Staff Working Paper:
ICANN Cost Recovery Structure for Domain Name Registries
(10 November 2000)
Note: This working
paper has been prepared by the ICANN staff and is posted here
to prompt public comment. It has not been adopted by the Board.
10 November 2000
Staff Working Paper:
ICANN Cost Recovery Structure
for Domain Name Registries
This staff working paper is being published
for public comment with the intention that it contribute to accomplishment
of three objectives:
(1) Provide an updated cost recovery structure
for Top Level Domain Name Registries that can be used in completing
agreements with the organizations selected to operate the new
(2) Provide a basis for discussion with
the country code top level domain registry community leading
to completion of registry agreements with those organizations.
(3) Provide a means to simplify and harmonize
the existing revenue structure, which was adopted in 1999, particularly
with reference to DNS scaling and registry business model issues.
Comment is welcome on all aspects of this
paper, but in particular, comments and possibly alternative approaches
and formulations are sought on the following points:
- application of a common structure to all
top level domain name registries/registrars that are comparably
situated in the DNS, as measured by their business model, volume
and level of service, etc.
- the appropriate division of the annual
fee structure between a fixed and a variable component, as discussed
in sections C, D, and E.
- the granularity and levels of fixed annual
fees presented in sections E.1 and E.4.
- the continued and expanded use of the
proportionate registry size formula for calculating the variable
annual fee that is contained in section E.3.
In addition to public comment, ICANN is
obligated under current Board policy to consult directly with
representatives of the Domain Name and IP address registries
in matters affecting the budget, and will do so with respect
to the recommendations and proposals in this staff paper.
The present budget structure for ICANN
was adopted by the Board in November, 1999, following completion
of the work of the Task Force on Funding (TFF). The complete
TFF report may be accessed at: <http://www.icann.org/en/committees/tff/tff.htm>
The ICANN Board, in directing the creation
of the TFF, charged it with "formulating recommendations
on cost-recovery mechanisms that fairly apportion ICANN's funding
needs, as reflected in the budget that has been adopted, among
the Internet name and address registry administrators and registrars
and possibly other parties..."
The subsequent report contained a number
of recommendations, of which the one most pertinent to the topic
of cost recovery structure is:
"The TFF recommends that for the foreseeable
future the basic funding needs of ICANN be supported by IP address
registries and domain name registries and registrars. As articulated
in the White Paper, ICANN constituents benefiting from ICANN's
technical coordination and policy development activities should
contribute to its budget, whether individually or through intermediary
fee aggregating organizations."
Following the above points, the goals of
the revenue structure may be stated as,
- to produce the funding necessary to support
ICANN's mission and programs,
- to allocate fairly the responsibility
for providing that funding,
- to develop a cost recovery, i.e. revenue,
structure that is understandable and that can be administered
without excessive costs
The revenue structure developed in support
of these goals and recommended in the TFF report has been only
partially implemented as a result of delays in executing agreements
with country code Domain Name Registry organizations. With respect
to the ccTLD agreements, part of the delay is related to disagreement
on an appropriate structure for contributions to support ICANN's
funding requirements. (An explanation of the details of the current
structure appears in Note 1 below.)
This staff working paper does not deal
with the issue of the appropriate balance between revenue contributions
from Domain Name registries and from IP Address registries, which
currently stands at 90%-10% based on last year's Task Force on
Funding (TFF) recommendation. All of the sections below assume
10% of the total annual budgeted revenue requirement continues
to be met by the Address registries.
C. Revisions to the
Domain Name Registry/Registrar Revenue Structure
After reviewing the pertinent background
material and the operating experience of the past year, the staff
believes the following general precepts ought to be applied to
the development of an updated domain name registry/registrar
(1) Scope of Application. In the
interests of consistency and harmonization, the new structure
should apply uniformly to all registries and registrars. In effect,
ICANN should shift from its current practice of treating registries
in terms of who or what they are, to a new policy in which the
basic financial relationship is modulated by the business model
of the registry. See section E below for more
elaboration on this point.
(2) Registry & Registrar Relationships.
In general, the revenue arrangements should be executed with
and administered by the registry operator. This appears to be
the most flexible and administratively efficient approach. For
the time being, ICANN should continue to deal separately with
registries and registrars, where that is the locally preferred
or required arrangement, with the intention of working toward
a registry centered relationship.
(3) Fixed and Variable Components.
The structure should continue to have both a fixed and a variable
component to reflect the diversity of economic circumstances
prevailing among the domain name registries worldwide. Commercial
registry operators, who provide more than 80% of ICANN's domain
name registry revenue under the existing structure, have recommended
that the variable component of the revenue structure should provide
a substantial proportion of the total needed revenue, since this
is believed to most equitably apportion the funding burden.
(4) Use of Proportional Registry Size.
The algorithm for determining the variable part of the individual
organizational shares in the domain name revenue component of
the ICANN budget should continue to be based on proportional
registry size as measured by number of domain names registered.
The present procedure, adopted by the Board in November, 1999,
at the recommendation of the Task Force on Funding, calculates
the proportional shares once each quarter based on registry data.
Although there has been some debate about using other measures,
such as gross revenues or net profits of registry companies,
or economic measures associated with countries in which registries
are located, or self-identification of amounts to be treated
as voluntary donations toward revenue needs, none of them meets
the tests of being administratively feasible and of meeting an
overall fairness criterion.
(5) Simplify Calculation. The TFF
recommended revenue structure has a two tier, two step process
in which the approved expense level to be recovered from Name
and Address Registries and Registrars is first divided into "macro"
shares and then subsequently recovered through a second formula
within each of the three macro contributors - Address Registries,
gTLD registries/registrars, and ccTLD registries/registrars.
During its deliberations, the TFF members agreed that a fair
apportionment of the macro shares, based on conditions prevailing
in the summer and fall of 1999, was 10% - 55% - 35% for the Address
community, gTLD community, and ccTLD community respectively.
Subsequently, these macro divisions have been challenged on the
grounds that they lack substantive rationale and hence are only
the subjective opinions of a small and not necessarily representative
committee of registry and registrar executives. The staff believes
that the recommendations of the TFF were sound under the circumstances
of the task force work, but that improvements are desirable.
To that end, this staff paper proposes that all of the domain
name portion of the revenue calculation be based on the fixed
and variable structure proposed in section D below. As noted
above, there are issues related to the division of ICANN's budget
support between Address Registries and Name Registries that are
not dealt with in this paper.
(6) Provide for Special Registry Circumstances.
At the same time that some simplifying assumptions are adopted
as proposed above, a number of exception or waiver conditions
should be considered by the Board in order to allow the staff
to deal with financial hardship and other special situations
D. Revenue Versus Expense
One of the agreements reached in the TFF
process a year ago, and subsequently adopted by the Board, was
that the budget should be driven from the expense side, not the
revenue side. This principle essentially commits the Board, with
respect to potential new revenue from the new TLDs, to using
any revenue capacity in excess of reasonably projected incremental
operating costs to rebalance and achieve improved consistency
of revenue shares among all the domain name registries and registrars.
With respect to the costs to be recovered
in the domain name portion of the revenue structure, the amount
budgeted for the current fiscal year is $4.386 million. This
does not reflect revisions that will be necessary to accommodate
increased expenses in ICANN's budget for management and administrative
costs of the new TLDs.
Although the Board has not yet had an opportunity
to review staff proposals on a midyear budget revision to cover
such costs, an increase in expenses of $614,000 has been assumed
for the purposes of this working paper, resulting in a total
domain name expense amount to be recovered of $5.000 million.
This figure is used in the projections in the following section.
Please note that in the actual application of the revised structure
to the current fiscal year, there would be adjustments for less
than twelve month's applicability.
(There are other currently unbudgeted new
expenses to be considered in the mid-year financial review in
January, such as the At Large membership program, and the root
server system improvement program. Provision for recovery of
these costs is not included in the calculations in this staff
E. Revised Revenue
As noted above, the proposed revisions
to the ICANN revenue structure are based on the type of business
model being employed by the registry. This section of the staff
paper presents a proposed business model registry classification
scheme, followed by sample calculations of fixed and variable
components of the fees to be assessed. The current evolution
of business models for domain name registries is rapid. The classifications
proposed here will benefit from public comment, and from alternative
formulations by registries themselves, if offered.
E.1 Registry Business
In order to calculate the fixed component
of the annual fee, a classification of registries is proposed,
based on the business model under which the registry is operating.
( N.B. Example TLD names used in this section that do not currently
exist are only illustrative of applications received by ICANN.)
The proposed classes are:
Class 1 - Commercial. (Either the registry,
or the registrar, or both, are operated as for-profit entities.)
Registrant categories are as follows.
1a - Worldwide availability, unrestricted
as to registrants. E.g., .com, .nu, .tv, .cc
1b - Worldwide availability, restricted
as to registrants. E.g., possible new TLDs such as .air.
1c - Restricted to country or territorial presence of registrant,
E.g., .au, .ca
Class 2 - Noncommercial. (Both the registry
and the registration activities are operated on a non-profit
or not-for-profit, cost recovery basis.)
2a - Worldwide availability, unrestricted
as to registrants. E.g., possible new TLDs such as .health
2b - Worldwide availability, restricted
as to registrants. E.g., .int, .union
2c - Restricted to country or territorial
presence of registrant.
Class 3 - Special Purpose. For registries
with no cost recovery structure, or qualifying under other criteria
such as demonstrated financial hardship. Currently is set at
$500 per year.
E.2 Allocation Between
Fixed and Variable Component
During the negotiations leading to registry/registrar
agreements for .com/net/org in 1999, a formula containing both
fixed and variable components was selected. In the current fiscal
year, $3.636 million ($2.140 M from gTLDs and $1.496 M from ccTLDs)
of the total $4.386 million of domain name revenue is shown to
be from variable sources, for a ratio of 83% variable to 17%
fixed. However, treating all of the ccTLD budgeted revenue share
of $1.496 million as variable per the amounts invoiced by ICANN
does not reflect the view among some ccTLD managers that a large
share of the support for ICANN should be based on an annual fixed
For the sake of illustration, an allocation
of 60% variable and 40% fixed revenue to be recovered in the
revenue structure is used here. This results in an amount of
$3.000 million for the variable component and $2.000 million
for the fixed component. It should be noted that in an environment
of strong growth in the registration of commercial domain names,
which has been the trend in recent years, a reliance on a high
annual fixed component disadvantages the non-commercial or otherwise
slow growing registries, whose relative share in the calculation
of total revenue would otherwise decline quarter by quarter based
on registry data.
E.3 Calculation of
The variable category of the revised revennue
structure is required to recover $3.000M under the assumptions
in this staff paper. This is accomplished using an algorithm
first constructed by the TFF to deal with registry and registrar
activity in .com/net/org. It is extended here to all Domain Name
Registries. According to the most recent announcement from Net
Names, domain name registrations currently stand at:
.com=18M names, .net/org=5M names, and
all cc's together = 7M names, for a total of 30M names worldwide.
The existing formula for calculating the
variable component of domain name registry/registrar fees would
become, under the revised new structure:
Quarterly Fee = .25E x n/N
.25E = division into quarterly payments
of the approved expense cost recovery budget
n = number of domain name registrations
attributable to a given registry at the close of the quarter
N = total number of domain name registrations
at the close of the quarter
Example - using data from previous section:
.25E = .25x$3.000 million = $750K
n = .com = 18M
N = total registrations = 30M
18M/30M = 60% share of total registrations
= $450,000 per quarter or $1.800M per year if the 60% registry
share did not change
For 1% share of total registrations = 300,000
names = $7,500 per quarter or $30,000 per year
For 1/10th of 1% share of total registrations
= 30,000 names = $750 per quarter or $3,000 per year
of Fixed Component
Within the fixed category, which under
the assumptions in this paper needs to recover $2.000M, a range
of annual fixed amounts is established, which are matched to
the business model classifications of section
E.1. Please note that the examples here assume that one TLD
string = one registry. There are four steps in Classes 1 and
2, assigned as follows, with estimated number of registries per
class per step shown. For the noncommercial registries, a 50%
discount from the level of the commercial fees is assumed to
reflect their different economic circumstances.
Class 1a - Commercial, worldwide, unrestricted
(10 @ $100K/yr =$ 1000 K)
Class 1b - Commercial, worldwide, restricted
(5 @ $50K/yr = 250 K)
Class 1c - Commercial, country (35@ $10K/yr
= 350 K)
Class 2a - Noncommercial, worldwide, unrestricted
(2@ $50K = 100 K)
Class 2b - Noncommercial, worldwide, restricted
(2@ $25K= 50 K)
Class 2c - Noncommercial, country (35 @
$ 5K = 175 K)
Class 3 - Special Purpose (150 @ $500 =
Total $ 2000 K
Note 1 - Current Registry/Registrar
Briefly summarized, ICANN's current revenue
structure for domain name registries and registrars has four
(1) Verisign (formerly NSI) Registry pays
a fixed annual fee of $250,000, which includes the three .com/net/org
(2) The .com/net/org registrars, including
NSI Registrar, pay a variable fee based on their proportionate
share of the total registrations in .com/net/org which amounts
to a total of $2.140 M in the current fiscal year budget. The
shares are recalculated quarterly based on data from Verisign
Registry and invoices issued accordingly.
(3) The ccTLD registries have been billed
a total of $1.496M based on their estimated proportionate share
of total ccTLD name registrations. Some ccTLD registries have
objected to this formula but have not made an alternative proposal.
(4) The .com/net/org registrars pay an
annual fixed fee of $5,000 in connection with their registrar
agreements. We previously "fenced" this in the one
time category of our revenue budget because we expected a registrar
group of 20-30 companies and the resulting fees to be totally
absorbed in administrative costs of processing agreements, etc.
Subsequently, we have accredited well over a hundred companies
and we have also committed to the registrar group an aggressive
support program for them. Thus, we believe this funds component
should be moved into the continuing revenue category and integrated
into the general registry/registrar revenue structure.
In addition, items (1) through (3) are
subject to a TFF recommended division of revenue shares among
gTLDs, ccTLDs and IP Address Registries of 55%/35%/10%.
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