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Private vs. ICANN Auction of Last Resort

Ray King

As an applicant in this new gTLD round with quite a few overlapping strings, I've had a keen interest in the various proposed auction platforms. In the past six months the ideas behind private auction have matured significantly and I now see it as a strong mechanism for resolving contention. My observations:

"I'm going to ICANN Auction!"

When the results were first announced I heard this said by quite a few applicants. The main reasons were that they felt they had worked hard on their string applications and had more "right" to them than others, or they felt others who had applied did so without the intention to win the string but merely to extract monies from the "legitimate" folks who applied in good faith to win the string. Some also indicated that they were going to ICANN auction as a way to scare off some of the other players (I have yet to see this work). A final reason some assumed participation in the ICANN auction is that some of the larger players felt that because private auction results in "losers" or "sellers" gaining money, that same money may work against them in other auctions.

"Why fight it out, let's all just work together?"

I've received quite a few invitations from other applicants to work together as an alternative to any sort of auction. For passionate single string applicants the option to collaborate vs. having to take a chance in an auction (of either type) is appealing. That makes sense to me, but for multi-string applicants it seems better to own 100% of some strings and 0% of others. Partnerships mean lots of meetings, calls, and everything else that goes into proper governance of a shared entity. It's a significant overhead burden that I will plan to avoid if possible — despite the fact that there are many great people who I'd be happy and honored to work with!

"Work it out among yourselves!"

There's a lot of money at stake and no one I've spoken with is interested in just giving auction money to ICANN when it could stay within the community of applicants. Furthermore, ICANN has encouraged us to work it out privately rather than reach the ICANN auction (why else call it the auction of last resort?). In an ICANN auction, the price the buyer pays goes entirely to ICANN and everyone else loses their $185,000 application fee and their related time and effort. You might ask "why does it matter if I plan to win it?" Well it does, because in the great majority of cases you can't be sure you're going to win.

Business minds will prevail

This uncertainty gave birth to the idea of a "private auction" (also known as "applicant auction"). The idea is simple: hold an auction earlier than the ICANN auction of last resort and split the money that the buyer pays among the "losers" (who may now be known as "sellers"). Another nice benefit of an applicant auction is the timing of receipt of partial application fee refunds — ICANN's progressive refund structure is such that the sooner contention is resolved, the higher the refunds are.

Private Auction

Here are some of the important facets:

Operationally as close as possible to ICANN's auction

The closer an applicant auction is to ICANN's method, the better — straying may benefit some applicants over others. The only real difference should be the recipient(s) of the auction proceeds.

Highest or second highest bid?

Let's say there are four bidders for a given string, each willing to pay as follows:

Bidder A - $1 million
Bidder B - $2 million
Bidder C - $3 million
Bidder D - $4 million

Bidder D wins, but what should he/she pay? A quick look might lead you to say $4 million (the high bid), but most agree that $3 million (the second highest bid) makes more sense because there is no good reason for the winner to pay more. This is not a traditional auction situation where the auction house is trying to maximize the prices paid.

Proportionate vs. Equal Sharing of Auction Proceeds

In our example, bidder D pays $3 million to the other bidders, but how much do the other bidders get? Earlier in the year most, myself included, thought that the payout should be proportionate to the bid. This way the more you bid, the more you get. This, however, creates a reward for bidders to "push" the bid up. Here's how that would look:

Bidder A - $1 Million, gets 1/6 of 3MM, or $500K
Bidder B - $2 Million, gets 2/6 of 3MM, or $1MM
Bidder C - $3 Million, gets 3/6 of 3MM, or $1.5MM
Bidder D - $4 Million, pays $3MM and get's the string

The other option is to pay out equally, whereby bidders A, B and C would all get $1 million. (Note: These totals would be a little less after auction fees.)

The argument for paying out equally is that people will more likely bid to what they think the string is actually worth to them, instead of trying to bid it up to inflate the price and their resulting payout as a seller. If you believe the end goal is simply to get the string into the hands of the person who values it most and at a price that is no more than the ICANN auction, then equal shares makes more sense.

Why an applicant may want to hold out:

When a large real estate developer needs to buy out a bunch of small property owners to build something really large, the smart owner will try to be the last one to sell — and for the highest price. So holding out until the last moment is a good strategy if you are trying to profit by selling. The only problem is in our industry's case, if that happens, we most likely end up at ICANN auction and this strategy is self-defeating.

Why an applicant may not want to go to Private Auction:

There is also the thought that paying "losers" in this round will create a bad precedent for future rounds in that many applicants will jump in with the hopes of "winning by losing". But if they do, the economics will balance when the reward is less than the entry fee. That also assumes that ICANN's rules of participation in the next round will be the same, which does not seem likely.

Three reasons an applicant may want to wait:

1) They're waiting for community evaluation to see if they can avoid auctioning against open applicants
2) They are hoping their competitors will be disqualified in the evaluation process
3) They are concerned that they might win the private auction, and subsequently be disqualified, thereby wasting a whole lot more.

Once issues are resolved it makes sense to go to private auction and maximize the refund as much as possible. Private auction avoids more delays in the process towards root delegation.

Cramton Associates

Cramton Session, Dec 18th, 2012 in Los AngelesThe day after the ICANN draw I participated in a seminar and mock auction put on by Cramton Associates. Peter Cramton has an impressive academic background and credentials, two of his associates are Nobel Laureates, and he led the session with help from several Ph.D. Economics students and a Lead Developer.

I understand Cramton to be completely independent of any applicant — his commitment to neutrality, rational thought and transparency are extremely high and I believe in his integrity. Cramton's leadership in auctioning services is also impressive. He's trusted and retained around the world by governments auctioning assets valued into the billions of dollars, which include deals as diverse as radio spectrum rights and airport landing slots.

During the mock auction, we were able to get a good sense of what the actual auction would be like. This was a very valuable experience and one that I strongly recommend other contending applicants try to do. It built my confidence in their auction software, the process and my personal comfort level with the overall solution. And it was fun. High five to my partner Krista!

Right of the Dot

Monte Cahn and Mike Berkens are two domain industry veterans who bring considerable expertise in domain name auctions, premium name sales and the launch of new TLDs. Monte previously ran Moniker and Mike is editor in chief of TheDomains.com.

They offer auction solutions that some may like because there is more choice, participants can choose:

  • Which auction format to use, sealed bid, live or ascending clock
  • When to hold the auction and
  • Whether to have equal or proportionate payments

Of course everyone participating in a given auction would have to agree.

They are also partnered with Escrow.com, a fine choice for handling the escrow of funds.

Timing

Cramton is offering at least two rounds of private auctions, one before initial evaluation, around March 2013, and the other in September 2013, following IE results. Because the members of different contention sets will be ready at different times, I'm hoping that he'll offer more rounds, perhaps one per month beginning in February or March. This will get the ball rolling and will allow more people to access a private auction alternative earlier, resulting in higher application fee refunds.

Auctioneer's fees

Cramton's fees are percentage based and subject to a floor and ceiling which is $1 to $4.5 million. Cramton has committed to a rate of 1% or less for the first auction round.

Right of the Dot is 4% fixed. So if there is a smaller amount of money transacted via private auction ROTD will be less expensive, but if ~$100MM or more in aggregate changes hands it will be significantly more.

Peter, Monte and Mike, feel free to chime in if I've gotten any of this wrong or you'd like to elaborate…

Summary

Both auction models have evolved and would work in my opinion — and I'm glad we have choice. Cramton's initial model seemed inflexible to me, but I really like the adjustments and choices he's made.

These private auction platforms are very well thought out and having used an actual test platform, I'm a believer in the private auction alternative.

Most importantly, let's get moving — private auction makes business sense, provides clarity and speeds the process for everyone.

By Ray King, CEO at Top Level Design and AboutUs.com

Related topics: ICANN, Top-Level Domains

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Comments

2013 gTLD Auctions Crystall Ball Rubens Kuhl  –  Jan 02, 2013 12:21 PM PDT

Every applicant that marked "community" will try its luck with the priority panel before paying someone out.

Applicants that have lower numbers will be more prone to outbid other competitors, because they will reach the root earlier.

Multi-string applicants will be more prone to make higher bids for the strings where their apps got lower numbers.

Google and Amazon will reach settlement-free private agreements for the strings where they are the only two applicants. Such agreements will include dropping from some of the contested strings (hint: look at apps Google didn't get a ticket) with Google, Amazon and other applicants, but some of the Google+Amazon+other applicants will see bidding wars among all the applicants.

Some or all of these predictions will be shown wrong by the outcome.

Ruben,Thanks for the predictions!Agree that community applicants Raymond King  –  Jan 08, 2013 1:02 AM PDT

Ruben,

Thanks for the predictions!

Agree that community applicants will try their luck first, why not.

Agree that lower # applications are worth more, but how much more depends on how rapidly apps move through the system.  If fast, then the difference will be less.

Interesting observation on Google + Amazon :)

Ray,Great article.We've done alot of work on Phil Buckingham  –  Jan 02, 2013 4:57 PM PDT

Ray,Great article.We've done alot of work on contention set valuation models.So on what basis and how are you going to quantify the value of your bid(s).Lets look at .group.You/Top Level Design LLC are in at 1507 (the worst number)of 5 applications,so everyone else defaults to that number - so you might be lucky to get evaluation in Oct 2013 ( bound to be more delays).You are in with Tucows (one of the best registrars in the world - in at 1159) .co (a huge success with a brilliant marketing strategy at 900) Amazon in at 723 (well it will do what it wants with this particular string !)and a certain,very very impressive team by the name of Donuts - who raised $100M.How many group companies are there registered?  Valuation $20M ???I would forget about an auction altogether.This is about GAME theory.Google,Amazon,Microsoft and Everyone Else.With 730 contention sets the permutations,correlations,assumptions will make valuations vary considerably.Prediction: Bids will prove to be too high and new gTLD registries will struggle to survive from the outset.

Up to bidder J Jean Guillon  –  Jan 02, 2013 6:34 PM PDT

Very interesting article Ray. From what I see and have heard some applicants will go as far as 10 million.

RightoftheDot.com Michael Berkens  –  Jan 02, 2013 8:37 PM PDT

Ray

Thanks for the input.

RightoftheDot.com offers highly flexible plans offering different auctions based on the desires and timing of the applicants for each string.

The other auction solution is offered only during highly restricted time frames, and in a highly restricted manner, which we think was designed in mind with the those with largest number of applications.

We believe that other auction solutions are overly complex and overbearing we believe is more subject to game playing and over paying by winning bidders.

We think each auction should stand on its own; each participant should know what their fees will be based on their own auction(s) not be based off auctions they are not participating in; and most importantly should be held at the time and in the manner in which the applicants to each string desire.

We believe the overall floor and limit on fees only helps the biggest of applicants.

We point out that other services fees can be as high as 20% depending on the dollar volume of the auctions over all.

At the end of the day its the auction provider that can get the participants for each string to the auction table that will be most successful and its the auction that results in the lowest, not highest price paid, will be the most advantageous for the applicants.

Most applicants applied to win not to lose.

Its important to note, that the winners of the auctions do not pay any fees.

In our preferred method, a singled sealed bid with the winner paying the second highest bid, our fees are taken out of the pot to be distributed to the sellers (non winning bidders) rather than as an additional amount to be paid.

If your intent is to win, its moot whether the fees are 1%, 4% or 10%.

Additionally we are allowing the option for the proceeds of the winning bid to go toward charities, non-profits and other causes, which will particularly appeal to those participants that do not want their payments to go to the non winning bidders (sellers) who they maybe in other auctions with. 

Indirectly funding competitors of other strings, has been an issue that has been expressed by some of the applicants; simply some of the applicants do not want to participate in an auction where the proceeds they pay win up funding competitors in other auctions.  

Our auction model based on flexibility and desires of the participants takes this into account.

We also want to point out that we are properly licensed as an auction business for this specific purpose and that Escrow.com who will be holding all funds is the only licensed online escrow company.  

Escrow.com has processed over $1 Billion dollars in transactions and we think that is very important to applicants who maybe placing millions, tens of millions or more into an escrow account to know that the company holding the funds has the proper licensing insurance and experience to hold the funds.

Lastly, our fees will be flexible to some extent based on timing, number of participants as well as type of auction.  We will most likely offer a discounted option for those wanting to resolve sooner than later.

However we think fees are just one part of the equation for most applicants who didn't even consider a private auction scenario when they made their application and put down their $185,000

Its being a part of the domain community, personal relationships, trust, and flexibility that most applicants will choose over the theoretical lower cost provider.

I should have ... John Levine  –  Jan 03, 2013 10:03 AM PDT

set up my own auction company when I proposed exactly this model last July.  Oh, well.

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

In support of the ICANN auction process Avri Doria  –  Jan 04, 2013 9:50 PM PDT

I do not understand why any community applicant would want to see money paid out to non-community applicants that might defeat them in a private auction.  I personally think it better that the money go to ICANN.  Maybe then ICANN would have a fund it could use for Developing Economy capacity building (i.e Registrar and Registry Service Providers) that could provide support for future community applications in remediation of ICANN's abysmal failure to reach out to Developing Economies in this round.

In an auction where bidders know they will get much of their money back, they will be more daring and will push the bids to a level that might be hard for a community, even one with strong support, to match.  Do not make it easy for them to steal your community's right to its name.  Private auctions only benefit those with a large cash flow, don't get sucked in.

Giving auction money to portfolio applicants who are trying to steal the names of communities from those communities makes no sense at all to me.  I recommend that all community applicants force those in their contention sets to wait until after the Community Priority Evaluation (CPE) and then, if necessary, require the full ICANN auction.  My message to community applicants: do not sell the most important raw resource a community has - its name.  And especially, don't give it away in a private auction.

Community? John Levine  –  Jan 04, 2013 10:44 PM PDT

I don't know anyone who thinks or has said that a community applicant would go to auction against non-community applicants before trying the CPE described in section 4.2 of the AGB. Do you know of community applicants who plan otherwise?

Avri,If a community applicant meets the criteria, Raymond King  –  Jan 08, 2013 1:20 AM PDT

Avri,

If a community applicant meets the criteria, then it doesn't have to bid against open applicants at all.  So I completely agree that it makes sense that community applicants wait until after CPE.  But if they don't pass, then arguably, they don't represent the community in which case they are (and in my opinion should be) treated as an open app.

If they are bidding against open applicants in any auction, that means they didn't pass so I don't understand how an open applicant can "steal" a name from an applicant that didn't pass?  Unless you are saying that a failed community app still has more "right" to the string than others?

A Community is a concept and a word which exists outside of ICANN Annalisa Roger  –  Feb 03, 2013 8:42 PM PDT

Hi Avri, I want to have a try at answering your comment above.  :-)

Communities exist all over the world whether or not they applied for a new gTLD, they are still communities in all senses of the word, in their own realities, and in the public's view.  With regard to those who have shown interest in a new gTLD with nexus to their community, I disagree that they MUST have applied for a community app and buy into the idea that if a "community applicant" doesn't pass (at ICANN) then it means they aren't a community or don't represent the community.  How could a one size fits all scoring system judge someone elses status in their own community?  Absurd.  As a matter of fact, the community application criteria was not designed by the actual communities who would use it, or need it.  It isn't a relevant scoring system in my opinion for all kinds of real communities out there, (many of whom have never heard of ICANN) and therefor receiving a score of "FAIL, NOT A COMMUNITY" would be far from the truth and often far from reality, which - if you think about it, reality is the Public Interest. 

Therefor, I believe in many cases, (perhaps not all) it is relevant and helpful to realize that there exists "community strings" which hold real "community value" by the nature of the actual string. It is much more important to detect whether or not a string is a "community string" in the first place.  If it is, then by all means there is nothing more important than listening to the Public and other stakeholders for documenting real support by a community.  Review the application, to see if it will act like a community, and if it is indeed a member of the community, and will it benefit not only the community directly but ALSO in meaningful inclusive demonstrative ways, by belonging to this community.  Finally, is there clear nexus between the string and the community?  How about clear nexus between the meaning of the Community String and the meaning of the application?  Now THAT is the definition of "community" with regard to a new gTLD.  Trust me, communities do know who they are and who is a part of them.  And future success relies on it as communities tend to be...well, obviously community oriented and protective.  So, now, going back to your question...Could an (ICANN defined) failed community app still have more "right" to the string than others?  The answer is YES! If it is a any application for a community string it absolutely has that right.  But I am sure you meant to ask, will it have more "right" to the string than others in this ICANN world? Everyone wonders if ICANN will indeed to the "right" thing - which according to The Affirmation of Commitments would be #8(c):to operate as a multi-stakeholder, private sector led organization with input from the public, for whose benefit ICANN shall in all events act. 

BTW For transparency, I am CEO of The DotGreen Communtiy,Inc. Our application is a standard Application for the .green Community String. (in a contention set of 4)

Good answer but... Avri Doria  –  Feb 03, 2013 10:21 PM PDT

And I think I pretty much agree with it.  Except for the fact that communities that did not apply for community strings should be treated as if they had applied for community strings.  Those who answered question 20 in the applications not only did a lot of extra work, they made lots of extra commitments.  Commitments which the GAC, quite appropriately, wants to see the successful community applicants held to by ICANN compliance.

But in many ways, I think you were responding more to Ray's question than mine.  I very much agree that the CPE is a horrible gauntlet meant to deprive communities of their names if they don't meet the strictest of criteria.  I fought ICANN all the way, on the manner in which they implemented this policy, but unfortunately the GNSO put nothing in the policy about them having to be reasonable in establishing the processes.  We asked for timeliness, but forgot to ask for reasonableness.  In some cases the ICANN caution about gaming inspired them to produce processes that might be too hard even for those who were not trying to game.

In any case I agree the public interest and community rights go far beyond the ICANN test, but unfortunately ICANN's test is the only chance we get to preserve the property of these communities during the process, unless we have big bundles of money. Of course some communities may resort to the courts if they feel the implementation is carried out in too restrictive a manner.

And if community applicants are going to pay big bundles of money to win an auction, I hope those monies end up being used for good works and charities for the target community instead of for lightening the financial burden on those who apply for community names without any intention of serving and protecting the community.  I understand some of the auctioneers are willing to adapt the process by giving the money to a charity. If that is really the case, I am less opposed to these outside auctioneers than before - as long as the money goes to the appropriate communities' charities.

In the end, though, the only thing those who trusted ICANN and filed Community applications have is to hope in, is the wisdom and understanding of the experts provided by ICC.

RFPs for generic strings was so obvious (to identify Community strings) Jean Guillon  –  Feb 04, 2013 1:46 AM PDT

It is SO obvious ICANN should have done Requets For Proposals for generic strings so those identified as communities could have been validated as community strings. This was not the role of applicants but ICANN's.
Wine TLDs are a god example of this issue as wine is recognized as a true Community online. It also has its institutions. Some of these institutions (also) located in Europe were informed by us about the new gTLD program. At no moment in the history of this program they received a phone call from ICANN. We now have applications with applicants who have absolutely no knowledge of wine and wine governments and institutions worried about how all this is going to end. One of the poor results of this situation here is that...the .VIN new gTLD may not have the same rules as .WINE !!!

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