Dear Members of the ICANN Finance committee and Board I represent a medium sized Registrar based out of India operating under the name of Directi. I would like to offer my comments on the ICANN 2004-05 budget posted on the ICANN website, as I do believe it negatively impacts the business of a large number of Registrars and breaks down this entire structure that ICANN has created over the last several years. Due to the lack of a public forum on ICANN's website I am having to send this email directly to you. I would appreciate it if ICANN could put up an online forum to allow public comment on this budget proposal. I detail out below in a structured format the reasons why I believe the budget in its current proposed form would negatively impact the entire domain name industry and ICANN itself Impact of the new ICANN Budget on Registrars In very simple terms the new ICANN budget will have one primary impact on Registrars - "the SMALLER ones will DIE and newer ones will stop entering the field" Lets investigate each of the effects on Registrars - Effect 1: Larger Registrars will not have to change their Selling price while smaller Registrars will have to increase their selling price The $19000 per annum additional fee increases the per domain name cost of large Registrars such as Netsol, Tucows, Godaddy etc by a meagre 0.5 cents or lesser. Infact the $19000 per annum additional fee increases the cost price of the top 20 Registrars by a meagre 10 cents per domain name The $19000 per annum fee however increases the cost per domain of smaller and mid-sized Registrars by a large component. Check the below table which shows how much the Registrar per domain cost would increase if a Registrar is in any of the brackets below Registrar Size Increase in per Domain Cost 1000 domains 19 dollars 2000 domains 9.5 dollars 5000 domains 3.8 dollars 10000 domains 1.9 dollars 20000 domains 95 cents 50000 domains 38 cents There are over 120 Registrars who fit in the above set. This means that over 120 Registrars will find themselves in a situation where they have to significantly change their selling price. This is no easy task. Customers and Resellers will never accept a pricing modification of this magnitude. I have also attached an excel sheet showing the ENTIRE LIST of Registrars (the list is 3 months old) and the direct increase they will perceive in their DOMAIN PURCHASE cost as well as the percentage increase they will see in their budget contribution. It is clearly visible from this list that the smaller and mid-sized Registrars (well over 120 in number) will be significantly impacted by the current budget as proposed. Effect 2: Larger Registrars will Save a HUGE amount of money while smaller Registrars will be footing that bill Until now the variable component of ICANN's budget was divided amongst all Registrars in the ratio of the number of Domains that they managed. This resulted in a per domain fee of 12 cents. In the new budget if the same model had been adopted then the per domain fee would be around 37.5 cents. Instead by passing on a $19000 per Registrar fee, this has been reduced from 37.5 cents to 25 cents. This results in significant savings of money for the larger Registrars at the cost of the smaller Registrars. For instance lets compute the savings of the top five Registrars (Note the market share figures are over 3 months old and therefore give only an approximate idea. The actual savings are higher than the below figures) Registrar Savings [(Domains x 12.5 cents) - $19000] Enom $302,215 Register.com $332,531 GoDaddy $339,507 Tucows $435,358 Netsol $904,208 As you can see from the above table in the earlier variable model fee Netsol would have to pay $900,000 (or 1 million dollars) extra, which it is saving now by that cost being passed on in the form of a fixed $19000 fee to the other smaller Registrars. While netsol makes money on every one of those domains it sells, the variable component of that is being borne by the tinier Registrars. Effect 3: Smaller Registrars and startup Registrars will be unable to sustain operations Smaller Registrars and Startup Registrars will not be able to sustain operations. As such they already have to compete in a market where the larger Registrars have had a head start. Now think about the fact that they have to additionally start at a disadvantage as compared to the larger Registrars - namely a higher per domain Cost. This means a new Registrar who does not currently have the capability to offer the features that an existing old large Registrar does, now also buys the commodity at a higher cost. This will completely stifle competition and put many a startup Registrars out of business. Effect 4: Several international Registrars in other countries will DIE, and new potential applicants will be discouraged A large chunk of the internet as everyone knows is still concentrated in the United States. A large number of the world's domain names are concentrated in the United States. Other countries have a relatively small share in the Domain Name market. There were still however many Registrars in various countries who had started operations and managed to sustain them since the ICANN fee so far was primarily variable and based on the size of the Registrar. This allowed a startup Registrar to begin operations without a significant working capital overhead, and bring it to a sustainance level. Now with the new budget process, Registrars in other countries and emerging markets will not have the ability to gain as many domain names as to be able to make operational profits. This will reduce international participation in the ICANN process. Impact of the new ICANN Budget on ICANN In short and simple words the new budget proposal "violates ICANN's core principles and does not foster healthy competition and international participation" Lets investigate this impact in more detail Effect 1: The new Budget destroys smaller Registrars and reduces Registrar competition, creating monopolies As detailed already above in the previous section, the current budget favours larger Registrars and will actually put the smaller and the mid-sized ones out of business. Effect 2: The new budget goes against a few principles stated in the ICANN Registrar Accreditation Agreement The new budget in its spirit is against certain statements in the Registrar Accreditation Agreement as follows - "Clause 2.3 General Obligations of ICANN. With respect to all matters that impact the rights, obligations, or role of Registrar, ICANN shall during the Term of this Agreement: 2.3.2 not unreasonably restrain competition and, to the extent feasible, promote and encourage robust competition;" The new budget DOES NOT promote and encourage robust competition thus not maintaining the spirit of the above clause "Clause 3.9.2 Variable Accreditation Fee. Registrar shall pay the variable accreditation fees established by the ICANN Board of Directors, in conformity with ICANN's bylaws and articles of incorporation, provided that in each case such fees are reasonably allocated among all registrars that contract with ICANN and that any such fees must be expressly approved by registrars accounting, in the aggregate, for payment of two-thirds of all registrar-level fees." The above paragraph explicitly states - "provided that in each case such fees are reasonably allocated among all registrars". The new budget does NOT reasonably allocate the variable fees amongst all Registrars. Effect 3: The new budget will not meet the ICANN budget objectives At a few places in the budget document ICANN states how the new budget is supposed to be heavily reliant on Registrant fees paid to Registrars. One of the objectives of ICANN's new budget was to try and work a way whereby the final stakeholders, ie the Registrants, participate in the process of paying for the ICANN budget. However this current budget allocation mechanism does not do that. This is because the top ten Registrars will not even bother to change their selling price to the Registrants since their cost does not change dramatically in the new budget allocation process. These top ten set represent over 25 million Domain Names. This means over 25 million Registrants will not even contribute towards the increased budget. Rather their contribution will actually come from the smaller and mid-sized Registrars who will suffer in the bargain. Effect 4: The new budget proposal will not meet the ICANN budget targets and is essentially flawed The new budget will directly result in a large number of Registrars going out of business and additionally discourage a large number of new potential applicants who were looking at applying for accreditation. This will result in reduced revenues to ICANN if ICANN chooses to charge a $19000 + $4000 per Registrar fee, since every Registrar who ceases to exist, or any potential applicant who gets discouraged will result in one less participant paying this $23000 fee. If however ICANN instead does not charge a fixed fee per Registrar but charges a variable fee per domain name only, ICANN will NEVER be impacted even if certain Registrars cease to exist. Since ICANN will continue to be funded on a per domain name basis, it will not matter as to the number of Registrars who exist. I do believe this was the intent of ICANN - ie to have its budget dependant largely on the end Customers (ie Registrants) as directly as possible. The best way to achieve this would be to charge ONLY A PER domain year fee (37.5 cents instead of 25 cents). This way smaller and mid sized Registrars continue to survive and continue to pay their $4000 per annum fee, and additionally ICANN does not bear the risk of not meeting its targets since the revenue is not dependant on the number of Registrars, but on the number of domains. Effect 4: The new budget does not comply with the MoU signed between DoC and ICANN The Memorandum of Understanding between ICANN and DoC starts of with "On July 1, 1997, as part of the Administration's Framework for Global Electronic Commerce, the President directed the Secretary of Commerce to privatize the management of the domain name system (DNS) in a manner that increases competition and facilitates international participation in its management." This budget move will unfortunately REDUCE competition and REDUCE international participation, violating the principles laid out in this MoU Effect 5: The new budget is partial to a set of Registrars The New budget is partial to a certain set of Registrars in two ways. Firstly it is partial to the larger Registrars since it does not increase their per domain cost. Secondly it is partial to a set of Registrars who will fall under the criteria of reducing their annual fees. The budget mentions the ability for Registrars to apply for waiving of 2/3rds of their $19000 fee component. Since the criteria for evaluating this are not objective it may result in differences and partiality In light of all of the above points I request the finance committee and all other participants to modify the current budget proposal by making one simple change - eradicating the fixed per Registrar fee and replacing the same with a reasonable per domain (per transaction) fee only. Thanking you Yours sincerely Bhavin Turakhia Founder, CEO and Chairman DirectI -------------------------------------- http://www.directi.com Direct Line: +91 (22) 5679 7600 Direct Fax: +91 (22) 5679 7510 Board Line (USA): +1 (415) 240 4172 Board Line (India): +91 (22) 5679 7500 --------------------------------------