Comments of Intellectual Property Constituency of GNSO

["Metalitz, Steven" <met@xxxxxxx>]

The Intellectual Property Constituency of the GNSO appreciates this opportunity 
to comment on the paper "Economic Case for Auctions in new gTLDs," dated 8 
August 2008.  
        The paper (page 1) describes auctions as "the final means of settling 
any contention cases that have not been resolved at any of the previous stages 
in the process" of launching new gTLDs.  As some commenters have already 
pointed out (see 
http://forum.icann.org/lists/auction-consultation/msg00008.html), this 
categorical statement is not consistent with the new TLD procedure as it has 
been presented to the ICANN community.  In fact, when one or more applicants 
claim support from an identifiable community, such an applicant may choose to 
have a comparative evaluation procedure, rather than an auction, used to 
resolve instances of string contention.  See  
http://www.gnso.icann.org/correspondence/new-gtlds-policy-discussion-11apr08.pdf
 at slides 25 et seq.  ICANN should clarify that the paper does not accurately 
reflect its decisions on this point, and at a minimum should reaffirm that the 
use of auctions in the new TLD process will not be expanded beyond what is 
currently proposed.  

        IPC urges ICANN to reject the approach suggested by the paper of 
resolving all string contention through auctions.  In previous comments on the 
gTLD process, IPC has stated its strong concerns about auctions as a means of 
allocating new TLDs.  See, e.g., 
http://www.ipconstituency.org/PDFs/IPC%20Impact%20Statement%20re%20new%20gTLDs.pdf
 (page 6) (June 2007); 
http://www.ipconstituency.org/PDFs/2006-Jan31_IPC%20Response%20to%20New%20gTLD%20Terms%20of%20Reference.pdf
 (pages 4-5 (January 2006).  The paper under discussion does not explicitly 
address the concerns raised by IPC in these earlier submissions.  This should 
be done before proceeding any further toward consideration of an auction method 
for allocating new TLDs. 
 
        The paper asserts that auction procedures are "less likely to be 
legally contested relative to a comparative selection procedure" (page 2), and 
that awards made through comparative evaluation, rather than through auctions 
"are unlikely to withstand judicial review" (page 6).  Neither assertion is 
documented, and neither necessarily applies to the new TLD process.  As IPC 
understands it, every applicant for a new TLD will be asked, at the time of 
application, to accept the pre-established selection procedure, including 
whatever limited avenues of appeal are offered, and to waive its rights to 
challenge the selection in court.  If so, and if such conditions are fully 
enforceable, the weight of this consideration would be substantially 
diminished.  

At one point (page 4) the paper observes that "an auction for gTLDs is more 
likely to be comparable to an auction for houses than to an auction for 
spectrum."  Unfortunately, the paper does not follow through on some of the 
implications of this insight.  In particular, the paper indulges in the 
assumption that "bigger is better" with regard to TLDs, and that an application 
that will "serve many users" is always to be preferred over one that "will 
serve few users" (see page 1).  If this assumption were true, all new TLDs 
would be competitors to .com, and niche markets would be overlooked.  However, 
a TLD that is better situated to serve a particular community or industry 
sector, or subset thereof, is often to be preferred over one that seeks to 
serve a mass market.  As with houses, prices are often not dependent on size, 
but rather on "location, location, and location."  
Similarly, the paper states (page 3) that "an auction process would tend to 
favor a high-quality, low-cost applicant over a low-quality, high cost 
applicant."  Regardless of the validity of this statement with respect to 
spectrum auctions, it raises two unanswered questions as applied to the new TLD 
process: (1) why is "a low-cost applicant" necessarily to be preferred over a 
"high-cost applicant" that seeks to fulfill a community need, and (2) what is 
it that differentiates two applications based on "quality"?  The first question 
seems to proceed from the same unexamined premise - "bigger is better" - 
discussed above.  A community need that can best be fulfilled at a relatively 
high cost is certainly preferable to a lower-cost solution that does not 
fulfill the need and perhaps even makes conditions worse.  The second question 
seems to return inescapably to the need for some form of comparative evaluation 
of "quality."  
Other statements in the paper make it clear that the analogy to spectrum 
auctions is inapposite.   Under the plan now under consideration,  "TLD rights" 
(an ambiguous phrase) would not be "transfer[red] ... to third [sic] parties 
for little or no compensation," nor would ICANN be "allocating these resources 
for free," (page 4); nor is ICANN proposing to distribute "a valuable but free 
government license" (page 6).  To the contrary, ICANN currently depends, and 
for the foreseeable future will continue to depend, on periodic fees paid to it 
by gTLD registries for nearly half of its revenue.  All new gTLD registries 
will be required to contribute.  
        The unspoken issue hovering over the auctions paper is what ICANN will 
do with the proceeds of any auctions it holds to allocate new TLDs. ICANN has 
committed to "undertake a community-based consultation to determine uses of the 
funds consistent with ICANN's mission and for the benefit of the DNS and DNS 
community," see 
https://par.icann.org/files/paris/GNSO-gTLD-Update-Paris22jun08.pdf (slide 14), 
but this consultation has not even been initiated.   An asterisk on page 3 
tells us that ICANN has foresworn one of the "key benefits of a well-designed 
auction mechanism," which is revenue maximization.  Whether or not revenue 
maximization is an ICANN "goal," it will be an ICANN reality to the extent that 
auctions are employed to allocate new TLDs.  The paper asserts on page 6 that 
these revenues "can be channeled to the good of the internet community." Yes, 
they can be; but they can also be wasted or spent counter-productively.  It is 
impossible to evaluate the viability of an auction mechanism without greater 
clarity about what use will be made of these funds. To assert (page 6) that 
comparative evaluations can be "invitations to corruption," without 
acknowledging that the same can be true of the consumption of auction proceeds, 
is simply naïve.  

Other unaddressed issues regarding auctions include: 
*       how to ensure complete separation between the organization conducting 
the auctions and all bidders;
*       what auction model will be employed (e.g., English auction, first price 
sealed bid, Vickrey auction, etc.); 
*       terms of payment, including how to handle defaults, and whether 
successful bidders will be allowed to launch new TLDs before full payment has 
been made.  
        While IPC agrees with the paper that the comparative evaluation 
approach to TLD allocation also presents challenges, we believe these can be 
met through careful advance planning.  In particular, it is important to 
establish, well in advance of the launch of the new TLD process, "meaningful 
transparent and objective criteria" for comparative evaluations (page 6).  
Furthermore, within the existing proposed model for new TLD allocation, greater 
specificity is needed regarding the definition of a community-based applicant 
who can choose to trigger a comparative evaluation.  (ICANN's track record on 
this issue is not encouraging, given the increasingly nebulous definitions of 
"community" that were accepted during the most recent sponsored TLD round.)  
Comparative evaluations must also be designed to minimize the risk of a "tie," 
which in at least one variant of the proposed new TLD process would also lead 
to use of au auction as a tie-breaker. See 
http://www.gnso.icann.org/correspondence/gtld-process-simplified-10apr08.pdf.   
IPC urges that these aspects of the new TLD allocation process be given the 
attention they deserve, and that further consideration of any proposals to 
expand the use of auctions as a tie-breaker should be deferred until these more 
basic questions are resolved.    

Submitted on behalf of IPC by Steve Metalitz, IPC president