MEMORANDUM FOR THE ICANN BOARD

SUBJECT: Response to the ICANN Budget published on May 17, 2005

FROM: gTLD Registries Constituency

DATE: June 22, 2005

Overview

The gTLD Registry constituency represents all gTLD Registry Operators and Sponsors
currently under contract with ICANN. The ICANN operating plan and proposed budget
was discussed by the constituency during its regular conference calls and on
the constituency mailing list. The following statement was approved unanimously
by constituency members on June 22, 2005.

The gTLD Registries and Registrars are estimated to be contributing $22 million,
or over 92% of ICANN's budgeted revenue in 2005. Following the recent contract
changes as seen in .net and new sTLD contracts, the gTLD Registries alone are
rapidly moving to providing the majority of funding coming in to ICANN.

There is a strong consensus in the Constituency that ICANN needs to be well
funded to provide consistent, predictable and good quality service to the Internet
community and the gTLD registries are ready to play their part in cooperation
with the registrars and domain name registrants who ultimately pay the bill.

However, we wish to see that the funding burden is shared fairly within the
community and that the funds obtained by ICANN are used economically, strictly
in a manner that is consistent with ICANN's narrow mission of technical coordination,
and for the benefit of the Internet community. In particular, we do not wish
to fund unmandated expansion of ICANN's mission.

1. Budget Advisory Group process needs radical improvement

We appreciate the opportunity to participate in ICANN budgeting process via
our elected representatives in the ICANN's Budget Advisory Group (BAG). However,
in the run up to budget publication on May 17, 2005, we have observed lack of
concern about providing the opportunity to respond to the budget in a timely
manner. While the BAG met twice during the budget preparation period, no data
or other documents were provided by ICANN staff to BAG representatives to discuss
with their constituencies until very late in the process and solicit constructive
feedback.

For BAG to provide value to the ICANN community, ICANN must provide minimum
necessary information about the budget to BAG members in a timely manner and
in a format which facilitates sharing with and soliciting constrictive feedback
from their constituencies.

2. Budget must be measured against key strategic objectives

The format of the budget makes it difficult to understand the methodology behind
what is being budgeted in particular strategic areas. Base expenditures, which
represent 76% of the total budget, are not allocated to strategic objectives.
We appreciate the detail provided in the section "Other expenditures",
questions remain over the nature of some items. For example, a portion of funds
under Security and Stability might be earmarked for DNSSEC, a seemingly under-funded
activity, but this is not clear.

The inability to be able to determine what dollars are earmarked to what areas,
and how staffing is attributed to what activity makes it difficult to assess
whether the funds are used appropriately and whether the funding is adequate
to fulfill the mission.

We recommend that this and certainly future ICANN budgets clearly indicate
the amount budgeted in relation to each of ICANN's strategic priorities. Further
detail for individual key projects such as DNSSEC implementation or IDNs should
also be provided.

3. Budget must show funds allocated to key strategic initiatives which promote
security and stability

As stated in our comments to the strategic plan on February 28, 2005, we believe
that security is of paramount concern and we strongly encourage ICANN to focus
on maintaining the stability of the identifier systems for which it is responsible,
and on implementing technologies that strengthen the stability of these systems
as and when they become available. The proposed budget does not clearly indicate
what amount of funds will be used directly for such activities.

Indeed, individual expenditures that can be associated with key projects such
as $300K for DNSSEC and $270K for IDNs represent together only 2.5% of the total
budget. This is very low given their importance for the security and stability
of the domain name system. Is the amount ICANN has devoted to IDNs in their
next FY budget a statement on the priority of IDNs for ICANN?

We are concerned that the ICANN budget and operating plan underestimate
the importance of key strategic initiatives. We wish to see more than 25% of
the ICANN budget allocated to security and stability issues. With regard to
IDNs, ICANN needs to carefully consider ramifications of not providing adequate
funding to take a leadership role in addressing IDN issues.

4. ICANN's funds must be used within the confines of its mission

Despite the fact that gTLDs fund over 94% of ICANN's budget, we see a significant
amount of money being spent by ICANN in forums that aren't gTLD related, and
we are concerned that the gTLD community is not being as well served as it should.
The contribution made by gTLDs appears to be disproportionate to budgeted expenses
in areas that are gTLD related and where additional resources are needed to
assist in timely responses to issues from ICANN staff. We are seriously concerned
about the risk of funds from gTLD registries being used to fund the expansion
of ICANN's mission.

For instance, the amount budgeted for translation of ICANN's own web site and
brochures, is more that the amount shown in the budget for addressing the entire
issue of Internationalised Domain Names (IDNs) and equals the amount shown for
DNSSEC.

As stated in our comments to the strategic plan we continue to have questions
concerning the intended use of the funds for Developing Country Internet Community
Project and the intentions by ICANN to fund Internet governance events. To the
extent that these efforts stay within ICANN's mission, they may be acceptable
uses of funds, but we do not believe that they should be put at a higher level
than security and stability.

While we understand that ICANN is under pressure from various quarters to
involve developing nations in its work, we do not believe that it is ICANN's
role to redistribute funds obtained from gTLDs according to the principle "From
each according to their ability, to each according to their need". We strongly
recommend ICANN review the allocation of funds to ensure that only activities
within ICANN's technical coordination mission are funded from gTLD revenues.

5. Burden of funding ICANN activities must be allocated fairly

We are worried about the continuing trend that ICANN passes the overwhelming
majority of all costs down to registrants of domain names in gTLDs and thereby
forces reductions in the margins of registries and registrars to the point of
non-aviability, and we see no justification for this. The gTLD Registries and
Registrars are estimated to be contributing $22 million, or over 92% of ICANN's
revenue. The IP Address Registries contribution to all revenues is 3.4%, and
the ccTLDs is 4.3%.

All users of the Internet including those using ccTLDs benefit from a stable
and secure Internet environment and should contribute proportionally to the
systems and organizations that make this possible. In addition, the operational
plan specifically mentions the need to develop "alternate revenue sources."
This is not accomplished in this budget as the ICANN approach is to continue
charges directly related to gTLD registrant activity although now shifting it
to the registry. Registry and registrar business models cannot easily absorb
these charges and therefore the "revenue source" continues to be the
gTLD registrant. That does not seem to fulfill the goals for revenue.

While ICANN indicates in the text of the budget that new sources of revenue
need to be found, we observe that the same statement was made last year and
that no change occurred since nor do we see any material change on the horizon.

This situation is untenable. We call upon ICANN to develop and publish a
clear funding strategy for the future and clearly communicate to the Internet
community what is being paid from what funds. We stand ready to assist in this
endeavor.

6. ICANN performance must be measured in transparent manner

The amount of funds budgeted from gTLD registries and registrars has increased
by 45% compared to last year's budget. A similar step increase was observed
in the last year's budget cycle. Despite the increase, we did not observe any
change in ICANN's responsiveness or improved service to gTLD Registries.

The budgeting process must include a feedback mechanism allowing to measure
the performance under the budget not only in financial terms but also in terms
of completion of strategic objectives. Further, we recommend ICANN to develop
and implement clear performance criteria for services provided to registries
and registrars.

7. Failover mechanism for registrars needed

The operational plan includes a reference to facilitating the implementation
of failover mechanisms to protect Registrants in the event of Registry failure.
We wish to note that there is no mention of the risk of Registrar failure, a
risk that we believe is much higher than registry failure. Unlike registrars,
gTLD registries have escrow provisions in place. Moreover, in case of a thin
registry such as .com, registrar failure can have significant impact on registrants.

We recommend ICANN includes the issue of Registrar failover in the operational
plan.

8. Lack of comments on the public forum

We are concerned that at the time of writing of this statement, almost no substantial
comments were submitted in the comment forum set up by ICANN for this purpose.
This might be a direct result as to the complexity and length of the budget,
discouraging thorough review and restricting the ability to succinctly summarize
comments. It is sending a message of ambivalence from the community regarding
the ICANN budget, which is of serious concern to us.

We believe it is important that a process is in place to permit the Registries
and the community as a whole to provide comments and we strongly encourage all
stakeholders to share their views.

We encourage ICANN to continue to publish comments from constituencies,
supporting organizations and other relevant bodies to this critical document.
Further, for future budgeting cycles, we encourage ICANN to develop a simpler,
transparent form of response which can be completed in a short period of time.
This is necessary to ensure that funds are being used in a manner that is consistent
with benefits received by the ICANN community.

The gTLD Registries Constituency commends ICANN for preparing the budget and
trusts that our comments are received in a constructive manner. The Constituency
commits to cooperate with ICANN in the budgeting and overall planning process
as we see this process key to provide longer term predictability and stability
for Internet businesses and users.

Sincerely,

Marie Zitkova

for the gTLD Registries Constituency