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gTLD Contention Set Auctions: Private Auction Alternatives

Christa Taylor

Open ascending price or English auctions are the oldest and most common auction form. Derived from the Latin words augere and auctus, "Auction" means to 'augment' via 'increasing'. While there are many theoretical types of auctions (ascending, descending, sealed-bid, second-highest bid, etc.) in this post we will focus on the two main types of auctions provided by Right of the Dot and Cramton.

Valuations

Auctions are used to determine the maximum amount each bidder is willing to pay. If each party knew the exact value, they could simply pay the value and close the transaction. So uncertainty regarding the value plays a pivotal role. No one applicant knows with absolute certainty what the other applicants will bid. Additionally, each applicant will assign a different value to the TLD based upon the value they assign to possessing the TLD. Similar to purchasing oil stakes, bidders have different estimates on the amount of oil in the block and the value of its future sale. The value will depend on a number of factors including synergies between existing businesses and new products or services the company will be able to offer. For example, the value of the .search TLD will have a different value to Google based on its existing business and associated products versus an applicant who is starting a new business selling .search domain registrations.

Advances of Private Auctions:

There are several benefits of opting for a private auction over the ICANN auction including:

  • Eliminates ICANN Process Delays: Resolving contention external to ICANN allows for the efficient processing of the application.
  • Recovery of Funds: Non-winning bids would receive a portion of the winning bid.
  • Partial Application Fee: Applicants who do not win their TLD may be entitled to a partial refund from ICANN. This is in addition to any payouts from the winning bid (described below).

Disadvantages of Private Auctions:

  • Jurisdictional: Enforcing agreements across jurisdictions can always be a challenge. Private auctions face the same challenge if a participant decides to renege on their agreement.
  • Funding other Auctions: In the case where applicants have numerous strings in contention, a portion of the winning bid will be paid to non-winning applicants that can be used in subsequent auctions in which the winning bidder will be participating in. For example, if Company X is the winning bid for Auction A against Company Y and later, Company X and Company Y are in Auction B, Company Y now has additional funds received from Company X to use in Auction B.
  • Participation: All parties within the contention set must participate.
  • Fail Evaluation: If the successful bidder fails the ICANN evaluation process after the unsuccessful bids have withdrawn their applications, the string could go unclaimed.

Second Price Sealed Bid:

Sealed bids are made to the auction house with the highest bid paying the second-highest bid price. That bid price is then divided either equally or by proportion (of the participants highest bid) to the non-winning participants.

For example:

Outcome: Party D wins and pays $500,000. The parties, who are unsuccessful on their bid, receive either $166,667 if split equally or $58k, $147k or $294k based on their proportion.

Ascending-Bid (English) Auctions:

The most common auction style where a sale is conducted by each participant placing a higher bid until only one bid remains.

Evaluation of Private Auction Providers

At this time, there are two key private auction providers, Right of the Dot and Cramton Associates LLC. A synopsis of each is provided below.

Right of the Dot:

  • Customized: Flexible auction method that can be customized for the participants.
  • Fees: The winning party pays the auction fee of 4% which is deducted off of the winning bid before the proceeds are distributed to the unsuccessful participants. All funds are due within 10 business days.
  • Unsuccessful parties receive their funds once ICANN acknowledges receipt of their withdrawal of their application and is reflected on the ICANN website. Payment is estimated to be within 20 days but is dependent upon ICANN's withdrawal process.
  • Protection: Depending on the participants' preferences, the disbursement of the winning bid funds can be held until the contract with ICANN is signed or until the string is delegated into the root. This would provide extra protection to the winning bidder if necessary but would delay payment to non-winning applicants which may/may not be acceptable.
  • Bidding Deposit: Minimum amount in escrow is $100,000 with a maximum of $2 million. The actual amount will be determined by the number of applicants and a 1-5 rating Right of the Dot assigns to the string.
  • Portfolio Planning: Auction date is chosen by the participants and when the required documents and funds are deposited into escrow.
  • Simultaneous auctions: Not required but can be employed upon the request of the participants.
  • Escrow: Exclusive agreement with escrow.com for deposits and distributing funds.
  • Each auction participant is required to sign a Limited Power of Attorney that will be used to file with an application withdrawal from ICANN (for the unsuccessful applicants).

Cramton Associates LLC

  • Participants would have all of their contention set TLDs into the auction. This was later eliminated so participants can work on an individual TLD basis.
  • Priority: Auction is sorted in order of the perceived value from highest to lowest.
  • Financing other TLDs: Winning a string would provide financing to non-winning bids which could be used in bidding for other strings.
  • Method: Ascending bids whereby each bidder has to stay in the auction as the bid price moves to a higher level. Once a participant drops out, they cannot get back in. The winning bid is determined when there is only one bidder at the next price point.
  • Portfolio Planning: Promotes strategy for managing a portfolio of TLDs.
  • Timeline: Q1 2013 which is before the results of the Initial Evaluation. So potentially the applicant with the winning bid could fail in obtaining their TLD with ICANN.
  • Simultaneous auctions: All domains are auctioned simultaneously in rounds with an expected timeframe of ten days
  • Bidding: Eight rounds per day with each participant either being "in" or "out" at the end of each round. If the participant declares they are "out" they specify a price between the start and the end of the round of when they drop out.
  • Market: In order for the Cramton model to work, a significant number of contention set applicants need to sign-up to using their auction model.
  • Fees: Based on a percentage of the aggregate transaction volume with a floor of $1 million and a ceiling of $4 million. Volumes less than $25 million commission of 20%. $25 million to $100 million – 4%; Volumes greater than $100 million commission is $4 million.

Conclusion

For applicants with a few TLD's, the Right of the Dot private auction services is the best fit. They provide a friendly, cost-effective yet customized approach that is likely going to be well-received and agreed to by all participants in the contention set. Additionally, auction costs are minimal and all funds are held in escrow. Finally, Right of the Dot are accomplished domain professionals who specialize within the domain industry.

By Christa Taylor, Christa Taylor is the CEO of DotTBA. More blog posts from Christa Taylor can also be read here.

Related topics: ICANN, Top-Level Domains

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Comments

Gosh, that never occurred to us John Levine  –  Dec 03, 2012 10:07 PM PDT

http://www.circleid.com/posts/20120602_icanns_new_tlds_of_course_there_will_be_an_auction/
http://www.circleid.com/posts/20120703_icanns_new_tlds_of_course_there_will_be_an_auction_part_2/

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