This post is the final installment of last week’s gTLD finance series. Today, we’re going to talk about tips to answer ICANN’s Financial Capability questions.
In keeping with its “one-size-fits-all” approach, ICANN designed the scoring system of the gTLD application to ensure that only established entities that with the technical and monetary wherewithal to operate a gTLD registry will be awarded extensions.
Since this is a series about finances, we’re going to delve right into Questions 45 through 50 of the new gTLD application, which ICANN has dubbed the Financial Capability Questions. The scoring for these questions is straightforward, but fairly wordy. Here’s how it breaks down: applicants must score a total of 8 points to pass this section. Questions 45 and 46 are basically pass/fail; applicants can score either 1 or 0. For questions 47 through 49, applicants can score 0, 1 or 2 points, and for question 50, applicants can score 0, 1 or 3 points.
As we noted in yesterday’s post about the Continued Operation Instrument (COI), ICANN gives applicants an incentivize to secure their COIs before they submit their applications by awarding them 3 points on Question 50. Once they get these points, applicants only to achieve a passing score of 1 on each of the other financial capability questions, 45 through 49.
If applicants decide to hold off on securing their COI, and make procuring their COI a condition of executing their contracts with ICANN, they will score 1 point on Question 50. That means they will then need to score 1 point on questions 45 and 46, and then score 5 more points across questions 47 through 49 (2 points on two of the questions, and one point on the third). To be on the safe side, applicants should shoot to score 2 points on each of the three questions, to ensure that they pass this section.
So how can applicants score 2 points on Questions 47 through 49? Well, applicants that just “meet requirements” will score 1 point on these questions, so to score 2 points, applicants must “exceed expectations.” To do this takes a little bit of strategic thinking. The difference between meeting and exceeding expectations can be subtle, so we have outlined the key differences for each question here:
Question 47: Costs and Capital Expenditures
This question asks applicants to project the costs of setting up and running a registry, including any functions that they will outsource.
To score 1 point, the description of all these cost elements must be reasonable and complete. The cost projections must also be in line with the historical financial statements applicants provide in their answers to Question 45.
To score 2 points, the estimated costs must be conservative and consistent with the proposed application, and, most importantly, they must be derived from actual examples of previous or existing registry operations.
Question 48: Funding and Revenue
This question asks applicants to describe where the funding for their registry operation will come from, and to provide projected revenue models for their gTLD registry. For applicants planning to run a closed, single registrant gTLD, there isn’t likely to be a revenue stream, since they will not be selling domain names.
To score 1 point, the funds needed to launch the new gTLD registry must be quantified, committed and identified as available to the applicant. If ongoing operations are to be at least partially resourced from existing funds, that funding is quantified and its sources identified in an amount adequate for three years operation.
To score 2 points, the funds needed to launch the new gTLD registry must be quantified, on hand and segregated in an account available for the purposes of the application only. If ongoing operations are to be at least partially resourced from existing funds, that funding is segregated and earmarked for this purpose only in an amount adequate for three years operations. Additionally, cash flow models are prepared which link funding and revenue assumptions to projected business activity.
Question 49: Contingency Planning
This question’s name says it all – it asks applicants to describe any potential risks and their contingency plans for dealing with them.
To score 1 point, the model that the applicant provides must identify key risks, give consideration to probability and resource impact of contingencies identified, and, if resources are not available to fund contingencies, must identify funding sources and a plan for obtaining them.
To score 2 points, action plans and operations should be adequately resourced in the existing funding and revenue plan even if contingencies should occur.
Hopefully these past few posts have helped to clarify how best to approach the Financial Capability section of the application. As operating a registry will require significant financial commitments, it would be wise to get a head start internally on these matters – we hear accountants don’t take kindly to surprises.
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