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.
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. 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.The day after the ICANN draw I participated in a seminar and mock auction put on by
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:
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.
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.
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…
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
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Minds + Machines