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<DIV dir=ltr align=left><FONT face=Verdana size=2>Dated: 20th May
2004</FONT></DIV>
<P><FONT face=Verdana size=2>Dear Kurt, ICANN Finance Committee and Board
Members and other participants,</FONT></P>
<P><FONT face=Verdana size=2>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.</FONT></P>
<P><FONT face=Verdana size=2>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.</FONT></P>
<P><FONT face=Verdana size=2>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</FONT></P>
<P><B><U><FONT face=Verdana size=2>Assumption/Flaw</FONT></U></B><FONT
face=Verdana size=2><B><U> 1: Batch Pool Revenue will subsidise ICANN
fees</U></B><BR>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 -</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>* 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</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>* 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. <I>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? </I>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.</FONT></P>
<P><FONT face=Verdana size=2>* 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</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>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.</FONT></P>
<P><B><U><FONT face=Verdana size=2>Assumption/Flaw</FONT></U></B><FONT
face=Verdana size=2><U><B> 2: It makes sense to charge a fixed cost portion of
$3.8 million equally to all Registrars</B><BR></U>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 -</FONT></P>
<P><FONT face=Verdana size=2>* 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 -</FONT></P>
<P><FONT face=Verdana size=2><A
href="http://www.webhosting.info/domains/country_stats/">http://www.webhosting.info/domains/country_stats/</A></FONT></P>
<P><FONT face=Verdana size=2>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.</FONT></P>
<P><FONT face=Verdana size=2>* 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.</FONT></P>
<P><FONT face=Verdana size=2>* 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.</FONT></P>
<P><FONT face=Verdana size=2>* 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.</FONT></P>
<P><FONT face=Verdana size=2>* 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?</FONT></P>
<P><FONT face=Verdana size=2>* Lets look at the long term view of both the
models. Take two Registrars today</FONT></P>
<P><FONT face=Verdana size=2>Godaddy - whose per domain cost is $6 + $0.25 +
$0.005. Godaddy can therefore sell at $6.5 and still make a profit</FONT></P>
<P><FONT face=Verdana size=2>"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</FONT></P>
<P><FONT face=Verdana size=2>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</FONT></P>
<P><B><U><FONT face=Verdana size=2>Assumption/Flaw</FONT></U><FONT face=Verdana
size=2><U> 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</U></FONT></B></P>
<P><FONT face=Verdana size=2>I want to ask two questions at this stage
-</FONT></P>
<P><FONT face=Verdana size=2>* 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.</FONT></P>
<P><FONT face=Verdana size=2>* 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</FONT></P>
<P><FONT face=Verdana size=2>* 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.</FONT></P>
<P><FONT face=Verdana size=2>* 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.</FONT></P>
<P><B><U><FONT face=Verdana size=2>Assumption/Flaw</FONT></U><FONT face=Verdana
size=2><U> 4: Smaller Registrars will not be affected since their annual fees
will be forgiven</U></FONT></B></P>
<P><FONT face=Verdana size=2>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 -</FONT></P>
<P><FONT face=Verdana size=2>* 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</FONT></P>
<P><FONT face=Verdana size=2>* 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<BR> </FONT></P>
<P><U><B><FONT face=Verdana size=2>Conclusion</FONT></B></U></P>
<P><FONT face=Verdana size=2>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.</FONT></P>
<P><FONT face=Verdana size=2>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.</FONT></P>
<P><FONT face=Verdana size=2>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.</FONT></P>
<P><FONT face=Verdana size=2>Yours sincerely<BR><BR>Bhavin Turakhia<BR>Founder,
CEO and
Chairman<BR>DirectI<BR>--------------------------------------<BR>http://www.directi.com<BR>Direct
Line: +91 (22) 5679 7600<BR>Direct Fax: +91 (22) 5679 7510<BR>Board Line (USA):
+1 (415) 240 4172<BR>Board Line (India): +91 (22) 5679
7500<BR>--------------------------------------
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