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How the Registrar Cash Flow Model Could Collapse with New ICANN gTLDs

Thomas Barrett

An important talk every TLD applicant should have with their back-end provider.

New top-level domain applicants are getting plenty of advice nowadays about how to launch their new Registry. In addition to thinking about their branding and distribution, they should also be thinking about their business practices with Registrars.

What many of them do not realize is that their cash flow practices, with respect to Registrars, may be a factor of whether ICANN Registrars even support their Registry.

The typical cash flow model today for TLDs is that the ICANN Registrar needs to pre-fund an account at the Registry before processing registrations. When the Registrar uses up their pre-funding, they need to send more money to the Registry. Every Registrar monitors their existing Registry balances and estimates future transactions in order to decide when to send more funds to each Registry.

This model has worked fine for the first decade of ICANN. But it is going to collapse with the introduction of hundreds of new gTLDs.

Consider this very common scenario:

It's a long holiday weekend and a registrar just received a large order, which exhausted its funds at a Registry. The banks are closed, so sending a wire is not an option. How will the Registry and their Back-End Provider (BEP) handle this?

Possibilities include:

  • The Registry is closed and does not provide any weekend or holiday support. The Registrar's access is shut down until they re-open for business
  • The Registry shuts down the Registrar's access to process transactions until funds are added. No emergency credit is extended
  • The Registry shuts down the Registrar's access unless they call and request emergency credit
  • The Registry shuts down the Registrar's access but accepts credit card payment 7x24 to allow the Registrar to restore their access
  • The Registry takes no action and provides the Registrar a fixed time window, say seven business days, to replenish their account, before terminating access
  • The Registry takes no action because the Registry has a business practice of invoicing their Registrars and receiving payment in arrears. Registrars have no disruption unless they fail to pay an invoice on time

Guess which approach will appeal to Registrars?

This cash flow challenge for Registrars is going to EXPLODE with the addition of over 1,000 new TLDs. So much so, that it may become a major factor for a Registrar deciding whether to support a new TLD. Many new TLD applicants will be stuck with a limited set of options supported by their BEP. How the BEP handles Registrar cash flow could have a significant impact on the viability of a single TLD.

Dear BEP, can we talk?

Every TLD applicant should have a talk with their BEP regarding the BEP's Registrar cash flow practices. Here is a list of the business practices that should be covered:

  1. Is there an "accreditation" fee charged by the Registry?
  2. How much does the Registry require as an initial deposit and for replenishments?
  3. How does the Registry communicate the existing balance to the Registrar?
  4. Is there an auto-renewal policy for non-renewed domains?
  5. What are the bank fees to fund the Registry account?
  6. What payment options does the Registry accept for funds?
  7. Does the Registry have its own account for each Registrar or does the BEP provide a single account for each registrar for all of the TLDs the BEP manages?
  8. Does the Registry provide emergency credit if funds run out?

1. Is there an "accreditation" fee charged by the Registry?

Sometimes a Registry will require an up-front fee from the Registrar just to become eligible to resell the TLD. This will be a show-stopper for many Registrars. This is especially true if the Registry is using a BEP that the Registrar has not integrated with before. Most BEP's will claim that their Registrar interface conforms to the industry standard, although experience has shown this is not always the case. Requiring a fee before allowing the Registrar to even review the BEP's technical toolkit is a great way to discourage Registrars from offering a TLD.

2. How much does the Registry require as an initial deposit and for replenishments?

Some Registries may require a large initial deposit. Without any history with the Registry, Registrars will be hard-pressed to determine if this deposit represents one month or 12 months of sales. This is especially problematic for those Registries with a large wholesale price, where most of the Registrar's cash proceeds are simply going to flow up to the Registry's account. Some Registries may also mandate a minimum amount to replenish the account. History tells us that after the typical "land rush" surge, sales occur at a much lower rate, thus requiring far fewer funds than the initial deposit.

3. How does the Registry communicate the existing balance to Registrars?

How easy does the Registry make it for the Registrar to manage their daily balance? Does the Registry send an email or require the Registrar to "poll" it? Some Registries today do neither. Some even send out monthly invoices simply showing monthly activity with no indication of what their records show as the current balance. And, a personal nit, if the Registry does send out "existing balance" emails, they should have the decency to include the TLD string in the subject line.

4. Is there an auto-renewal policy for non-renewed domains?

Does the Registry follow an auto-renewal policy, where domains are renewed automatically without any action from the Registrar or Registrant? This means that the Registry is getting paid before the Registrar has been paid. And it often occurs over a long holiday weekend. Tip: Registrars don't want to be providing credit to the TLD or the BEP.

5. What are the bank fees to fund your registry account?

Bank wires cost money. The bank fees can be even higher if intermediary banks are involved or a currency conversion is required. Also, how long does it take for your BEP to deposit the payment to the Registrar's account? Today, there is one BEP who claims it takes from 2-5 business days! Make sure your BEP is not using outdated banking practices to support your business.

6. What payment options does the Registry accept for funds?

Most Registries accept only bank checks and bank wires as payment. BEPs that accept credit cards and PayPal for payment provide flexibility for Registrars and generate good will for your TLD.

7. Does the Registry have its own account for each Registrar or does the BEP provide a single account for each registrar for all of the TLDs the BEP manages?

A combined account managed by the BEP will save Registrars a LOT of money from sending fewer bank wires to hiring fewer staff required to monitor balances. If the average BEP manages 100 TLDs, the cost difference between separate accounts versus a single combined account is substantial for Registrars.

8. Does the Registry provider emergency credit if funds run low?

How the Registry, or their BEP, handles emergency credit will be a critical issue for Registrars. Despite constant monitoring, sometimes the Registrar runs out of funds at the Registry. This often occurs during a long holiday weekend. How the Registry's BEP handles this very frequent scenario could be a significant factor in a Registrar's decision to re-sell a TLD.

Registrar cash flow by BEPs

As you can imagine, with the introduction of hundreds and hundreds of new TLDs, how the BEP handles the Registrar cash flow will be an increasingly significant issue for Registrars. Consider three possible cash flow scenarios for a BEP managing 100 different TLDs:

  • BEP #1 requires Registrars have separate bank accounts for each Registry it manages. It accepts bank wires only, takes 2-5 days to credit the Registrar account and does not provide emergency credit
  • BEP #2 combines all of its managed TLDs into one account for each Registrar. It provides emergency credit upon request
  • BEP #3 combines all of its managed TLDs into one account for each Registrar. It does not require up-front deposits from Registrars. Instead, it issues invoices each month based on actual sales activity

Bottom line: BEP #3 is going to attract the most Registrars re-selling its TLDs. Registrars will more readily support those TLDs and BEPs that understand and support their cash flow. BEPs who fail to provide this flexibility will disadvantage their managed TLDs in the marketplace.

Key take-Away for new TLD applicants:

  • Get your BEP to include your TLD in a combined account for all of their managed TLDs
  • Get your BEP to invoice Registrars instead of requiring pre-payment
  • At a minimum, your BEP should be able to support extending credit to Registrars

By Thomas Barrett, President - EnCirca, Inc. More blog posts from Thomas Barrett can also be read here.

Related topics: Domain Names, Registry Services, ICANN, Top-Level Domains

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Comments

Explode and Implode - Phil Buckingham  –  Feb 04, 2013 11:31 AM PDT

Tom, as we know from experience @ Netnames, registrar circa 1997/1998 management of cashflows in year 1-3 for a registry or registrar start up ( which is the case for all 1917 registry applicants) will be ABSOLUTELY CRITICAL . 70% of UK start ups fail Year 1-3 . This will be the case with open new TLD registries IMO. Is it therefore not surprising that hundreds, (if not a 1000) of the applicants have failed/will fail the financial evaluation and will receive CQ- Financials over the coming months.
As to your very last comment, why would a Registry's selected BEP fund the operations of a registrar of which it has no affiliation/ control. This about the F Factor - Fadi,feasibility,financials,funding or fail for both new registries and registrars. The business relationship between a new registry and its registrar(s) will be ABSOLUTELY KEY.

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