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ICANN and Voodoo Economics in Wonderland

Greg Thomas

The Coordinator of Unique Internet Identifiers' Latest Financial Disclosure Reveals Rot at the Root

The exposed areas needing improvement by ICANN — both the organization as well as its global community of stakeholders — provide a target-rich environment. In the nearly three years since the completion of the transition of the Internet Assigned Names Authority (IANA), ICANN has persistently sought to drive top-down dictatorial policymaking; to shroud its activities and decision-making from public view; and, to evade accountability — in some cases even doubling down on its efforts. Alarmingly, the Domain Name System's (DNS) community of stakeholders has demonstrated an inability — or, in some cases, an unwillingness — to serve as an effective check on the ICANN organization's worst tendencies towards profligacy, expediency, and obfuscation. This sorry state of affairs cannot continue.

To substantiate this assertion, one need not look further than ICANN's recently released Form 990 from fiscal year 2018. Form 990 is a financial disclosure required by law to be made annually by non-profit organizations in the United States, and if financial stability is a metric of overall organizational health — and we argue that it is a critical indicator — then ICANN's vital signs are troubling to say the least.

In fiscal year 2018, ICANN — for the first time since its incorporation in 1999 — has posted a net loss. The $23 million shortfall is a 37% decrease in average revenue since 2012 and a 55% drop from an all-time high in 2017. This mind-boggling plummet is made even more dizzying by the disclosure's $5 million downward restatement of FY17 revenue.

What happened?

Well, much like the 20-something millennial that it is, the ICANN organization has overestimated its ability to spend while neglecting to prepare for the proverbial "rainy day" when revenue reality doesn't live up to rosy projections. More than half of its current shortfall can be accounted for by an inexplicable human-resources surge, with 26 new employees and a $13 million increase in compensation from the prior year. There appears to be a disconnect between compensation and the not-for-profit's mission to serve the public interest.

This would be concerning enough, but what is far more troubling are the clear implications that new generic Top-Level Domains are not performing as expected, with market adoption of domain names in the new gTLDs not matching the optimism which accompanied their roll-out. While there are some interesting examples of innovation in a few of the new gTLD namespaces, the vast majority of new entrants to the DNS appear to be pursuing mostly legacy business models in an attempt to become the primary .COM alternative in their market. There are no indications that any sort of disruptively innovative development is on the horizon that might hope to transform the domain name industry and the DNS.

Although ICANN is proposing major cuts in expenses, the mere existence of these dynamics makes any assessment of ICANN's accountability and transparency — along with the community's track record of counter-balancing the organization — much more than an academic exercise. This is because, while budgets with more holes than Swiss cheese may be de rigeur for the Silicon Valley's technology industry, ICANN can't rely on a stock IPO or Series B round of venture capital to cover shortfalls caused by deficit spending. Instead, it must look to its contracted parties — registries and registrars — to forage for new stopgap financing.

Johnny-come-lately attempts at fiscal austerity are a nice talking point but don't address challenges related to budget discipline and expense increases associated with scope creep. Discerning the dangers facing the DNS doesn't require a crystal ball — just a cursory look at the past and some closer scrutiny of the present.

In 2011, ICANN quietly inserted new language into VeriSign's .NET registry agreement that created a "special development fund." This contractual innovation requires the registry operator to remit to ICANN an additional $0.75 per domain name registration per year, in addition to the $0.25 per domain name registration that it, along with every other gTLD registry, already contributes. However, this special assessment on .NET — the second largest registry in the DNS after .COM — is simply placed into ICANN's general treasury without being segregated or otherwise separately accounted for. This amounts to more than $11 million per year that ICANN receives from the .NET registry with no reporting or audit requirements. This "special slush fund" was continued for another six years when the .NET registry agreement was renewed in 2017.

Another area where ICANN has shown remarkable creativity and innovation is in its use of auctions. During the roll-out of new gTLDs, so-called contention sets — where a proposed TLD had more than one applicant — were offered the opportunity to resolve the issue between themselves and, when that failed, the matter was settled by auction. In these auctions, the highest bidder paid to ICANN an amount equal to the second highest bid.

Some controversy arose — and the matter is still being reviewed — during the auction for .WEB. In that auction, the $135 million winning bid was made by Nu Dot Co, a company that was reportedly controlled by VeriSign. The second highest bid of $117 million was the amount to be paid to ICANN by Nu Dot Co using VeriSign's money — an investment that, given the economic realities of operating a registry and especially with what we now know to be the market realities of new gTLDs, will take a very long time to recoup. At a minimum, this has the appearance of impropriety: namely, that an enormous bribe was paid — in plain sight — to ICANN by its largest ratepayer.

More recently, issues surrounding another auction have arisen with respect to VeriSign's proposed auction of one Single Character Domain Name (SCDN), O.COM. The release of this SCDN, which has been coveted by Overstock.com for more than a decade, raises serious and substantive questions about the spirit of cooperation that exists between VeriSign and ICANN. The current negotiation for amending the relatively similar legacy registry agreement for .ORG offers a revealing juxtaposition.

As part of that effort, ICANN and Public Interest Registry, the operator of .ORG, negotiated an interrelated set of amendments that included the removal of pricing regulation — a benefit sought by the registry operator — along with new public interest safeguards, such as including community-developed intellectual property rights protection mechanisms and anti-abuse provisions.

The process for amending the .COM registry agreement to permit the release of O.COM, however, includes a veritable grab bag of benefits sought by VeriSign — including returning the domain name to the registry upon expiration rather than back on the open market, as is current procedure; as well as exempting O.COM from regulatorily restricted pricing, among other things — but without any accompanying public interest concessions, such as the recommendations made by ICANN's own Intellectual Property and Business Constituencies and others that the release of O.COM be subjected to community-developed intellectual property rights protections mechanisms, including a Sunrise period and Priority Access.

ICANN's questionably selective deal-making capabilities became even more suspicious when VeriSign's O.COM proposal was approved by the ICANN Board in Kobe, Japan during a March 14, 2019 vote on a consent agenda — essentially a package of items represented as non-controversial and pro forma. Suspicion turned to alarm upon discovering — during discussions with multiple Board members — that they appeared not to be aware that they had voted to approve a proposal for O.COM nor did they have any understanding of the outstanding issues of controversy and concern related to O.COM.

Additionally, the release of O.COM attempts to skirt regulated pricing by claiming that the auction proceeds — expected to be in the millions of dollars — will be controlled by a trustee who will be charged with distributing this largesse to non-profit organizations that are specified in "Exhibit A" of the proposal. Never mind that "Exhibit A" is redacted to protect the identities of co-conspirators, unwitting or not. Or, that the proposal reserves for VeriSign itself the unilateral right to select and replace the trustee (wink, wink — nod, nod). It is entirely unclear how — by causing a price to be paid that exceeds the regulatory cap as well as indirectly controlling the distribution of the proceeds through direct control of the distributor — this is anything more than a consumer protection bedtime story being spun for a community that is, at best, already somnambulant and, at worst, complicit.

Rather than contorting the release of O.COM into something resembling a pretzel, why didn't the publicly-traded corporation simply choose to accrue for itself the revenue associated with releasing O.COM and other SCDNs? In order to do so, it merely needs to honor its own commitment relating to its transliterated .COM Internationalized Domain Names. These IDNs are not subject to regulated pricing and VeriSign can charge whatever it likes for them. So why not set the price for IDN SCDNs at, say, $8 million each and bundle the legacy .COM SCDN along with it for an extra $7.85?

That would be a very attractive bundled offering that would be compliant with regulatory restrictions as well as its own commitment to reserve in the .COM legacy registry the same, exact-match domain name for the registrant of the corresponding label in one of its transliterated .COM IDNs. But taking that more than reasonable approach would have many practical effects, including adding a lot of revenue to VeriSign's bottom line that would otherwise go to non-profits and could be made available to offset ICANN's budget imbroglio.

How?

Who's to say that those non-profits don't use the funds to assume, for example, the expense burden of paying for ICANN's Fellowship program that covers expenses for travel to ICANN meetings? That's a few million dollars a year in relief for ICANN's budget with no outwardly discernible change in the status quo. Unless ICANN's ranking on a Corruption Index counts as discernible change — but when everybody's in on it there's nothing to see here, folks, please move along.

We are witnessing corruption metastasizing at the root of the Internet at a breakneck pace. ICANN's precocity and opacity with alternative revenue sources is nothing short of remarkable. The spirit of cooperation that exists between ICANN and its largest ratepayer is unseemly, to say the very least. The stakeholder community that was supposed to serve as the check and balance on the ICANN organization has gone AWOL — bought off by the promise of a pittance and sung to sleep by fanciful lullabies of castles in the sky.

By Greg Thomas, Founder of The Viking Group LLC – He is the executive director of the Responsible Consumers Alliance, a non-profit organization educating consumers of the Internet's Domain Name Service (DNS). Stay informed at protectdnsconsumers.org Visit Page
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