technologist, content developer and CMO should start spending some serious time understanding what these changes can and will bring to how the ‘human web’ is evolving. Be smart, nimble and opportunistic and be ready to steal the march from those who chose to worry and wait.

What Would Happen if the ANA Got Its Way?

People who have been involved in the ICANN process scratching their heads. Where were all these companies and associations over the last five years of policy developments? What is this group and what is their aim? Are they really going to sue, and do they have any hope of succeeding? Is there anything fact-based about their assertion, or is this a pure lobbying play? And since ICANN is in its usual dilatory fashion saying nothing in response to these groups, many are wondering what’s going on, and what will happen to the new gTLD program.

The ANA and CRIDO, using the same arguments, but in a louder voice, are not going to succeed in overturning a hard-fought consensus that has involved all the significant interests in the space. The arguments have been taken seriously, been given years of hearings, have resulted in numerous changes to the gTLD program to accommodate the concerns that they raise, additional protections have been put in place, and the finally the program passed on a vote by the ICANN Board. Governments, businesses, intellectual property owners, ISPs, civil society, everyone participated.

Internet innovation doesn’t stop because it upsets someone’s business model. Let me refer readers to an article published in 1995 by Newsweek (now nearly defunct). Among other the many reasons it gives as to why the Internet will never work, it says:

The truth is no online database will replace your daily newspaper… no computer network will change the way government works. We’re promised instant catalog shopping — just point and click for great deals. We’ll order airline tickets over the network, make restaurant reservations and negotiate sales contracts. Stores will become obsolete. So how come my local mall does more business in an afternoon than the entire Internet handles in a month? Even if there were a trustworthy way to send money over the Internet — which there isn’t — the network is missing a most essential ingredient of capitalism: salespeople.

That’s what the ANA is saying: you need to prop up our outdated business model as an “essential ingredient” — or else capitalism will end. But actually we don’t, and it won’t.

The new gTLD program is not going to be undone. For that to happen would mean jettisoning 10 years of the ICANN experiment and all the work that has gone into it. Too many people, governments, and institutions have put in too much work, and have too much at stake for that to happen. If, on the basis of a lobbying campaign in the United States by some fearful people, a global consensus were overthrown, the splitting of the root is not far behind, and if that happens the results will be much worse for ANA and its members (and everyone else) than the introduction of new gTLDs.

ICANN’s current plan for a Continued Operations Instrument (COI) is a self-insurance scheme that asks registries to tie up a massive amount of cash, when much cheaper and more sensible options are available. The COI is a massive barrier to entry for all applicants, and one that hits smaller registries and those from developing countries with disproportionate weight. The COI requires massive amounts of cash to be set aside in case of business failure. It is so punitive that it will certainly encourage falsely conservative sales volume estimates by applicants, and likely to lead to higher prices for registrants. Combined with the Emergency Backend Registry Operator (EBERO) RFI, it will rob developing registries of much-needed funding during their critical first few years, and use the funds from the resulting failures to reward large incumbent registries. This is not a conspiracy theory — several incumbent registries, notably Afilias, also recognize this plan as dumb and have been working actively to make it more sensible: all boats float on a rising tide, and sink together too.

While registrants do need to be protected against registry failure, the ICANN formula for the COI seems much better calculated to cause registry failures than to prevent them.

The requirements for the COI are given in Question 50 of the Application Guidebook. Basically, the applicant has to set aside funds (or get a letter of credit) to assure “core registry functions” for 3 years. Core registry functions are: access to the shared registry system; Whois, DNS resolution; data escrow; and DNSSEC. That sounds reasonable enough until you start to get into the details — and the difference between what this would actually cost and what ICANN wants set aside.

At a recent session at the ICANN Dakar meeting dedicated to the COI, no-one spoke in favor of the current COI requirement. A registry stakeholder group proposal that would pool the risk was shot down by intellectual property interests, who predictably were not in favor of a mandatory payment to protect others (large companies will have no problem coming up with the COI). Others insisted that the pool was a form of insurance, and ICANN should not be in the insurance business. But some preliminary ideas toward the solution proposed in this post did receive some support. The way forward is provide estimates of actual likely costs, instead of the “sky is falling” scenario that the current plan envisages. Several groups are working to gather such data to present to ICANN. This post critiques the current system and provides an outline for a way forward.

Delay Is Not an Option

A short but important point: changing the amount of the COI does not mean a delay: it is not a change in policy, it is only a method for more reasonably estimating cost. The EBERO RFI, as the name implies, is a request for information. This too can be modified within the parameters of existing policy. Everyone involved in trying to reform this crazy mechanism has spoken out against any delays.

The Amount of the COI Is Directly Tied to the EBERO

Quoth the Guidebook:

The Continuing Operations Instrument (COI) is invoked by ICANN if necessary to pay for an Emergency Back End Registry Operator (EBERO) to maintain the five critical registry functions for a period of three to five years. Thus, the cost estimates are tied to the cost for a third party to provide the functions, not to the applicant’s actual in-house or subcontracting costs for provision of these functions.

Note that ICANN is building a model for these costs in conjunction with potential EBERO service providers. Thus, guidelines for determining the appropriate amount for the COI will be available to the applicant. However, the applicant will still be required to provide its own estimates and explanation in response to this question.

That’s what the Guidebook says, but that’s not what the EBERO RFI says. The EBERO is filled with extraneous requirements that have nothing to do with core registry functions, with the result that only large incumbent registries can qualify.

What Are the Real Costs of Transitioning a Failed Registry?

A registry stakeholder group presentation estimates that the current system would require a registry with 100,000 names in Year 3 to set aside $450,000, and a registry with 1,000,000 names in Year 3 to set aside $4,500,000. Will this kill any growing business? Is this more than most registries’ estimated profit margin? Is this completely crazy? Yes, yes, and yes.

You would think that ICANN would have done some research into the real costs of providing these five core functions to a failed registry. Maybe they did, but it doesn’t show. Let’s look at what it will actually cost. There are a few answers:

• The first and most likely answer is “almost nothing,” because the registry service provider of a failing registry can easily be persuaded to continue these operations (M+M guarantees it for their clients). That’s because in their assessment the risk is low (or they wouldn’t work with the registry in the first place) and because their incremental cost to do so is in fact near zero.
• A second answer is also “almost nothing,” because even supposing the registry operator *in addition to the registry* were to fail (a very low likelihood), in most cases any other registry service provider would be happy to pick up the names, since their incremental costs to run additional names are also near zero (there are transition costs, but these are not great — M+M transitioned a sizable zone over a weekend).
• A third answer is the ICANN way: multiply the estimated volume registrations by a dollar amount to be determined by the results of the EBERO RFI — which is only open to the most expensive incumbent registries, who charge orders of magnitude more than smaller, perhaps more efficient registries. (As one example among many, VeriSign charges $7 per name per year for .com names; Minds + Machines and many of its competitors charge less than $2 at a fraction of the volume of .com — and per-unit costs generally fall with increased scale).

Fortunately, there are plenty of examples of transition costs drawn from both the ccTLD and gTLD world that provide actual costs, and there is an effort to gather up these examples and provide them to ICANN, to give them cover (sigh) to do something sensible.

Accrediting Registry Service Providers

ICANN doesn’t like Answers 1 and 2, because (they say) “How do we know that the new registry service provider can do the job?”

Actually, the question should be reframed, “Why don’t you know?” because frankly they should know already. ICANN’s reluctance to accredit registry service providers is the greatest source of unnecessary cost and delay in the post-application period.

Without a doubt the biggest inefficiency of ICANN’s new gTLD process is the silly requirement of answering the entire tech section for each and every application. There are only a few registry service providers — Minds + Machines is one of perhaps ten — and nearly every application will use one of them. Although it’s theoretically possible to file an application for a system that’s not yet built, the level of detail required by the application effectively requires an existing, working registry. And yet for each new gTLD application, the tech section, the bulk of the application, will be reviewed anew in its entirety. So if there are 1000 applications, the evaluation of the tech section will be duplicated effort for 990 of them. I defy anyone to defend this as sensible.

Why did ICANN not simply accredit registry service providers, so that applications using accredited providers would not need to be tested and retested. Given that the application fee is based on cost recovery, an accreditation process would surely have reduced the $185,000 to something more manageable. Now that this opportunity has passed, accrediting registry providers for the five core registry functions is surely possible.

Happily, the fix is within reach and will not require further policy development or delay, if only ICANN comes to its senses. One obvious solution lies in amending the current EBERO RFI. In fact, amending the EBERO RFI could result in huge cost and time savings across the board.

The EBERO: Gold Mine for Incumbent Registries, Paid for by Applicants

The EBERO as written could be retitled the “Incumbent Registry Free Money RFI.” It is in fact a registry service provider accreditation program, but only for the chosen few. It is written to exclude any provider who is not a high-volume incumbent, assumes a .com-like one-size-fits-all model, and includes pages of requirements that have nothing to do with providing “core registry services,” even though Question 50 of the Guidebook links the two explicitly. In fact, the EBERO is filled with requirements that aren’t required of applicants in the Guidebook. Why are they required here?

Here are some examples of overreaching EBERO requirements (picked from among many such entries):

• High Capacity traffic service capability
• Ability to handle up to 20,000 concurrent client connections and a daily minimum peak volume of 2 million transactions with a read/write ratio of 10/1 (based on an estimated 1 million aggregate domains in the EBERO).
• Provide examples of thought leadership, industry participation, and publications that highlight your experience ["Thought leadership" as a technical requirement? - puh-leeze!]
• Ability to support and maintain IDN registrations
• Multiple DNS service locations that are geographically diverse and can be demonstrated to fully serve global resolutions
• Ability to accept live call volumes from an estimated user base of 300 and an expected contact rate of 15-20% during emergency migration periods without queuing times exceeding 10 minutes

The list goes on, one gold-plated requirement after another. The problems with this approach are manifold, but they all stem from the idea that one registry service provider should be able to handle *any and all* failing registries. That’s just plain silly — why not accredit a diversity of registry service providers as EBERO candidates and then assign failing registries to them according to the requirements of the registry?

Why the EBERO Doesn’t Make Sense As Written

The EBERO doesn’t pass the sniff test:

• Even though the most likely scenario for registry failure is an inability to sell as many names as estimated, resulting in a registry with few names, the EBERO calls for high-volume experience only. If anything, they should be looking for low-volume experience.
• If the failing registry doesn’t sell IDNs, why should the EBERO support them?
• If the failing registry only has 3 registrars, why should the EBERO support 300 concurrently?
• Data escrow, one of the five core registry services, is by definition outsourced. DNS is not outsourced necessarily, but in many cases it makes good sense both financially and technically (for redundancy) to do so. Why does the EBERO need to provide DNS services? ICANN could easily ask for EDNS (Emergency DNS) providers — they would line up to provide reasonably priced services.
• The EBERO as drafted assumes (unreasonably) that it will take 3 years to find a new home for the registry. Instead of providing a gold mine to large incumbent registries with little obligation, why not ask EBERO’s to provide a permanent home? In that case the funding wouldn’t need to cover three years — more like three weeks at the outside.
• Why should billing be suspended during the emergency period? If functions are being provided as normal, why not accept renewals at least, if not new registrations? This would substantially reduce the amount needed in the COI.

The EBERO as written is perfect for the fool who gives away millions of .BLAH registrations and then finds that no-one wants to renew them for money. For everything else, it’s overkill, and tying the COI for all registries to the cost of rescuing .BLAH is unreasoningly punitive. ICANN is asking all applicants to tie up precious cash reserves to cover for ICANN’s poor planning in this regard, and the result will be that new registries will find it hard to market their new TLDs in the critical first years of their registries — leading, inevitably, to registry failures.

Fix the EBERO, and the COI Suddenly Becomes Reasonable

ICANN should ditch the one-size-fits-all EBERO specification, and change it to accept a diversity of models, and rate registry service providers for volume of names, IDN capabilities, and some other criteria. Most of all, they should be rated on their ability to provide the required core registry services, and not on the number of gold-plated toilet seats they have. Once rated, these providers would be accredited for the capabilities they provide. Will this take a while? Maybe, but no new registry will be online for over a year. ICANN should also ask for Emergency DNS providers, since DNS can be easily provided independently of the Shared Registration System. DNS prices in the open market range from free to expensive — again, one size does not fit all. Overall, the prices for emergency services would drop drastically, and the effect would be to re-price the COI at a reasonable amount.

In a free market, registry service providers would be lining up to provide transition services for free if they were allowed to collect renewal fees for a certain period of time. Why is this not allowed in the EBERO? Only in extreme cases would there be no takers, and only then should a larger payment be invoked. The EBERO as written is a gift to large incumbent registries to pick up distressed registries (probably permanently, because why should they move again?), leaving aspiring applicants to pay for their gain via the COI.

There is a better way, and if ICANN (and, ahem, the GAC) actually gave a thought about the real-world issues faced by small registries or those from developing countries, they would insist on tying the COI to a real-world cost, and they would resist give-aways to incumbents through a guaranteed-income scheme paid for by struggling newbies. The COI and EBERO severely reduce choice and competition, and the security they promise is illusory and unsupported by experience or fact. They need to be changed, and the way to do it is to widen the field of emergency providers and thereby reduce the cost of the COI.

Today, though, ICANN released a number of results and initiatives that are quite newsworthy. There’s a lot to digest and report on, which should keep the journalists a safe distance away from Wondering What It All Means.

Among the releases from ICANN:

• A new updated Applicant Guidebook. It is missing the important word “final,” but does nail down some dates and clarifies some GAC issues. Still unanswered, in the guidebook or elsewhere, are questions about the Continuing Operations Instrument (a ham-fisted business-killer that has raised many concerns). Nonetheless, for those thinking of applying, a must-read. ICANN unfortunately did not publish a red-lined version to quickly see the changes from the last version, though there is a Summary of Changes to the Applicant Guidebook.
• A new web site devoted to the gTLD program. Until today, looking at the main ICANN homepage, you’d never guess that the major undertaking of ICANN’s history was about to get underway. Now, however, the photo of CEO Beckstrom and the guys from .BR, which looked like it was lifted from the annual report of a Minsk tractor factory, has been pushed down to make way for the headline “New gTLD Program In High Gear,” accompanied by some stock photography of a woman looking determined and competent. On the gTLD mini-site, there’s a section with videos of “experts” (some are, some aren’t) as well as an FAQ, knowledgebase, latest materials, and so on. It’s still in development, and that’s ok. Let’s hope it keeps developing.
• The final report of the contentious and dysfunctional JAS Working Group concerning support for disadvantaged applicants. You can’t read the report yet (at least I can’t) but it should be made public soon. This has been listed as one of the major issues left unsolved from the Singapore meeting in June. If you’re a serious ICANN geek, you can listen to the working group session (thanks to Joly MacFee of ISOC NY)

It’s good to see ICANN breaking their radio silence and providing a useful resource to applicants.

New program and pricing for brands

We will be introducing a new program for brand owners who have decided to apply for a new gTLD. Features include:

• Emphasis on a complete partnership. We’ll handle the entire gTLD process, from application to operation, from ICANN questions to technical implementation, without passing you off to other consultants or technical providers.
• Reasonable flat-rate pricing, making it easy to plan, and easy to expand.
• Brand-friendly workflow once you’re up and running, making it easy to ensure that your internal registration policies are followed.
• Expert advice. Did you know that members of our team have handled the domain portfolios of many of the world’s largest companies? (Complete list upon request).
• Do you work with a favorite registrar? We work with them too. Our registry platform is connected with all major registrars, including Mark Monitor, CSC, and others. You won’t have to switch anything if you don’t want to.
• Do you want a private, fully ICANN-compliant registrar for internal use? We supply one as part of the package. We’ll help you get accredited and provide you with a complete registrar solution.

We expect that the conference will be very interesting, with lots of different points of view. ICANN Chairman Steve Crocker will be a speaker, as will many members of ICANN’s Intellectual Property Constituency, along with other prominent IP lawyers.

If you’re going to be at the INTA show, please find us on the floor or at a session. Everyone at the conference will be carrying a very handsome bag with a Minds + Machines logo, but we will be the ones wearing the distinctive Minds + Machines lapel pin.

See you at INTA, and watch this space!

Case in point: a letter from the Association of National Advertisers (ANA) that arrived a few days ago, full of bombast and muscle-flexing, demanding that ICANN immediately stop the new gTLD program until a long list of demands from the ANA were met, or else the ANA would be forced to take some Very Scary Actions:

Should ICANN refuse to reconsider and adopt a program that takes into account the ANA’s concerns expressed in this letter, ICANN and the Program present the ANA and its members no choice but to do whatever is necessary to prevent implementation of the Program…”

The ANA is also featuring on its website an unintentionally hilarious video of ANA chief Bob Liodice mangling facts, grammar, vocabulary, good sense, and Internet architecture as he warns about “an insidious problem that is about to take place within the Internet domain.” And that’s just the first sentence.

Mr. Liodice betrays no sense of embarrassment as he sounds the alarm about this Terrible Thing he has just discovered, even though the ANA has had five years, seven guidebook drafts, dozens of ICANN meetings, and easy access to ICANN Board members and staff to say something about the program before now. Barn door… horse… bolted… oh well. I suspect Paul Revere was not an ANA member.

ICANN, though, has responded forcefully, albeit after the ANA had the ear of the press for five days of unopposed scare-mongering. In a long and substantive reply to ANA’s letter, ICANN CEO Rod Beckstrom takes Mr. Liodice to school and raps him on the knuckles for shoddy scholarship:

Your letter also claims that the program represents “unrestricted expansion” or allows “virtually any word or phrase.” These statements demonstrate a lack of understanding of Program details. More research on your part would have revealed: (i) restrictions on delegation rates; (ii) string requirements and limitations; (iii) required applicant background, financial and technical qualifications; (iv) objection processes for infringing and other inappropriately applied-for strings; and (v) standing registry operator obligations in the registry agreement.

Your quotations from the economic studies are highly selective and lead to an unsupported conclusion that more domain names will lead to cyber security lapses or consumer privacy violations. Your claim of “enormous financial burdens” and other broad statements are offered without supporting data or rationale.

ICANN is unyielding in its commitment to the public interest, and the new generic top-level domain Program is only one expression of this commitment.

Please be advised that ICANN will vigorously defend the multi-stakeholder model and the hard-fought consensus of its global stakeholder participants, its duty to act in accordance with established bottom-up processes, and its responsibility to the broad public interest of the global Internet community, rather than to the specific interests of any particular group.

It’s good to see ICANN find its feet and its voice. The approval of the new gTLD program is already having some collateral benefits.