[registrars] RE: Appeal to ICANN Finance committee to modify ICANN Budget proposal

["Bhavin Turakhia" <bhavin.t@xxxxxxxxxxx>]

Dated: 20th May 2004

Dear Kurt, ICANN Finance Committee and Board Members and other participants,

Thank you for a very detailed and quick response, I realise you have burnt
midnight oil on this one, so I must upfront clarify that it is not my
intention to give ICANN sleepless nights :). Please do not take my entire
communication below in the wrong sense. I do criticise almost all of the
points that you have brought up in your email, but that is not to mean any
disrespect. I realise that we are both seeing different sides of the same
issue.

The important aspect in this whole exercise is the fact that we are both
aiming for the same thing, namely a strong budget which allows ICANN to
fulfill its goals without compromising on fairness and without being
burdensome to the participants in a way which negatively impacts their
business. Your assurance that even ICANN feels the same way is not even
required since we are all aware that ICANN itself does not wish to see
Registrars, especially deserving ones, go out of business.

Having said the above, please find below the flaws in the arguments that you
have sent to us. I believe we can mutually overcome these flaws, but I also
believe that this will not be achieved by further patching the existing
budget (for instance I consider the portion of forgiving fees of certain
Registrars as a patch). Instead we will need to modify certain basic
premises of this budget to overcome these fundamental flaws

Assumption/Flaw 1: Batch Pool Revenue will subsidise ICANN fees
The most fundamental assumption your entire email is based upon, is that of
the batch pool connection revenue. Infact, out of the 50 or so paragraphs in
your email almost 12-15 reference the batch pool in some way or the other
(some of these paras are entirely devoted to the batch pool). A majority of
your email content and argument therefore relies on the fact that the batch
pool revenue derived by a set of Registrars will allow these Registrars to
pay the higher ICANN fees and therefore the newer budget model makes sense.
This assumption is flawed in so many respects (please do not get me wrong)
that I was actually surprised this occupied so much content of the response
-

* Firstly and most importantly, the ICANN Board has itself approved WLS.
This obviously means that in the near term future we are likely to see the
implementation of the same. If a LARGE chunk of the reason for the new
budget structure is the batch pool revenue, then I am surprised that the
ICANN budget committee based their decision upon a revenue source that they
themselves have taken steps to eradicate 3 months ago. Infact most
Registrars who are participating in the batch pool themselves perceive this
revenue to be a short term opportunity which could disappear any given
moment. So is the ICANN Budget meant to be a short term one to be modified
as business models change or as WLS gets implemented?

* Many places in the email, you mention that one of the basic aspects you
will use to determine whether a Registrar should pay the $19000 fee or the
fee should be forgiven, will depend on whether the Registrar participates in
the batch pool or not. What will you do after the WLS comes in? Forgive this
fee for EVERYONE or apply this fee to EVERYONE? Your primary forgiveness of
fees factor comes across as non-participation in the batch pool. So after
WLS will you be modifying the parameters based on which you will forgive
Registrar fees? Or will you stop forgiving them?

* After WLS will you then transfer this $19000 per Registrar burden to the
Verisign Registry since the income that the current Registrars make from the
batch pool will directly get siphoned off to the Registry at $24 + $6 per
WLS

* Since you are going this granular how about taking this one step further.
Some Registrars make $5k per month on their batch pool connections while
some make $20k. Will you charge each Registrar differentially based on their
income from the batch pool?

* What about Registrars who are not participating in the batch pool today
and begin to participate tomorrow. Will ICANN keep a constant HAWK watch on
every Registrar on a temporary short term business model that will soon be
eradicated in order to fulfill its revenues?

* So why restrict yourself to the batch pool. I see some Registrars making a
GOOD chunk of money in selling secondary market domain names. Some Domain
Names are selling for $1 million and above and would fetch handsome
brokerage to Registrars who participate in the aftermarket. Many a Registrar
run secondary market places making EXCESSIVE incomes over and above their
current income thanks to a creative business model. So does ICANN intend to
also investigate these types of business models in the future and base their
revenue upon such models?

* Lets also take into account landrushes for the launch of new TLDs. As
ICANN clearly knows, many a Registrar made a sizeable amount of money by
auctioning off spots in the .INFO landrush and the .BIZ landrush. On the
other hand many Registrars who were not aware of these landrushes made
nothing. I know Registrars who made as much as $80,000 in just 3 weeks by
adopting a creative business model which required no labour during the
launch of a new TLD. So in the future there will be many such opportunities
which a certain section of the Registrar community will avail of. Does this
mean ICANN will inspect everyone of these creative opportunities and
modulate its fee structure per Registrar who participates in such
opportunities?

* Add to this I know MANY Registrars who reserve expiring domain names for
themselves and then redirect the traffic on such names to Pay Per Click
programs. Some Registrars are making cool 6 figure incomes through pay per
click programs by registering expired domain names. So is ICANN looking at
that too?

* In the email you mention that newer Registrars can subsidise this activity
through the batch pool. While ICANN is up close and personal to the batch
pool issue you need to realise that there are a large set of potential
applicants out there looking at the ICANN website for accreditation who do
not even know of the existence of the batch pool. Infact I run a separate
entity called LogicBoxes where we provide Accreditation consultancy to
companies. We are currently talking to several Hosting companies who do not
know or care about the batch pool. I know several of these companies are
potential Registrars with 5000+ domains each. They are willing to take the
step forward because currently apart from the fixed $4000 fee they do not
bear any fixed costs. However these potential applicants if they visit the
ICANN site and find out that the annual fee is hiked up to $23000 they will
not bother to even ask us or ICANN for help. So is ICANN going to state on
its website that potential applicants need not be scared of the $23000 fee
since the applicant can make more than that by participating in the batch
pool? If not then the only applicants that ICANN will be getting will be
from those who know about the batch pool and are getting accredited solely
to monetize their connection threads. The genuine applicants will get
discouraged from the site itself and will not apply, unaware that they can
participate in the batch pool.

* In the email you clearly mention - "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." and "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". As soon as WLS kicks in a
large number of these Registrars will cease to exist. They will shut their
shop and leave. If you have taken a closer look at the numbers of these
Registrars you will find none of them register any domain names and all the
names registered through their batch pool are transferred away immediately
after the first 60 days. So has ICANN given a thought to what will happen to
its revenues when 20%-50% of the Registrars just walk away from the
Registrar business

* In your email you differentiate between Registrars who use the batch pool
and those who do not. So is ICANN going to personally inform all existing
Registrars who are not using their batch pool that they can do so in order
to subsidise their $19000 fee?

Infact as you can see from the above flaws, the direction this is taking
seems to be even more precarious than what my earlier email suggested. If
ICANN will base its revenue and budget model upon short term temporary
creative business models of Registrars, then the consequence will be a very
weak, fluctuating, subjective and seemingly unfair budget. Some participants
will be advantaged and some will not and this will keep changing. A budget
must be rock solid and not depend on ANY short term or creative business
model of a Registrar outside of pure Domain Registration activities. I
realise that many a ICANN staff as well as other key industry participants
are not too happy about Accreditations which have spawned solely for taking
advantage of the batch pool. I personally have voiced my concerns in the
past about this practice. However the ICANN budget is not a weapon to be
wielded against this issue. I am quite concerned that the ICANN budget
committee sought to modify the budget to correct this anomaly or, even
worse, to use this anomaly in the short term to make revenue for ICANN. Both
of these objectives come out in Kurt's email and I am worried by the thought
to a great extent (please don't get me wrong here). While I realise that
ICANN and many others may feel that it is unfair that a set of Registrars
out there are making between $5-$20k a month without significant effort,
this is a completely unrelated matter which has already been addressed by
approving the WLS proposal. If ICANN feels that any further steps need to be
taken to address this then these steps should be taken as a separate issue
and not mixed with the budget at all. For the budget to be strong, stable
and long term, it is essential for it to be NOT DEPENDANT on any short term
business model at all. It must only be dependant on pure domain name
registration business.

Assumption/Flaw 2: It makes sense to charge a fixed cost portion of $3.8
million equally to all Registrars
This is another fundamental weakness in the budget. The budget assumes that
since ICANN needs to spend $19000 per Registrar as a fixed cost it must
charge it in the same fashion to all Registrars. ICANN forgets however as
Tom Barrett from Encirca mentioned that it is a quasi-governmental body with
one of its primary aim being to foster and promote competition. Here I
discuss a few of my observations -

* We run a website called WebHosting.Info which publishes live statistics
about the entire Domain Names and Web Hosting industry. Please visit the
below URL and check the Ranking column -

http://www.webhosting.info/domains/country_stats/

You will find out that except for the TOP 25 countries worldwide the
remaining 218 countries have all less than 50,000 Domain Names attributed to
them (this calculation methodology is not based on Registrant, but is based
on hosting company, however it gives a decent approximate). Also you will
find that over 200 countries have less than 20,000 Domain Names. This means
that with the new budget a sustainable Registrar will not be able to exist
in any of these countries. Has ICANN actually conducted such research
itself, considering that its goals are to promote competition? It makes more
sense to adopt a budget approach which does not make life so difficult for
the smaller countries to participate in the ICANN accreditation process.

* By raising the fixed fee component from $4k to $23k, ICANN has straight
away increased the barrier to entry. Previously a Registrar could enter the
market and sustain operations with around 4000 domains and a $1 profit. Now
a Registrar needs 23000 domains at a $1 profit to just cover his ICANN costs
(add insurance and operations and the figures change). If the profit margin
is lesser than $1 then the number of domain names required to break even
further increases. In the current market, to compete with GoDaddy, Enom etc
a new Registrar must sell at the same price that the larger Registrars do.
This is not possible and hence will reduce applicants.

* For any body like ICANN, which is responsible for creating healthy
international competition, it is important to create a reasonable barrier to
entry and a way for newer entrants to be able to compete with existing ones.
This current budget move is counter to that.

* You mention in your email - "why should larger Registrars bear a larger
cost of this $3.8 million as compared to the smaller Registrars". The answer
is - the fundamental way of looking at the costing by any Registrar is their
per domain cost. The larger Registrars and the smaller Registrars both will
always look at their per Domain Cost and determine their selling price. It
is important for ICANN to ensure that the per Domain Cost for EACH Registrar
remains nearly the same no matter from which country the Registrar is and no
matter whether the Registrar is new or old. That is the only way a new
Registrar in a small country can survive.

* Infact in any government regime you will always observe that the tax
component paid by the higher income brackets is higher per dollar than the
lower income brackets. This allows people who are at the bottom rung of the
income ladder to climb up and compete with those in the higher rung. What
ICANN is doing with this budget is the EXACT reverse. It is reducing the per
domain tax for larger Registrars and increasing the per domain tax for
smaller Registrars. That is like a government asking poor individuals in the
country to pay a higher per dollar tax than the richer individuals. How can
such a government expect to sustain the budget?

* Lets look at the long term view of both the models. Take two Registrars
today

Godaddy - whose per domain cost is $6 + $0.25 + $0.005. Godaddy can
therefore sell at $6.5 and still make a profit

"Small Registrar Inc" with 10000 domains in US - whose per domain cost is $6
+ $0.25 + $2. This Registrar can therefore sell at $8.5 only

Domain Names are commodity products and therefore a consumer can buy them
from pretty much anywhere. It is obvious that GoDaddy will continue to grow
while "Small Registrar Inc" will lose customers to the likes of godaddy due
to its higher selling price. The more clients that "Small Registrar Inc"
loses the higher it has to raise its price, thus starting a vicious circle
which will not allow this company to survive. Infact "Small Registrar Inc"
realises that it can buy domains cheaper from Godaddy than from ICANN
itself. In the long term this effect will be felt across a large number of
Registrars causing a REVERSE DRAIN of domain names. In the past 4 years
ICANN has successfully created a large belt of Registrars and resulted in
market share getting distributed across all of these Registrars on a gradual
basis. The new budget will begin to reverse that effect by causing a
consolidation of domain names towards the larger Registrars

Assumption/Flaw 3: There are many new applicants in the pipeline as well as
many existing Registrars who will sustain the new Budget by adding $19000 to
the kitty

I want to ask two questions at this stage -

* How many of your new applicants (except those who have applied solely for
the batch pool) have you actually spoken to and figured out as to what their
reaction will be if their fee was increased from $4000 to $23000? I am of
belief that a good percentage of the ones who are not aware of the batch
pool will immediately question their ability to sustain.

* Of the current set of Registrars that exist, how many active Registrars
with less than 50,000 names have you spoken to with regards to how a
increase of $19000 in their annual fee will affect their business (in a
post-WLS world). I am of opinion that several of them will begin to question
their ability to sustain

* This new budget policy will infact not do anything to discourage the
applicants who solely want to monetise their batch pool, and on the other
hand completely discourage genuine applicants unaware of the batch pool,
which is the opposite of the desired result.

* Until now there were many mid-sized hosting companies who could apply for
accreditation. These companies currently buy domains at $6.49 or so from
existing Registrars. In the new budget if these Registrars get accredited
their per domain cost will range from $7 to $9. There is no reason for them
to get accredited, they will continue to be resellers of larger Registrars.
It is no wonder that the larger Registrars find this budget a positive one.
They were earlier afraid of losing some market share as some of their
clients themselves became Registrars. Now that fear is gone. ICANN however
will lose out on the $4000 annual accreditation fees it would have made from
these companies (and there are over 2000 such companies worldwide). Moreover
ICANN will lose out on being able to achieve its aim of creating
international competition.

Assumption/Flaw 4: Smaller Registrars will not be affected since their
annual fees will be forgiven

Please do not mistake my statements here as an allegation or a remark that
this additional aspect of "forgiving fees" is a knee-jerk reaction. But
please take a look at the budget policy yourself. Does it not appear that
the "forgiving fees" process seems like a PATCH applied on the budget. Does
it not seem out of the ordinary, as if a budget was drafted and then some
flaw was realised and so a patch was applied to the budget to sort of
workaround that flaw? The concept of forgiving fees for some Registrars and
not for others initself seems so shaky as a model that the very fact that
people in the committee started thinking in that direction should have been
warning enough to try and rework the fundamentals -

* Firstly a good chunk of the "forgiving fees for certain registrars" seems
dependant on the batch pool monetisation. There are many flaws with this
assumption covered already in the first section

* Secondly the very concept of forgiving fees for a set of Registrars
irrespective of the objectivity of criteria seems onerous. Whatever
conditions you can think of will still result in certain Registrars who
deserve a waiver of fees not getting it and viceversa, some Registrars who
DO NOT deserve a waiver getting it. This type of treatment is actually a
breeding ground for dissonance and mistrust. ICANN CANNOT have a grey area
and differential charging policy for its fixed annual fee based on criteria
such as batch pool monetisation or other such subjective criteria
 

Conclusion

In conclusion, once again let me request to kindly take all of my comments
above in the right spirit. At some places the language maybe a little harsh,
please attribute it to the fact that it is 4:00am here right now :). I do
not think that ICANN has spent such a lot of time and come out with a bad
budget. Infact I do think that several portions of the budget are perfect.
All I think is that a certain set of base fundamentals in the budget need to
be modified. I firmly believe that if the budget was passed in its current
form it would be catastrophic for the industry as a whole.

ICANN must revert to a simple per domain year variable fee. It does not
matter what this amount is since whether it is 10 cents or a dollar, it is
applicable to all Registrars and will thus enable unencumbered free
competition. This model is also scalable for ICANN. The variable fee amount
can be modified in any year without impacting a specific segment of
Registrars. Any such modification would impact all Registrars equally. The
effect would be felt by the entire industry as a whole.

I would once again urge ICANN to reinvestigate its current budget and make
this modification to ensure that the budget is not dependant on short term
revenue models of a set of Registrars, and that the budget does not stifle
competition, or discourage newer or existing participants in any way now or
in the future.

Yours sincerely

Bhavin Turakhia
Founder, CEO and Chairman
DirectI
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