Public comment on the 2013.12.12 auction rules

[Oleg Serebrennikov <oleg.serebrennikov@xxxxxxxxx>]

Hello ICANN,

Please find below our comments on the current auction rules and policy.

Unfair advantage given to uncapped bidders

We notice that the below two auction rules


   1.

   Allow unlimited bids after a sufficiently high deposit has been made;



   1.

   Set the winning price at the second highest bid;


being put together create a competitive advantage for a bidder in an
auction, where said bidder is the only bidder with the unlimited bidding
capability (provided by uncapped deposit).

The strategy for such a single unlimited bidder would be to make the
deposit of USD 2 million, which enables unlimited bidding, and make a bid
of USD 20 million (exceeds highest limited bid at least for USD 10), then
automatically win and pay only the second highest bid, which will be on
average less than USD 5 million, as is known from current statistics. This
strategy is really available only to portfolio applicants who by their very
nature have overwhelming financial powers.

Effectively, the current auction rules are advantageous for portfolio
applicants rather than for small and innovative applicants, which is at
odds with the “diversity and innovation” ICANN policy. The rules encourage
therefore applicants to compete solely on the strength of their financial
power.



ICANN does not encourage contenders to agree “through voluntary agreement
among the involved applicants”

Amazon EU S.à r.l. is currently scheduled to participate in 34 auctions,
out of its 75 active applications, while Charleston Road Registry, Inc. is
currently scheduled to participate in 57 auctions, out of its 97 active
applications. The numbers of the scheduled actions are still equal to the
numbers of the contention sets for these applicants and no indications have
been publicly given so far that would suggest that either portfolio
applicant is negotiating a “voluntary agreement”.

The Applicant’s Guidebook indicates that auctions should only be used as a
last resort in contention, and advises that contention should be settled
“through voluntary agreement among the involved applicants”.

However, the current policies and rules do not incentivize applicants to
seek a “voluntary agreement among the involved applicants”. As a result of
this policy, certain portfolio applicants seem to have neglected the advice
to settle contention “through voluntary agreement among the involved
applicants” and rely on auctions significantly, if not exclusively.



Possible change of auction rules & policy addressing the disclosed issues

The auction rules & policy should be established in a way that would
discourage an applicant from, or penalize an applicant for resolving
contention through auctions routinely.

Such policy could, for example:


   -

   Require the auction winners to pay their own highest bids rather than
   the second highest bid, at least if such winner have used the unlimited
   bidding capability;
   -

   Limit the total number of auctions an applicant (taking affiliation into
   account) can be party to;
   -

   Limit the total number of auctions an applicant (taking affiliation into
   account) can be party to at no extra cost. Above this limit, the applicant
   will be penalized increasingly for each successive auction. Since most, if
   not all, applicants currently in a large number of contention sets are
   corporations with significant financial power, the penalties should be such
   that they are more than a token penalty for them;
   -

   Require portfolio applicants to prove via experts or arbiters approved
   by ICANN, at their own expense and for each contention set they are party
   to, that their intended use of the TLD string is aligned with the “public
   interest goal” and introduces more “diversity” and “innovation” than the
   intended use by their contenders;
   -

   Require portfolio applicants to prove via experts or arbiters approved
   by ICANN, at their own expense and for each contention set they are party
   to, that their intended use of the TLD string is essentially different from
   the intended use of the other strings they have applied for;
   -

   Inhibit unlimited bidding in auctions where only a single party has made
   a deposit that would normally allow unlimited bidding;
   -

   Require that the deposits for all the auctions an applicant (taking
   affiliation into account) intends to participate in must be made before the
   first auction starts and held until the last auction finishes.
   -

   Abolish  the limit on penalties for defaulting bidders, and introduce a
   legally binding liability when defaulting on excessive bids.
   -

   ...other ideas?



Defaulting bidders penalize other bidders

If a winner defaults, the defaulting winner will be penalized at USD 2
million at most, yet the other contenders will also have been penalized by
having to pay a potentially much higher price compared to the likely
winning price if the defaulting winner had not participated in the auction.
This is especially apparent in an auction with only two contenders, where
one escalates bids severely, wins the auction and then defaults.

We believe that the rules related to defaults must be modified to allow
non-defaulting bidders to go to auction again if they choose so.

Unclear meaning of “defaulting Bid”

Clause 60 of the current auction rules specifies that the penalty for
defaulting will be “10% of the defaulting Bid”. The term “defaulting Bid”
is not defined and is not used anywhere else in the document. It is
unclear, however, whether the “defaulting Bid” is the “Winning Price” as
defined in clauses 46 - 50, or the highest bid placed by the defaulting
bidder.

We request that the term “defaulting Bid” be specified exactly, or that
cause 60 be modified so that it uses only the defined terms.

-- 

Best regards

Oleg Serebrennikov
DOTPAY SA