Comments of Leap of Faith Financial Services Inc. (October 18, 2011)

[George Kirikos <icann@xxxxxxxx>]

Submission by: George Kirikos
Company: Leap of Faith Financial Services Inc.
Website: http://www.leap.com/
Date: October 18, 2011
Topic: RySG Alternative Proposal for Continuity Operations Instrument

SUMMARY

We strongly oppose the proposal by the RySG and question whether ICANN
is giving equal access to alternative viewpoints in its new TLDs
process.

INTRODUCTION

Leap of Faith Financial Services Inc. is a privately held company
based in Toronto, Canada. We own and operate a network of some of the
leading websites in the world, including Math.com and School.com.
We've commented extensively during the new TLDs debate, and oppose
their introduction.

NEW TLDS PROCESS

1. In June of this year, the ICANN Board approved the new TLD program,
despite the lack of proper economic studies, and over the vocal
objections of the public. It placed the interests of a small number of
industry insiders above those of the general public. In its
resolution:

http://www.icann.org/en/minutes/resolutions-20jun11-en.htm

it cut-off debate from the public. However, now we see some of those
industry insiders (members of the RySG) seeking to tilt the Guidebook
in their favour one more time, even before new TLDs launch. This was
not some proposal that came through the GNSO Council, but a privately
developed proposal by one of its stakeholder groups. There is not even
a public archive of the RySG mailing list, for example (nor an archive
of many other individual constituencies, despite ICANN supposedly
operating "transparently").

2. The RySG is not the only entity to have made "altervative
proposals" during the new TLD process. Many others made careful and
thoughtful submissions, yet ICANN has chosen at this late date to
single out this proposal of the RySG, and place it on its homepage,
opening up that sole proposal to the ICANN community for public
comment? We question why ICANN is giving it preference over all other
alternative proposals. ICANN should either:

(a) remove the proposal completely (and compel it to go through the
GNSO Council), or
(b) provide equal access to all others with alternate proposals

ALTERNATIVE ALLOCATION METHODS FOR NEW TLDS

1. ICANN has proposed a self-serving means of introducing new TLDs,
without lack of proper economic studies. It completely ignored the
input of Tim Berners-Lee, who opposed the introduction of new TLDs:

http://forum.icann.org/lists/2gtld-guide/msg00020.html
http://www.w3.org/DesignIssues/TLD

2. ICANN ignored the comments of the NTIA/DOC/DOJ

http://www.ntia.doc.gov/files/ntia/publications/icann_081218.pdf

who clearly stated that "(bottom of page 6) once it has decided to
authorize a new gTLD, ICANN should implement a process by which
prospective gTLD operators compete for the privilege of operating a
particular gTLD by offering terms that benefit consumers. Effectively
implementing such a process would require that ICANN evaluate bids
from the perspective of the benefits they provide consumers, not
merely the amount bidders are willing to pay to ICANN for the right to
operate the gTLD." They went on to discuss price caps, and competitive
bidding for renewals of the gTLD registry agreement.

Instead, ICANN is auctioning new gTLDs to the highest bidders, not
implementing price caps to protect consumers, and is granting
presumptive perpetual renewal to registry operators.

Despite these precise and reasonable recommendations which directly
relate to the allocation method for new gTLDs, ICANN at no time put
forth this proposal to the public on its homepage, or opened up a
public comment period so that the public could express its support for
the NTIA/DOC/DOJ recommendations. Yes, somehow ICANN *did* post for
public comment the proposals of the RySG? Why is ICANN showing that
favouritism?

3. ICANN's own "economic experts", in response to criticisms that they
did not study efficient allocation methods of new TLDs, stated:

http://www.icann.org/en/topics/new-gtlds/analysis-response-phase-ii-report-21feb11-en.pdf

"The Phase II Report did not analyze all possible policy alternatives.
The report is one component of a larger decision-making process and is
intended to provide information on economic magnitudes of relevance to
a wide range of policy analyses." (page 4)

How can one possibly take ICANN seriously when it did not even
instruct its own economists to analyze all possible policy
alternatives, i.e. ones that are far superior to those that the
self-serving ICANN has proposed?

4. ICANN's own experts stated "Contrary to Krueger’s assertion, the
Phase II Report did not offer a conclusion as to whether the benefits
of new gTLDs outweighed the costs." (page 5, same URL as above) This
damning result was ignored by ICANN, despite it being repeated yet
again on page 8 "The Phase II Report did not reach conclusions on the
desirability or undesirability of moving forward with new gTLDs, nor
was it intended to do so."

5. In light of the above, it's clear that more work needs to be done,
including analysis of policy alternatives. In terms of new TLD
allocation, there are multiple proposals that have been put forth that
deserve equal access (and public comment periods), instead of ICANN
giving preference to those proposals put forth by its insiders. Just a
few of the proposals are:

(i) no new TLDs (status quo)

(ii) .com domains all ascend to the root: in this policy alternative,
.com essentially becomes the root, so the owner of example.com would
be entitled to .example, the owner of music.com would obtain .music,
and so on. This has been suggested by many people at different times.
This flattens the namespace for all but approximately 200 existing
registrants.

(iii) Ascended TLDs approach. We put forth this serious proposal in 2009, see:

http://forum.icann.org/lists/irt-draft-report/msg00016.html

which would allow ascension to the top-level if a new TLD applicant
obtained "easements" from the owners of the .com, .net and .org
domains. For example, Verizon could easily obtain (or block) .verizon,
because it owns verizon.com, verizon.net and verizon.org. This would
be a proposal far superior to ICANN's plan, with fewer objections from
the public, because it takes externalities into account.

(iv) Regular competitive bidding/tenders for lowest cost to
registrants: This was the approach advocated by NTIA/DOC/DOJ, namely
that if the public decided that .shop was desirable, there would be a
tender process. If Registry A bid $5/yr per domain, Registry B bid
$3/yr, and Registry C bid $4.50/yr, then Registry B would win the
fixed term contract, because its bid was the lowest (and thus most
favourable to consumers).

(v) ICANN's own self-serving proposal, a free-for-all where consumers
get gouged by profit-maximizing registry operators, who "own" the TLD
for themselves and can set prices as high as they want, and can pay
ICANN for that mini-monopoly. It is an allocation mechanism that is
based on monetizing defensive registrations through FUD, as much of
the latest "marketing" from new TLD parasite companies has
demonstrated. ICANN would use the proceeds from auctioning desirable
TLDs for itself, or "good causes" that its insiders favour. Most
people do not consider "forced charitable donations" to be very
different from "taxation."

6. ICANN should be compelled to give equal time to all these
proposals, and not just proposals that are put forth by insiders like
the RySG or by its own staff/Board, many of whom end up at new TLD
companies as we've seen via the revolving door.

CONTINUITY OF OPERATIONS

1. It is of critical importance that a registry be able to continue to
serve its registrants. That is why there are safeguards in any
reasonable registry agreement, in order to ensure that consumers are
protected.

2. The alternate proposal by the RySG of a $50,000 flat fee represents
a clear one-sided attempt to "game" new TLDs, again, before they even
launch. One need only look at the table on page 2 of:

http://www.icann.org/en/topics/new-gtlds/rysg-proposal-cof-addendum-01sep11-en.pdf

to see that registry operators would save up to 99% or more of what
they are supposed to set aside under the current guidebook. While this
may save money for registry operators, it would put registrants at
risk. This is pure cost-shifting.

3. There is an important concept in economics called "signalling"

http://en.wikipedia.org/wiki/Signalling_(economics)
http://en.wikipedia.org/wiki/Information_economics#Signaling

There is asymmetric information, and various choices can be used to
"signal" between "good" and "bad" properties. Asymmetric information
is critical in insurance. For example, if everyone had to pay
$3,000/yr for car insurance, bad drivers would love it. Those who
drive a lot or own expensive cars would also love it. Those "higher
risks" aren't reflected in the policy. In the real world, good drivers
might pay $800/yr, and bad drivers might instead pay $10,000/yr. Some
drivers might be uninsurable. That's left up to the market.

4. By implementing a flat rate group insurance plan, ICANN would be
eliminating the "signals" provided by the marketplace that would
eliminate or punish bad actors, and instead would be saying that
everyone is equally risky. This is obviously not the case, and would
benefit the "bad drivers" and "riskiest drivers" the most.

5. People have bemoaned the lack of economic studies, and ICANN has
not heard those cries. Instead, it listens to the whispers behind
closed doors of its insiders. This proposal, like a "tell" in poker,
actually *is* an economic study of its own. Going back to the driver
example, who on earth would be proposing flat rate insurance plans? It
would be the *worst* drivers, the riskiest prospective registry
operators. They would be the ones who would benefit the most. The fact
that they have the gall to make this proposal before the new TLDs have
even launched, at this late date, tells us everything. It tells us not
to trust the past observations of the RySG, the past stories of "great
demand" for new TLDs. These new proposals seek to subsidize the
registry operators, instead of allowing the market itself (via third
party insurance) to determine who is risky and who is not risky. It
tells us that instead of long-run business models, ICANN wants to
promote high risk speculation at low cost. ICANN intends to "privatize
the gains", but "socialize the losses".

6. This proposal totally ignores the concept of "correlation." By
pooling the insurance, the RySG is attempting to assert that registry
failures are independent of one another, and thus one doesn't need as
large a contingency fund. Nice try, but that's not how things work in
the real world. Bad things tend to happen at the same time, as those
with any knowledge of the financial markets or who has observed the
economy in the past few years can easily recognize. There are
linkages, or correlations, between events. These bad events can even
become perfectly correlated at the worst of times --- and that's when
you need the insurance coverage the most.

For example, suppose you had an instrument that paid $1 million if
your house was hit by a hurricane, and that insurance costs
$10,000/yr. Your house is on 123 Main Street, Miami, Florida. If you
tried to buy house insurance for 125 Main Street, Miami, Florida (i.e.
right next door), it would still cost $10,000/yr (identical houses).
If you tried to "pool" the risk together, to pay *less* than
$20,000/yr for *both* houses, the insurance company would laugh at
you, because the event risk is nearly *perfectly* correlated (i.e. a
hurricane hits Miami, it's likely both houses will be damaged at the
same time, and the risks are purely additive).

If you wanted to get insurance on a 2nd house in Nice, France at the
same time, instead of the house next door in Miami, there might be
some limited support to the arguments to be made for what the RySG is
proposing (global climate change might correlate those risks).
However, it would *not* support such a drastic reduction in
fees/coverage. If one TLD fails, it is highly likely that many other
TLDs will also fail, as their market circumstances are *highly*
correlated. Many of the applicants will be in the same corporate
group, for example. Or they face the same exposure to the internet
economy (all target similar entitities who are buying domain names).
In other words, if business is bad for one soup company, it's probably
very likely that business is bad for all the other soup companies too.
While there is firm-specific risk, there is also industry-wide risk
that is highly correlated.

In other words, high correlation, an economic and financial reality,
completely destroys the arguments of the RySG. ICANN should not be put
in the position of even further engaging in "mission creep" to become
a private insurer, rather than let the rational marketplace determine
the true risks. Indeed, ICANN's own operations are correlated to the
entities it is purporting to insure! When "disaster" strikes at
registry operators, ICANN would not have the financial cushion itself,
because its highly likely "disaster" would also befall ICANN at the
same time.

If I'm buying life insurance, I would not buy it from my parents or my
children. I would obtain it from an entity which is totally
uncorrelated with my life events (i.e. "an insurance company"). ICANN
knows nothing about insurance. Yet it now wants to insure its
"children"? Preposterous. It'd end up that its "other children" (i.e.
dot-com registrants) end up paying for all of its mistakes.

7. Given the RySG proposal is preposterous, it begs the question of
who would benefit from the proposal. Certainly "fly by night"
operators, who auction off the highest paying keywords in a TLD,
immediately pay off its own shareholders with the proceeds (rather
than saving for a "rainy day"), and then abandon the TLD would benefit
from a fixed-rate continuing operations fee. If we go back to the
"signalling" discussion, it's like all the bad drivers being attracted
to the cheapest insurance plan, one that misprices the risk. These are
the "get rich quick" schemes that ICANN pretends that it is not
targeting via the new TLD program.

In the real world, insurance companies are smart, and will assess the
risk. They don't take input from the "bad drivers", asking them how
their premiums should be set. The premiums are set by a scientific
actuarial process. ICANN instead is allowing itself to be lobbied, to
set the premiums to token minimums, replacing the judgment of the
marketplace itself.

When all the fly-by-night operators who have engaged in "pump and
dump" schemes have abandoned their TLDs, it will be left to dot-com
registrants to foot the bill.

ICANN reveals its true intentions by supporting the "pump and dump"
model, by having the gall to highlight this proposal on its home page,
and not highlight the serious alternate proposals advocated by others,
including my company. ICANN demonstrates that the public and
regulators like the GAC/NTIA/DOC/DOJ have been bamboozled, that
registry operators aren't willing to put their own many where their
mouths have been for the past few years. Instead, these registry
operators want to shift even more risk to the public, thereby
threatening the stability and security of the DNS. This
"cost-shifting" shall not stand.

CONCLUSIONS

1. ICANN should reject this preposterous proposal, which would
position itself as an "insurer" for bad actors.

2. Since ICANN has no ability to even assess the risks (having not
done the proper economic studies in the first place), not only should
it not operate as an insurer, it needs to halt the new TLD process and
complete the required studies, instead of jumping to a predetermined
outcome that favours itself and its insiders at the expense of the
public.

3. Since ICANN has created this precedent of opening up comment
periods developed by independent parties, and highlighting them on the
ICANN homepage and through their announcements mailing list, we demand
equal time. For starters, we resubmit our Ascended TLDs allocation
method:

http://forum.icann.org/lists/irt-draft-report/msg00016.html

for a formal ICANN comment period and invite others to do the same.

Sincerely,

George Kirikos
President
Leap of Faith Financial Services Inc.
http:///www.leap.com/