Task Force on Funding
Draft Final Report

30 October 1999

[Note: The following draft report of the President’s Task Force on Funding is being posted for public comment prior to its formal submission to the ICANN Board of Directors in accordance with the Board’s resolution of July 26, 1999. Comments should be forwarded to the members of the Task Force (listed with email addresses below), or to Andrew McLaughlin, who will forward any comments to the members.]

ICANN
PRESIDENT’S TASK FORCE ON FUNDING

Report and Recommendations on ICANN Permanent Funding Arrangements

Contents

I. Executive Summary

II. Background

A. Creation of Task Force
B. Board resolution
C. Membership of Task Force
D. Charge to Task Force

III. ICANN Budget

A. Current Budget Process
B. Current Budget Status
C. Controls on ICANN Budget
D. Future Budget Process

IV. Allocating the ICANN Budget

A. Principles for fair allocation
B. Proposed ICANN/NSI Agreements
C. Aggregate shares among classes of registries and registrars
D. Distribution of global shares to individual organizations within classes of registries and registrars
E. Revenue from other sources

I. Executive Summary and Recommendations

At the request of the Board of Directors, ICANN President Michael Roberts convened a task force composed of ten representatives of Internet IP address registries and domain name registries and registrars to consider relevant issues concerned with creation of permanent funding arrangements for ICANN. The task force has met four times, once in a face to face meeting in Santiago, Chile, and three times via teleconference. It has reviewed the funding assumptions contained in ICANN's chartering documents and in the U.S. Government's White Paper on Management of the Internet Domain Name System. It has also considered a variety of issues related to the process and procedures by which the ICANN budget is formulated and approved, including the sources and amounts of the expenses contained in the current fiscal year's budget. Finally, it has deliberated on the most appropriate means by which the annual expense budgets should be apportioned to the registry and registrar communities, which receive the benefit of ICANN's technical coordination and policy development activities. These topics are discussed and the views of the Task Force are set forth in sections III and IV of this report.

The Task Force has developed twelve recommendations, within four topic areas, for further action by the ICANN Board and staff. These are stated below, with supporting material referenced in the body of the report.

A. Basic Cost Recovery Principle

(1) 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.

B. Improvements to ICANN Budget Process

The TFF believes that ICANN's budget process needs to be improved in future iterations to give the entities providing the funds – the domain name and address registries and registrars – a formal role in the budgeting process. The goal of the Task Force's recommendations in this area is greater accountability, predictability, participation, and transparency in the budgeting process.

(2) The TFF recommends that the budget proposed by the President at the outset of the budget process should be directly transmitted via email to each name and address registry and registrar for review and comment, with adequate time for study and response.

(3) The TFF recommends that the budget process include a meeting among members of the ICANN Board and representatives of the IP address registries and domain name registries and registrars to review the proposed budget in detail and to seek consensus on areas of controversy.

(4) The TFF recommends that ICANN provide the IP address registries and domain name registries and registrars with a quarterly update on ICANN's financial situation, including figures showing the degree to which ICANN's revenues are exceeding or falling short of the approved budget.

(5) In addition to the entities directly contributing the funds to ICANN's cost-recovery program, the rest of the ICANN community must have a fair opportunity to review the proposed budget and participate in the consensus-development process. The Task Force recommends that ICANN require that the proposed annual budget be placed on the agenda for at least one Public Forum prior to adoption.

(6) As an interim measure to build greater accountability and transparency into the budgeting budgeting process -- while recognizing the difficulty that ICANN staff currently has in making budget projections for a startup organization that has not completed many of its transitional activities -- the TFF recommends that ICANN prepare and present to the community for public review and comment a detailed multiyear budget and financial analysis for the next fiscal year not later than the end of the first quarter of 2000. A detailed multiyear budget and financial analysis would help to foster confidence in the long-term integrity of the budgeting process.

C. Allocation of FY99-00 Budget Among Classes of Contributors

(7) The TFF believes that the annual revenue budget for continuing expenses should be allocated among the three major groupings of (i) IP address registries, (ii) domain name registries, and (iii)domain name registrars on a proportional basis. TFF has considered a range of alternatives for such allocations and recommends that the proportions for the current transitional budget year (beginning 7/1/99 and ending 6/30/00) should be 55% to gTLD registrars and registry, 35% to ccTLD registries, and 10% to IP address registries. Within each funding community, fair and proportional formulas will be developed, as described in this report, to further allocate funding amounts to individual organizations.

(8) TFF has reviewed the Board's approved budget for the current fiscal year and the recently submitted projection of estimated actual income and expense for the year, and recommends that the amount of income to be allocated according to the proportional formulas contained in recommendation 7 should be $4,275,000.

D. Implementation of Funding Formula

(9) TFF recommends that the funding allocations and formulas contained in this report and its recommendations be included in agreements to be executed between ICANN and the registry and registrar organizations.

(10) The TFF recommends that ICANN implement a budget mechanism to correct over- and under-recovery of budgeted amounts. Specifically, the TFF recommends that budget deviations under 10% should flow into the next fiscal year's budget process, while deviations over 10% should be dealt with by an interim budget adjustment by the ICANN Board after a full public comment and consensus-development process.

(11) TFF recommends that the ICANN staff work with representatives of the registry and registrar communities to develop necessary implementation details to support quarterly invoicing of amounts due to ICANN.

(12) TFF agrees with the Board that ICANN's supporting organizations and At Large Membership should be financially self-supporting. It further recommends that certain activities, such as the processing of registrar accreditation applications, be identified for special purpose funding so that inadvertent subsidies do not creep into the ICANN financial structure.

II. Background

A. Creation of Task Force

In a letter to ICANN dated July 8, 1999, the U.S. Department of Commerce made the following comment:

"In carefully reviewing your [June 15, 1999 Status Report] report, and the considerable progress made toward establishing the structures for representative decision making contemplated in the White paper, there is still important work to be done:

"- ICANN should eliminate the $1 per-year, per-domain name registration user fee. Although the user fee may be determined to be an appropriate method for funding ICANN's activities, it is controversial. We believe a permanent financing method should not be adopted until after the nine elected members are added to the ICANN Board in November. By taking such a step, ICANN will ensure that this important decision is made in accordance with the representative, bottom-up process that is essential for ICANN to carry out its mission. In the meanwhile, we will work with ICANN and the entire Internet community, to the extent permitted by law, to obtain interim resources for ICANN. "

In response to this comment, the ICANN Board unanimously adopted the following resolutions at its teleconference meeting on July 26, 1999:

WHEREAS, the budget adopted on May 27, 1999, by Resolution 99.55 established the variable component of the registrar accreditation fee at $1 per registration-year;

WHEREAS, that $1 component has recently been the subject of controversy, causing the U.S. Department of Commerce to request that ICANN suspend collection of the fee until the matter can be considered by a Board including directors selected by ICANN's supporting organizations;

WHEREAS, various accredited registrars have announced that they intend to voluntarily pay the $1 component in the event its collection is suspended;

WHEREAS, that Board would benefit from additional views from name and address registry administrators and registrars, which will provide a principal source of ICANN's funding on an ongoing basis;

RESOLVED [resolution 99.61], the Interim President and Chief Executive Officer is authorized to suspend collection of the $1 variable component of the registrar accreditation fee until further action by the Board;

FURTHER RESOLVED [resolution 99.62], the Interim President and Chief Executive Officer is directed to convene a President's Task Force on Funding, chaired by him and also consisting of representatives chosen by him from IP address registries, domain-name registrars, and administrators of gTLD and ccTLD registries, and charged 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;

FURTHER RESOLVED [resolution 99.63], based on the input of the President's Task Force on Funding and such consultation with staff and legal counsel as he deems appropriate, the Interim President and Chief Executive Officer is directed to have posted a preliminary report on funding alternatives on the ICANN web site in advance of the Board meeting scheduled for August 25 and 26, 1999, in Santiago, Chile, with further consideration of this matter to be as directed by Board resolution at that meeting or otherwise.

The members of the Task Force joined in August. A number of them held a first meeting during ICANN's Santiago meetings on August 23. Subsequent meetings have been held every two weeks by teleconference, typically lasting one hour.

B. Membership of Task Force

The Task Force consists of ten members, representing the name and IP address registry and registrar communities:

From the gTLD Registrar community:

• Richard Forman, Register.com, USA <rforman@register.com>
• Peter Gerrand, MelbourneIT, Australia <ceo@melbourneit.com.au>
• Per-Anders Hurtigh, Ports International, Sweden <per-anders@ports.se>

From the IP Address Registry community:

• Kim Hubbard, ARIN, Americas/sub-Saharan Africa <kimh@arin.net>
• Mirjam Kuehne and Kees van Draanen, RIPE, Europe/North Africa <mir@ripe.net> <kees.van.draanen@ripe.net>
• Paul Wilson, APNIC, Asia-Pacific <pwilson@apnic.net>

From the ccTLD Registry community:

• Willie Black, Nominet, .uk <w.black@nominet.org.uk>
• Naomasa Maruyama, JPNIC, .jp <maruyama@nic.ad.jp>
• Jose Luiz Ribeiro-Filho, Brazil-RNP, .br <zeluiz@nc-rj.rnp.br>

From the gTLD Registry community:

• Don Telage, Network Solutions, USA <dont@netsol.com>

The Task Force is chaired by Mike Roberts, Interim President/CEO of ICANN <roberts@icann.org>, and is advised by Andrew McLaughlin of the ICANN staff <mclaughlin@icann.org>.

C. Charge to Task Force

As set forth in the Board resolution, the Task Force is charged 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 task force discussed a more detailed charter and agreed that initially the following points would be considered:

(1) What criteria should be adopted to identify classes, if any, of registries and registrars for purposes of assessing funding obligations?

(2) What criteria should be used to determine the amounts payable to ICANN by the classes identified in (1) above?

(3) What procedures should be used to adjust for over- or under-recovery of budgeted revenue attributable to registry and registrar fees?

III. ICANN Budget

The Task Force identified a number of concerns relating to ICANN's budget, focusing primarily upon the need to ensure meaningful limits on future growth in the budget and the need for an improved, more inclusive, and more transparent process by which the budget will be set in future years.

A. Overview of Current Budget

1. Budget Process

In Article XI, Section 4, the ICANN Bylaws define the process by which the ICANN Board is to adopt its annual budget:

"Annual Budget. The President shall prepare and, at least forty-five (45) days prior to the commencement of each fiscal year, submit to the Board, a proposed annual budget of the Corporation for the next fiscal year. The proposed budget shall identify anticipated revenue sources and levels and shall, to the extent practical, identify anticipated material expense items by line item. The Board shall adopt an annual budget and shall publish the adopted Budget on the Web Site."

See <http://www.icann.org/general/bylaws.htm#XI>.

As required by this provision, ICANN's President prepared and submitted to the Board a proposed budget for the fiscal year starting July 1, 1999. The budget was posted for public review and comment and discussed at ICANN's first public meetings in Singapore, March 2-4, 1999. Following a further comment period, the Board approved the budget at its May 25-27 meetings in Berlin. See <http://www.icann.org/berlin/berlin-resolutions.html#7>.

2. Current budget status

The 1999-2000 budget adopted in May, 1999 provided for total revenue of $5.9 million, total expenditures of $4.2 million and total capital equipment purchases, contribution to operating reserve and provision for prior year loss of $1.7 million. See <http://www.icann.org/financials/budget-fy99-00-27may99.htm>.

Based on estimated actual expenses in the first quarter of FY99-00, ending September 30, 1999, and other financial developments since the budget was adopted, the projected total revenue for this fiscal year has been revised downward to $4.977 million. Total operating expenses are now projected at $3.246 million, resulting in an operating surplus of $1.731 million. This amount, if realized at fiscal year end, would be sufficient to retire total working capital loans of $1.025 million and provide working capital for the corporation in the amount of $706,000 at the beginning of the next fiscal year. Additional detail on the revised financial projections for the current year may be found in Appendix A, below.

3. Transitional nature of budget

The Task Force noted that the current budget is transitional in nature, meaning that some start-up expenses will not be repeated in future years, and that some expected ongoing expenses have been avoided during the course of ICANN's start-up phase. The Task Force also acknowledged ICANN's need for a degree of budgetary flexibility in light of the unreliability of ICANN's current budget figures, attributable to ICANN's young age, limited experience with the actual costs and expenses entailed in its policymaking and consensus-development activities, and to the lack of steady income from registry or registrar sources.

Other factors contributing to budget volatility include ICANN's inability thus far to rely on agreements for payments from registries and registrars, delays in hiring staff, and reliance on short term loans to meet working capital requirements. Taken together, these factors counsel against an overly rigid approach to budgeting, and in favor of some flexibility for year-to-year adjustments up or down based on operational experience, if coupled with an inclusive and transparent consultative process.

4. One-time expenses

Included in ICANN's 1999-2000 budget are several one-time start-up expenses. To account for such items as they arise, the Task Force agrees that ICANN will require a mechanism whereby its operating budget can, subject to the determination of the budget process, be supplemented on a one-time basis. Funding formulas must accordingly account for the possibility of a one-time surcharge or assessment.

For example, ICANN's 1999-2000 budget includes provisions for prior year loss, the repayment of loan obligations, and the creation of an operating reserve. See <http://www.icann.org/financials/budget-fy99-00-27may99.htm>.

a. Prior year loss and loan obligations

Since its launch in October 1998, ICANN's day-to-day operations have been funded by one time startup contributions, short term working capital loans , accreditation fees, and the patience of its creditors. ICANN's financial statement for the start-up phase (September 30, 1998 to June 30, 1999) reports that ICANN received total income of $707,870 (including $171,650 in donated services), as against total expenses of $1,466,637, producing a net loss for the year of $758,767.

This loss amount has been covered by short term loans on an interim basis but will need to be offset by operating surpluses in the current and/or future fiscal years. See <http://www.icann.org/financials/financials1.htm>.

b. Operating reserve

As part of its obligation to foster and maintain the operational stability of the Internet, the ICANN Board has adopted a plan to create an operating reserve in an amount equal to one year's operating expense. Contributions to the operating reserve are intended to be spread out over several years. As with the start-up loan repayment obligations, these reserve contributions will disappear once the operating reserve has been fully funded.

c. Other non-recurring expenses

In addition, ICANN is likely to be confronted from time to time with other non-recurring expenses, such as extraordinary legal expenses. These expenses should be addressed at the time they occur, rather than burdening the existing, dedicated operating budget.

B. Possible future expenses - not yet budgeted

The Task Force also discussed the possibility of future expenses not yet reflected in the ICANN budget. Even within the confines of ICANN's narrow mandate to manage technical coordination functions, the Task Force agreed that there might arise recurring operational expenses beyond the categories currently defined in the ICANN budget, and that the budget process must be able to accommodate such new operational expense categories.

For example, the DNS root name server operators currently provide their services voluntarily, without reimbursement from the Internet community they serve. The Task Force discussed the possibility that ICANN may need to defray the costs associated with the operation of root name servers in the future.

C. Controls on ICANN Budget

A central concern of the Task Force has been the need to place some meaningful controls on the future size and growth of the ICANN budget. There are both philosophical and practical elements to this concern. The philosophical basis for limiting ICANN's budget is rooted in the notion that ICANN is a limited-purpose technical coordination entity; however, ICANN is likely to come under pressure to expand its reach into areas outside its narrow mandate. Controls on ICANN's budget are an important safeguard against mission creep and the unrestrained budget bloat that might enable it. Moreover, there is a practical need among the registries and registrars for predictability in ICANN's year-to-year budgets. The registries and registrars must themselves make budgets and business plans that are not vulnerable to significant surprise financial obligations newly imposed by ICANN.

At the same time, for the reasons set forth in Section (B), above, the need for firm and reliable controls on the ICANN budget must be balanced against the occasional need for extraordinary one-time expenses and/or new categories of operational expense within ICANN's limited technical coordination mandate.

1. Mechanisms to address over- and under-recovery

Recognizing the need to balance firm budget controls against necessary flexibility, the Task Force discussed a staff proposal that ICANN handle both over- and under-recovery in a uniform way. Depending upon the design of the funding formula, the steady exponential growth of the Internet's domain name system might generate greater revenues to ICANN than are required by its budget.

As a non-profit, ICANN is obligated to recover its costs, but only its costs. Under-recovery presents ICANN with the difficult task of meeting its budget by raising additional funds from those already paying; over-recovery presents ICANN with the need to prevent future over-recovery, and the need to credit existing excess funds so as to reduce future obligations accordingly.

The staff proposal, with which the Task Force is in general agreement, is for budget deviations under 10% to simply flow into the next fiscal year's budget process. Deviations over 10% would require an interim budget adjustment by the ICANN Board after a full public comment and consensus-development process.

2. Surcharges for extraordinary expenses

One particular form of under-recovery discussed above is the potential need for one-time surcharges for extraordinary expenses such as prior year loss or the creation of an operating budget reserve. The Task Force generally agreed that all such surcharges should be addressed during the course of ICANN's annual budgeting process, except in the case of an ongoing under-recovery greater than 10% below ICANN's approved budget. In that case, the Board should have the ability to initiate an interim budget adjustment, subject to a full public comment and consensus-development process.

3. Limits on cost recovery amounts

Task Force members, and the DNS community generally, feel strongly that the mechanisms established for the recovery of ICANN's operating expenses should have built-in limits such that mere operation of a revenue formula does not generate income over and above approved expense targets. For instance, this is a major disadvantage of a formula based solely on numbers of domain names assigned and why that particular approach has been discarded in the recommendations of the Task Force.

D. Future budget process

The Task Force agreed that ICANN's budget process needs to be improved in future iterations to give the entities providing the funds -- the domain name and address registries and the gTLD name registrars -- a formal role in the budgeting process. The goal of the Task Force's recommendations in this area is greater accountability, predictability, participation, and transparency in the budgeting process.

In particular, the budget proposed by the President at the outset of the budget process should be directly transmitted via email to each name and address registry and each gTLD name registrar for review and comment, with adequate time for study and response. As a second element of the budgeting process, a meeting should be convened among the ICANN Board and representatives of the gTLD and ccTLD registries, the address registries, and the gTLD registrars (perhaps structured like the Task Force on Funding) to review the proposed budget in detail and to seek consensus on areas of controversy. As a third element, the registries and registrars should be given a quarterly update on ICANN's financial situation, including figures showing the degree to which ICANN's revenues are exceeding or falling short of the approved budget.

In addition to the entities directly contributing the funds to ICANN's cost-recovery program, the rest of the ICANN community must have a fair opportunity to review the proposed budget and participate in the consensus-development process. The Task Force recommends that ICANN require that the proposed annual budget to be placed on the agenda for at least one Public Forum prior to adoption.

As an interim measure to build greater accountability and transparency into the budgeting budgeting process, while recognizing the difficulty that ICANN staff currently has in making budget projections for a startup organization that has not completed many of its transitional activities, the Task Force recommends that ICANN should prepare and present to the community for public review and comment a detailed multiyear budget and financial analysis for the next fiscal year not later than the end of the first quarter of 2000. A detailed multiyear budget and financial analysis would help to foster confidence in the long-term integrity of the budgeting process.

IV. Allocating the ICANN Budget

Given the White Paper's mandate that ICANN be funded on a cost-recovery basis by its global private sector constituents, the Task Force has considered the difficult problem of fairly allocating ICANN's annual budget among the entities with which ICANN is expected to enter contracts: the name and address registries and registrars. The Task Force analyzed a range of principles and criteria on which to divide the budgetary pie, then proceeded to apply them to ICANN's present realities to determine a fair allocation of shares.

A. Principles for fair allocation

The Task Force agreed on two general principles to guide its analysis of budget allocation forumulas.

1. All ICANN constituents benefiting from ICANN's coordination and pro-competition efforts should contribute to its budget.

This is the principle articulated in the White Paper. Put another way, the name and address registries and registrars (the parties with whom ICANN is expected to have contractual relationships) are the entities through which the global Internet's private sector financial support should be obtained.

2. Not-for-profit and for-profit constituents should be treated equally, as both types of bodies need to pay their fair dues, on the user-pays principle.

The Task Force also agreed that the funding formulas should not vary according to the for-profit or not-for-profit status of a given registry or registrar. The vast diversity of business models and national business laws makes any principled distinction among registrars and registries on that basis ultimately infeasible. Instead, in applying the user-pays principle, registries and registrars should pay according to a formula that fairly approximates the global distribution of benefits from ICANN's technical coordination and pro-competition efforts.

The Task Force does believe that some principled distinctions can and should be drawn on the basis of a realistic assessment of ability to pay. In contrast, the Task Force rejected, at least for the moment, the proposition that ICANN's cost recovery mechanism should be based on a cost accounting formula in which the costs of specific activities are allocated to the presumed beneficiaries of those activities. Some Task Force members indicated that they opposed the proposition on the grounds that cost accounting seldom if ever satisfies desires for fair apportionment of costs. Other Task Force members believe that the practical impossibility of accurate cost accounting during ICANN's start-up phase, together with likely shifts in ICANN's policymaking focus over the coming year, render cost accounting an imprudent basis for allocation for the time being.

B. Proposed ICANN-NSI-DoC agreements

During the course of the Task Force's deliberations, a set of proposed agreements among ICANN, the U.S. Department of Commerce, and Network Solutions, Inc. ("NSI"), was announced. Because these proposed agreements contain provisions of direct relevance to any ICANN funding mechanism, the Task Force reviewed them in detail.

In particular, the Task Force focused on three of the proposed agreements: the Registry Agreement (between ICANN and NSI the registry); the Registrar Accreditation Agreement; and the Transition Agreement.

1. Funding obligation of NSI as registry

The ICANN-NSI Registry Agreement establishes the following funding obligation on NSI in its capacity as the registry for the .com, .net, and .org generic top level domains:

Several features of this section warrant comment.

The proposed mechanism provides that NSI will pay approved fees applicable to gTLD registries, with several conditions. First, the fees must be approved pursuant to Section 4 of the Agreement, which states:

Second, the proposed section states that gTLD registry fees must be "reasonably allocated among all gTLD registries that contract with ICANN." Since NSI is, for the moment, the sole gTLD registry, this provision does not bear particular relevance. The question of fair sub-allocation among gTLD registries will arise if and when new gTLD registries are added to the root.

Third, the proposed section provides a cap on the NSI registry's total annual funding obligation, with an override mechanism: "if NSI's share of the total gTLD registry-level fees are or are budgeted to be in excess of $250,000 in any given year, any such excess must be expressly approved by gTLD registries accounting, in aggregate, for payment of two-thirds of all gTLD registry-level fees." In other words, so long as NSI is paying 100% of the gTLD registry-level fees, NSI can effectively veto any funding obligation in excess of $250,000 a year.

2. Funding obligation of NSI as accredited registrar

The proposed Registrar Accreditation Agreement makes the following provisions with respect to the funding obligations of registrars:

Thus, accredited gTLD registrars must pay an accreditation fee of $5,000 a year, together with an ongoing fee. The ongoing fee must be comply with the following principles, which are identical to those contained in the proposed Registry Agreement:

The proposed Registrar Accreditation Agreement also places a key condition on the on-going component of ICANN's accreditation fees: the fee structure "must be expressly approved by registrars accounting, in aggregate, for payment of two-thirds of all registrar-level fees." At the moment, one company -- NSI -- accounts for well over two-thirds of all gTLD registrar fees and has an effective veto power over the on-going component of the registrar accreditation fee.

However, in the proposed Transition Agreement, which supplements the Registrar Accreditation Agreement between ICANN and NSI, NSI agrees to the following:

Thus, NSI retains an effective veto -- for the time being -- over any increase in on-going registrar accreditation fees when its share exceeds $2,000,000 a year.

In sum, the Task Force concludes that its recommended global funding allocation formula should take into account the expected caps contained in the proposed agreements: no more than $2,000,000 from NSI the gTLD registrar; and no more than $250,000 from NSI the gTLD registry.

C. Aggregate shares among classes of ICANN constituents

The Task Force recommends that continuing revenue requirements to support ICANN's transition budget for FY99-00 (July 1, 1999 to June 30, 2000) be allocated among the name and address registries and registrars according to the formula set forth below. In making this recommendation the Task Force accompanies it with the caveat that although it believes these proportional shares are fair and appropriate to the current circumstances of ICANN and the registry/registrar communities, any such formula requires scrutiny over time, and it assumes that this recommendation will be reviewed in connection with development of the ICANN budget for FY00-01, commencing in the spring of 2000. Further, the Task Force notes that due to parallel processes operating with respect to its own work, the negotiations among ICANN, NSI and the USG over pending contract agreements, and the development of ICANN's revised budget projection for the current fiscal year, the percentages used herein are subject to rounding and interpolation as applied to specific agreements to be executed following Board action on the recommendations of the Task Force.

gTLD registrars and registry = 55%

- gTLD registrars = 50%

- gTLD registry = 5%

ccTLD registries = 35%

IP address registries = 10%

A fuller discussion of the rationale for each share follows:

1. gTLD registrars = 50%

The gTLD registrars (and, more importantly, their customers) are the parties that most directly and tangibly benefit from ICANN's pro-competitive policymaking and implementation functions. Much of ICANN's efforts to date have been devoted to developing and implementing a registrar accreditation program, to the ongoing work needed to execute and monitor that program successfully, and to the negotiations required to establish a permanent structure for a competitive registration market in .com, .net, and .org.

Assuming income to support continuing expenses of $4.275 million for 1999-2000, the aggregate gTLD registrar share will amount to $2,101,000 (rounded), of which no more than $2 million will be paid by Network Solutions.

2. gTLD registries = 5%

The gTLD registry will also benefit directly and tangibly from ICANN's pro-competitive policymaking and implementation functions. Under the framework established by Amendment 11 to the Cooperative Agreement between NSI and the U.S. Department of Commerce, the gTLD registry collects a fee from the competitive registrars for every domain name registered in the .com, .net, and .org top level domains.

The Task Force believes that a total allocation of 55% to the gTLD registrars and registries was appropriate, and that the division between registrar and registry fees should calculated according to a 10:1 ratio, or 50% from the gTLD registrars and 5% from the gTLD registry.

There was discussion among the members of the Task Force as to whether all fees should be collected at the registry level, rather than dividing the funding obligation among the registry and the registrars. At least one member of the Task Force supported the aggregation of funding contributions through the registries only. However the consensus of the Task Force was that a number of practical considerations weigh heavily in favor of a two-tiered funding structure for the total amount attributable to the gTLD registries and registrars. Among these were (1) because a single company continues to serve both as the gTLD registry and as a competitive gTLD registrar, a two-tiered gTLD funding structure best ensured equal treatment among the competing registrars; and (2) a two-tiered gTLD funding structure provides maximum flexibility for the funding structure applicable to future gTLD registries (if any).

Assuming income to support continuing expenses of $4.275 million for 1999-2000, the gTLD registry share will be $250,000 (rounded).

3. ccTLD registries = 35%

The Task Force concluded that the share attributable to ccTLD registries should be 35% of the budget. Because of the vast diversity of operational and financial models among the ccTLDs, it was difficult to generalize about their aggregate ability-to-pay.

Nevertheless, the Task Force noted that the ccTLD community is now estimated to account for over 3 million domain name registrations, with a rapid rate of growth Assuming income to support continuing expenses of $4.275 million for 1999-2000, the ccTLD registry share will be $1,496,000 (rounded). Divided among the roughly 250 ccTLD registries currently in existence, the average individual registry share would amount to less than $6,000 a year -- a little more than one-tenth of one percent of the ICANN budget. Compared with the $250,000 annual contribution from the gTLD registry, this average seemed to the Task Force to be an acceptable basis for calculating a fair aggregate share for the ccTLD community.

4. IP address registries = 10%

The Task Force concluded that the many differences between domain names and IP addresses warranted differential treatment for the IP address registry contribution. In particular, the Task Force noted that the IP address registries are all member-supported non-profit entities that do not charge per-number fees for IP address allocations. Put another way, the address space is thus not "monetized" in the same manner as the domain name space.

The Task Force also discussed the differences between name-to-IP-number resolution, which is carried out by the name registries and is essential to the functionality required by most registrants, and reverse domain name mapping, which is carried out the IP address registries and is not similarly mandatory.

The Task Force reviewed the annual budgets of the existing regional Internet registries, and concluded that a 10% share of the ICANN budget was appropriate. Assuming income to support continuing expenses of $4.275 million for 1999-2000, the IP address registry share will be $428,000 (rounded).

D. Distribution of global shares to individual organizations within classes of ICANN constituents

In addition to making recommendations about global aggregate shares, the Task Force discussed a range of issues relating to how those shares should be recovered from individual organizations.

The funding responsibilities of registries and registrars must be translated into specific language within the agreements that will be executed among the various parties. This is essential in order to meet the needs for stability and predictability that both ICANN and the registry/registrar organizations require. Accordingly, the Task Force undertook to review some possible models by which distributions could be calculated and reduced to contract language specific to individual entities.

1. gTLD registry

Because there is at present only one gTLD registry, the Task Force did not need to consider sub-distribution within this class of funding organizations.

2. gTLD registrars

The gTLD registrar members of the Task Force reported a broad consensus among gTLD registrars that a volume-based formula was the fairest means to distribute the registrars' global funding share among these businesses, and that the related calculations should be done on a quarterly basis.

The Task Force recommends that the following formula be used to calculate the on-going portion of the gTLD registrars' fees under the Registrar Accreditation Agreement:

Quarterly Fee = .25E x .5 x n/N x S

Where:

.25 = division into quarterly payments

E = the annual ICANN budgeted income to support continuing expenses (see Appendix A)

.5 = the 50% share attributable to the gTLD registrars

n = number of domain name registrations in the gTLD registry sponsored by the given registrar at the close of the quarter

N = total number of domain name registrations in the gTLD registry at the close of the quarter

S = any agreed upon one-time surcharge to be applied in a given fiscal quarter, such as a contribution to an operating reserve (i.e., a 5% surcharge would result in an S value of 1.05)

Example, using numbers and percentages above, for a hypothetical gTLD registrar with 100,000 names in a gTLD registry with eight million registrations:

Quarterly Fee = .5 x .1M/8M x .25xUS$4.275M x [tbd-assume no surcharge in example]

Quarterly Fee = US$ 6,680

In addition, the Task Force discussed the need for "floor" and "ceiling" amounts for individual organizations. It believes these are appropriate, but that the specifics of such amounts require further study.

3. ccTLD registries

The Task Force agreed that the ccTLD registries should determine among themselves the fairest formula for distributing the global ccTLD registry share to individual ccTLD registries. There are a number of models that could be used, including volume-based; banded tiers according to size; and a flat fee per ccTLD registry.

The Task Force noted the difficulty that confronts the ccTLD registries in reaching consensus on this issue. Across the vast diversity of the ccTLD registry community, there are large and small ccTLDs; well-funded and poorly-funded ccTLDs; professionally- and volunteer-managed ccTLDs; globally accessible and geographically bounded ccTLDs; nationally-, regionally-, and territorially-identified ccTLDs; government-administered and non-governmental ccTLDs. Some ccTLD registries also act as registrars; others facilitate competitive markets in domain name registration services. The interests of a large, well-funded ccTLD may diverge from those of a small ccTLD administered by a volunteer from the academic community. Compounding the difficulty is the lack of a single global framework in which to discuss these issues, and the absence of many ccTLD registries from existing forums on ICANN issues.

Thus, the Task Force is concerned that the ccTLD registries utilize a credible and participatory process from which consensus can reasonably emerge. The Task Force emphasizes that an acceptable result must meet the ccTLD registries' need for fairness and predictability, and ICANN's need for workable contract language.

4. IP address registries

As with the ccTLD registries, the Task Force believes that the IP address registries should determine among themselves a fair division of the global share, using a formula that is appropriate to the individual agreements which the address registries will make with ICANN.

E. Revenue from other sources

Over the course of several meetings, the Task Force discussed the question of the extent to which ICANN's core budget can or should be dependent on sources of income other than contributions from registries and registrars. This is a complex question on which there are no clear answers, especially at a time when the ICANN budget is still in an early stage of development. However, the following preliminary and tentative conclusions were arrived at.

1. Financial support from Supporting Organizations

The Supporting Organizations were made part of the ICANN organization and Bylaws in an effort to ensure that the corporation received the benefit of expert professional technical opinions on policy matters within the scope of ICANN's charter. The SO's are loosely organized, bottom up organizations designed to be inclusive with regard to participation of practicing professionals. This style of organization, and the policy charter, do not lend themselves to the type of organizational structure that could be relied on for significant funding amounts, and the existence of a requirement for such amounts, perhaps in the millions of dollars per SO, would be a substantial, if not fatal, impediment to the accomplishment of the primary policy-making mission of the organizations. The Task Force endorses the Board's current view that while it is entirely appropriate for the SO's to fund their own relatively modest expenses, they should not be regarded as sources of mainstream financial support for ICANN.

2. Financial support from Governments

Some Task Force members questioned why governments were not expected to contribute to ICANN's budget. ICANN staff noted that ICANN's mandate is to accomplish private-sector non-governmental management of its technical coordination and policymaking functions, with private-sector funding. At the same time, ICANN staff observed that ICANN will gladly accept contributions from any legitimate source, including governments.

The Task Force recommends that ICANN continue to accept voluntary contributions from legitimate sources, including governments, but that the ICANN budget not become dependent upon governmental contributions.

3. Membership and meeting fees

Some Task Force members recommended that ICANN seek to raise funds through membership and meeting fees and sponsorships. ICANN staff welcomed this recommendation and will include further discussion of it in future budget discussions, subject to the restriction imposed by current Board policy that all ICANN events be made accessible to the largest possible audience.

Appendix A