DSTI/ICCP/TISP(2004)2/FINAL 

Revelation and use of information 

Future demand for domain names can not be predicted with any certainty. However, even with such 

uncertainty, existing and prospective registry operators have superior information about themselves in 

terms of potential cost functions, price structures, potential returns on investment and innovative ability. 

Given this information firms also have the capacity to judge the risks they are willing to assume and be 

able to better estimate the economic value they can create and the profit they can expect.  

The market should, therefore, be in a better position than ICANN to judge the demand for new TLDs. 

In the situation where ICANN needs to make an allocative choice on a gTLD, with prescribed string, such 

as 

.net

, an auction would enable firms to reveal, via their bids, the expected value of this resource. Based 

on revelation and use of information, Economic theory would suggest that the most efficient operator 

would outbid the less efficient operators. 

In a situation where ICANN did not specify strings, thereby allowing bidders to propose strings, or 

bid on strings proposed by others, auctions could also reveal the names most likely to succeed in the 

market. In the case of two or more organisations proposing the same string, such as occurred in the 2004 

sponsored domain name procedure, an auction would reveal the firm that believes it could create the most 

economic value if awarded that resource. If auctions were used only as a tie breaker, in the case of the 

same string being proposed, this could provide an incentive for prospective operators to research, consider 

and offer alternative names. It is worth noting that during the 2004 round more than half the applicants for 

sTLDs did not offer alternative strings. Neither of the two applicants for 

.tel

 offered alternatives. 

Reliance on expertise 

In an auction prospective registry operators determine the price of market entry through their bids. In 

this scenario ICANN would not need to rely on technical or financial experts to select winners. This may, 

of course, not obviate the need for expertise to be available to ICANN, such as in the case of pre 

qualification, but it could potentially reduce the cost of the allocation process and reduce the `moral 

hazard' problem. 

A further benefit of auctions can be foreseen in relation to expertise. The current round of sTLDs 

revealed a range of players with proposals for the creation of new services based on securing a TLD. 

Among the proposed sTLDs, examples include proposals for `spam free e mail', relating telephone 

numbers to domain names, relating second and third level domains to postal standards, as well as creating 

gTLDs dedicated to navigational tools or content aimed at mobile communication devices.  

It is not clear that sufficient expertise exists, outside the group proposing a new service, to choose 

which entity should be awarded a TLD. To put this into perspective how would choice have been exercised, 

prior to their widespread success, in the case of services such as e mail, the World Wide Web, streaming 

media, instant messaging, Web logs (blogs), and so forth, if they had first been proposed in association 

with the introduction of a TLD. ICANN should not be expected to be the arbiter of the merit of new 

services, particularly where it is not a technical imperative to have a new gTLD but may be a marketing 

imperative. 

Avoiding corruption 

A major advantage of an auction is that the mechanism is transparent to all market players, the 

Internet community and the public. Bids are observable and verifiable meaning that the scope for 

corruption is minimised since it would not affect the ranking of bids. 

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