GTLD Auctions

This article is neutral, but is sponsored by Cramton Associates, a consultancy offering specific services for contending TLD applicants. More information can be found here.

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In the case where multiple entities apply for a single ICANN new gTLD, two main models -- ICANN Auctions and Private Auctions -- will be used to determine the winner of each contention set. Exceptions are made in the case of geographic and community-based applicants, who receive preferential treatment over other applicants.

In August 2008, ICANN published a document stating the economic case for using auctions in new gTLDs. They cite allocative efficiency, via the following ways in particular:

1. Applicants whose true intentions or abilities are to serve many users would be able to justify higher bids than applicants who will serve few users;
2. Applicants capable of providing high-quality service at low cost would be able to justify higher bids than low-quality, high-cost applicants;
3. Applicants who intend to develop the gTLD immediately would be able to justify higher bids than applicants whose purpose is to hold the gTLD, unused, for speculative purposes.

ICANN notes in the document that though "auctions are not perfectly aligned with ICANN's objectives, alternative allocation mechanisms such as comparative evaluations and lotteries inherently have much more severe limitations and defects".

ICANN Auctions

ICANN condones private auctions as it encourages all contending applicants to work out contention themselves, presumably through buy-outs, partnerships, and auctions. ICANN offers its own auction model as a last resort. All gTLDs auctioned off under ICANN's auction model will see their proceeds going to ICANN as "excess funds" that go well past covering original costs. Those funds will be redistributed at a later date, in ways that are yet to be determined.

Private Auctions

Numerous companies have surfaced to offer private auction models, including Sedo, Cramton Associates, and Right of the Dot. All offer slight variations on implementation and services but share commonalities in their proposed models. The winner will pay the amount of the second-highest bid, and money will be split either equally or proportionally between the losers, so that all applicants will receive a percentage of their initial investment back. All applicants must agree to participate in a private auction model in order for it to proceed; otherwise, the contention set will be managed via ICANN's auction system.

During ICANN 45 in Toronto, auction expert Peter Cramton outlined an "ascending clock" model, where a price is increased by the auctioneer at each stage; bidders and sellers can then either drop out or bid on the increased amount. This model is also preferred by Right of the Dot, though it also proposed "sealed bid" and "live auction" models. In a sealed bid model, applicants securely send money via a courier and packages are stored in a safe place until they are opened at the auction session.

Cramton's original model proposed to run auctions during the first quarter of 2013, before ICANN announced the results of their Initial Evaluation. Such a model would allow losing bidders to receive 70% back from their ICANN application fee, but would pose difficulties if winning applicants later discovered their applications were rejected as other applicants would have withdrawn already, and the new gTLD would be left without an owner. The former model also lumped all TLDs that an individual applicant had applied for in one package. Criticisms stating that such a model would benefit larger companies led to a change, so that auctions will now proceed on a TLD-by-TLD basis, with all auctions being simultaneously resolved at the same time.

Applicants also have to decide on when they wish to enter into private auctions. Those who withdraw their applications before ICANN posts its Initial Evaluation results will receive a 70% refund of their $185,000 application fee; those who wait until after the IE stage will only receive a 35% refund.

Benefits of the private auction model include the following:

• Elimination of ICANN Process Delays: Resolving contentions externally allows for more efficient application processing.
• Recovery of Funds: Non-winning bids receive a portion of the winning bid.
• Partial Application Fee: Those who not win their TLD may be eligible to receive a partial refund from ICANN, in addition to payouts from the winning bids.

Drawbacks of the private auction model include the following:

• Jurisdiction: Enforcement of agreements across jurisdictions could be challenging, particularly if a participant fails to make good on its agreement.
• Funding: According to a CircleID article: "In the case where applicants have numerous strings in contention, a portion of the winning bid will be paid to non-winning applicants that can be used in subsequent auctions in which the winning bidder will be participating in. For example, if Company X is the winning bid for Auction A against Company Y and later, Company X and Company Y are in Auction B, Company Y now has additional funds received from Company X to use in Auction B."
• Participation: All parties within a contention set must agree and participate.
• Failure: If a bid is entered early and the winning bidder fails to pass ICANN's evaluation process, the string could go unclaimed.

Donuts co-founder Jon Nevett says that Donuts will handle as many of its contention sets as possible via this method, as auctions will be cheaper and faster for applicants than ICANN's original method. "The cost of losing an ICANN auction is greater than the cost of losing a private auction," Nevett said. "If you lose an ICANN auction you get nothing, zero, you lose your asset... [but with private auctions] it doesn't hurt as much to lose, so the theory is the second-place guys won't stretch as much."

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