ICANN|ARCHIVES

Internet Corporation for Assigned Names and Numbers

Auctions as the fairest method of resolving contention for domain names made available by a gTLD registry.

Bruce Tonkin, Chief Technology Officer, Melbourne IT 24 November 2004

1. Background
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A domain name is effectively a licence to use a particular identifier (name) within the unique domain name system hierarchy for a particular period of time. The licence is obtained from an ICANN accredited domain name registrar through the domain name registration agreement between the registrant and the registrar. The identifier itself is not owned. It is part of the hierarchy of identifiers managed by ICANN on behalf of the Internet community.

Domain name licences are already routinely traded amongst licence holders. When a domain name licence is traded, the new holder of that licence is effectively bound by the conditions of the domain name registraiton agreement with the registrar of record for that name. The new holder of the licence will need to renew the licence at the end of the current licence period. A domain name may be traded because the current holder is no longer using a domain name, or the domain name holder registered a name with the intent to sell the licence at a later time.

When a domain name licence lapses, the domain name returns to the DNS system, and may be registered by another registrant. There is often contention amongst registrars to register a domain name that has just become available for registration again. A market has emerged where names are registered at the standard registry fee, and then immediately sold through mechanisms such as auction for a far higher fee. The value of this market has created a situation where many registrars send thousands of add commands at the same time, in the hope that randomly one of these will be successful. The more add commands that are sent the more chance that one may be successful. The current registrar-registrar framework allocates the same amount of capacity per registrar to send ADD commands regardless of the number of ADDs that are successful. This has created a amrket for setting up large groups of companies (containing over 100 companies) to act as registrars, purely to increase the volume of add commands that can be sent to the registry. This creates a very inefficient use of registry resources, and means that the registry can't scale with the number of registrars.

2. Solution requirements
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A solution to resolve the contention problem must meet the following requirements:
- allow all registrars a fair chance of registering a name on behalf of their customers regardless of the amount of connections/bandwdith available to that registrar or affiliated registrars
- provide an incentive for registrants that no longer have a use for a domain name licence to allow a domain name lience to lapse to provide other registrants with an opportunity to obtain a right to use that name
- support a range of business models for registrars to obtain names on behalf of their customers

3. Auction model as proposed solution
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Auctions have proved over time to be a fair system for resolving the market price for a particular item, when there is more than one party willing to pay the minimum acceptable price for the item. Examples of successful auction systems include the sale of houses or land (where location is important), or the sale of art (where there is strong visual appeal for a particular object). Domain name liences share some of the features of land and art. A domain name may have a high market value because it is easy to type or remember (e.g a short word that can be pronounced such as yahoo), or the name has some visual appeal (is based a on familiar generic word). In the case of a registry, the minimum acceptable price is the normal domain name registration fee.

I recommend that an auction be used to resolve contention for domain names.

Here is a possible model: - Registry publishes list of names to become available in 5 or less days
- A registrar may indicate interest in registering one of these names during the 5 day period
- If there is only one registrar that is interested in the name, the registrar will be able to register the name for the current registration fee at the end of the 5 day period
- if there are no registrar interested in the name, the name will be released for normal registration
- if there are more than one registrar interested in the name, an auction will be run. The auction could run over several days (e.g 5 days) allowing time for a registrar to consult with their customer/s, with the highest price available at the end of the period being the winning price. If a new price is entered, the auction will be extended for a further period of time (e.g 24 hours) to prevent a registrar waiting until the last second to lodge a bid, and hence creating another contention problem.
- the winning price will be payable in full at the end of the auction process

This model can be applied at any time a domain name becomes available at a registry. For example at the time a new gtld is created, or the time there is a change in policy (e.g the introduction of 2nd level .name domain names), or the name becomes available after a licence is cancelled.

4. Revenue distribution from auction:
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Probably the most contentious issue associated with running an auction is how the funds should be distributed.

For the purpose of this paper, I will only discuss how funds could be distributed once a domain name licence expires.

I propose that the funds be distributed in the following way:
- 80% of the funds to the previous registrar, for passing onto the registrant
- 10% of the funds to ICANN
- 10% of the funds to the registry operator

I expect that the gaining registrar will charge a service fee (either fixed or as a percentage of the winning price) for managing the purchase of the domain name licence on behalf of a customer. This service fee would be subject to the normal market forces, and will most likely reflect the amount of value the registrar can offer.

I also expect that the previous registrar will charge a service fee (either fixed or as a percentage of the 80%) for managing the passing on of funds to the registrant. Assuming an efficient system for transfers and appropriate market knowledge, market forces will also apply to this service fee as registrants could transfer their name to another registrar prior to letting the domain name licence lapse.

The whole market mechanism would also be subject to market forces over time. If insufficient funds are distributed to the registrant, the registrant will have an incentive to offer a name for sale through other markets prior to allowing a domain name licence to lapse. Overtime, the percentages provided to the registry or ICANN could be reduced as the value of domain names increaess (e.g 10% for first $1000, 5% for next $10,000 to $100,000, 1% for amounts above $100,000).

With respect to the 10% of funds made available direct to ICANN. These funds should initially be tied to the management of the competitive domain name registration market, through ensuring that registries and registrars comply with their contracts with ICANN. ICANN could drop the registrar licence fees over time, if the fees available from auctions become significant.

To ensure appropriate market knowledge of the value of domain names and transparency of the market, the registry should be required to publish to registrars the winning price for each name, and provide a monthly report to ICANN on the prices obtained.

5. Examples of business models for registrars obtaining names on behalf of customers
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There are already several business models in place for obtaining domain names for customers when they next become available. This section summarises examples of the existing models and explains how they can continue to operate using the auction mechanism described above.

(a) An upfront fixed price service, with single customer

In this model a customer is charged an upfront fee (e.g $US60) to monitor the availability of a particvularl name, and register the name on behalf of that customer the minute it becomes available.

Under the auction model, the registrar could bid on a name up to the upfront fee minus the margin charged by the registrar. The registrar would register the name on behalf of the customer.

(b) No upfront fee, with single customer

In this model a registrar may contact the customer to seek instructions. In this model the registrar would act as a buyers advocate in the auction. The customer may set a maximum price, and reques the registrar to get the name at the best price up to that maximum price. The registrar would charge a service fee for this service.

(c) No upfront fee, with multiple customers

In this model the registrar may contact several customers, and keep all customers informed of the current state of the auction. All customers would be able to place bids via the registrar. The registrar would regster the name on bhelaf of the winning customer.

(d) Dealer/Trader

In this model, a registrar may act as a dealer (either directly or through an associated company). The registrar would make an assessment of the market value of a name, and bid up to the market value. The registrar may then offer the domain name to its own customer base on either a fixed price or auction basis.

6. Advantages of solution
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- allows all registrars a fair chance of registering a name on behalf of their customers regardless of the amount of connections/bandwdith available to that registrar or affiliated registrars
- supports multiple registrar business models
- ensures that registrars can match their business model to the needs of their customers
- it is scalable, and ensures that the stability of the registry provisioning system is maintained
- provides an incentive for registrants that no longer have a use for a domain name licence to allow a domain name licence to lapse to provide other registrants with an opportunity to obtain a right to use that name
- protects the value a registrant has built in a particular domain name (e.g through creating marketing material around a particular name or creating content around a particular name)
- provides returns to both the previous and new registrar - ensuring sustainable registrar market
- does not prevent licence holders from selling the licences through different markets prior to letting a domain name licence lapse
- ensures a fair market that is understood by registrants