Letter re SRS Implementation

Office of the Domain Name Commissioner
InternetNZ
Level 4, 4 Bond Street
P O Box 11881, WELLINGTON
www.dnc.org.nz

6 November 2002 BY EMAIL

Frank March
Chair
.nz Oversight Committee

Dear Frank

I am writing to you as I have two areas of concern relating to the operation of Domainz and how they fit within the requirements of the Stabilising Registrar Agreement that is currently in force. It is my belief that these matters are in conflict with the Agreement, for the reasons detailed below. If you agree with my assessment of the issues, I would appreciate it if you could take this matter up with the InternetNZ President as a matter of urgency.

1. Xtra Accredited Provider Agreement

As you are aware, I wrote to Domainz on 29 October 2002, seeking answers to a number of questions relating to the 'A Provider' Agreement Xtra had recently entered into. In that letter I sought answers to my concerns regarding the nature of the Agreement signed with Xtra, and also of the process involved in allocating domain names across to be formally identified as 'belonging' to Xtra.

I received a response from Derek Locke, CEO Domainz, by email on 31 October 2002 (though the letter was dated 29 October). In his letter Derek outlined the process that Domainz had put in place with Xtra to ensure only Xtra customers were targeted, and he also responded to many of the questions I had raised. I am satisfied with the answers provided in respect of my Domain Name Commissioner responsibilities and feel that as robust a system as is possible in the circumstances has been put in place by Domainz to ensure the right names are transferred across to Xtra.

However, as part of my DNC role, I also have the role of overseeing the operation of the Stabilising Registrar Agreement from the InternetNZ perspective. In respect of that position I still have some concerns about the nature of the agreement between Xtra and Domainz.

In my letter to Domainz, I referred to the Stabilising Registrar Agreement and stated:

"Domainz responsibilities as detailed in Schedule B include a requirement to apply policies, procedures and practices equitably. I am aware that Xtra were seeking amendments to the standard .nz provider agreement. Were any amendments made to that to accommodate the requirements of Xtra? If so, I would like details of those amendments and the reasons they were made. I would also like to receive a copy of the signed agreement with Domainz."

In response to that statement Derek responded in his letter:

"The contract we have with Xtra is commercial in confidence. Xtra do not want the terms and conditions disclosed, therefore, I couldn't consent to its release.

The contract with Xtra is essentially the standard agreement with changes made to various sections where Xtra found the existing provisions unacceptable."

With this wording, Domainz is acknowledging that they did make changes to the standard Provider Agreement to accommodate Xtra. They have, however, refused to provide details citing commercial confidence. With respect, this is unacceptable.

The Stabilising Registrar Agreement clearly puts an obligation on Domainz to apply all policies, procedures and practices equitably. Without details as to the nature of the changes made to the standard agreement, it is impossible to judge whether any advantage has been afforded to Xtra as a result of the amendments. However, it is difficult to see why Xtra would have sought changes to a standard agreement if they didn't derive any benefit.

I consider it important that Domainz allows InternetNZ to view the agreement they signed with Xtra so that the changes made to accommodate Xtra's demands can be evaluated. If this were to occur, then InternetNZ would be in a position to judge whether Domainz have met the requirements of the Stabilising Registrar agreement in respect of equity of practice.

If an evaluation of the amendments made for Xtra show that Xtra have been given an advantage then appropriate action can be determined at that stage. Please note that the Stabilising Registrar Agreement requires Domainz to ensure that they can terminate all new accreditation agreements entered into after 1 August 2002 with notice of 30 days and without penalty.

In my opinion it is important that the extent of the amendments made to the standard provider agreement are provided to InternetNZ and I would recommend that Domainz be directed to provide the information that I initially requested in my letter of 29 October.

2. Domainz billing in the competitive SRS environment

This matter is rather complex and I acknowledge that Domainz has a right to operate its business as they require, and also that the Directors need to ensure the company remains solvent. However, in my opinion, this issue fits within the requirements specified in the Stabilising Registrar Agreement, namely that Domainz has a responsibility to restructure internal systems, policies and procedures to accommodate an efficient and effective transition to the shared registry model.

Following the successful implementation of the SRS on 14 October 2002, detailed planning for processes around the connection of the first competitive registrars on 7 December 2002 began. One of the processes discussed was how billing for domain names would take place in the month that the new registrars connected. It is an issue because Domainz has a different billing model to that used by the SRS.

Domainz currently produces invoices on the last day of the month. These cover registrations for the last month, in arrears, and also all renewals due the following month with payment due on the 20th of the month. For example, the invoice run dated 31 October would cover all new registrations in October and all domain names to be renewed in November. Payment would be due on 20 November.

The SRS functions differently and invoices are produced monthly in arrears. For example, the invoice run in the beginning of November will bill for all domain names registered and renewed during October. Payment will be due on 20 November.

The different approach between Domainz and the SRS creates a conflict situation in the month when a new registrar connects to the SRS and domain names are transferred from Domainz to the new registrar. This is because there are potentially two invoices outstanding for the same domain name ? the one 'in advance' from Domainz, and the one 'in arrears' from the SRS. Note that this conflict affects only renewal invoices as registrations are already invoiced in arrears. Consider the following two scenarios.

Registrar A is an accredited 'A' provider. They bill their customers directly and so are bulk-billed by Domainz for any of 'their' domain names that are due for renewal in a given month.

They decide to connect to the SRS on 15 December. From that date the SRS acknowledges they are the authorised registrar for 'their' domain names (allocated and transferred as per the DNA policy and as directed by the DNC) and so, at the required renewal date, a charge is entered in the system against that registrar for the appropriate domain names.

However, Domainz have already invoiced Registrar A at the start of the month for all domain names that were due for renewal during the whole month.

This means that for all domain names with a renewal date between 15 and 31 December, Registrar A are effectively getting invoiced by two different companies for the same domain names.

Under this scenario, it will be reasonably easy for a credit to be arranged between Domainz and Registrar A. It will be clear what domain names 'belonged' to Registrar A and not Domainz from 15 December and an appropriate credit off the invoice can be agreed.

Registrar B is a newly authorised registrar who was an accredited provider with Domainz but whose customers are billed by Domainz rather than directly through them.

They decide to connect to the SRS on 15 December. From that date the SRS acknowledges they are the authorised registrar for 'their' domain names (allocated and transferred as per the DNA policy and as directed by the DNC) and so, at the required renewal date, a charge is entered in the system against that registrar for the appropriate domain names.

However, Domainz have already invoiced all those customers who had a domain name due for renewal at any time during the month. This includes domain names due for renewal between 15 and 31 December when Domainz does not have any billing relationship with that customer as the domain name has transferred to Registrar B.

This means that Domainz have billed a customer for a domain name that the SRS has invoiced Registrar B, and not Domainz, for. Unless Registrar B wants their customer to be billed twice for the same name, they aren't able to invoice their client for the renewal service and Domainz receive money for a service they haven't provided.

Under this scenario credits are not easy. Domainz has a schedule of fees, but Registrar B may have a totally different amount that they want to charge their customers for a renewal. They may also want to offer a different term of registration. This is difficult if Domainz has received money from a registrant for a renewal that isn't theirs to process as the renewal date is after 15 December.

This is potentially an ongoing issue for a number of months as it occurs every time a new registrar connects to the SRS and existing domain names are transferred to them upon that connection.

At meetings with Domainz, NZRS and the DNC a number of different approaches to this issue were discussed and the pros and cons debated. The focus was on a simple solution, that could be applied on an on-going basis and that minimised the impact on Domainz especially in the way of processing credits etc.

The solution proposed was:

• Domainz invoices as current up to 6 December 2002. (Note: new registrars can connect from 7 December).
• NZRS agree to a schedule following 7 December of when new registrars can connect to the SRS, specifying that connections can only occur once a week on a given day and time.
• Domainz alters its invoicing run to a weekly process rather than a monthly process and changes the renewal billing to be in arrears. This means that, for example, an invoice run undertaken on 14 December will bill domain names renewed in the period from 7 ? 13 December
• The weekly Domainz invoice process is timed to fit in with the connection schedule such that Domainz bills for all those domain names with a renewal date the previous week, and then the appropriate domain names are transferred to the new registrar.

This solution enabled a simple way of ensuring Domainz only invoiced for those domain names that were still 'theirs' and would mean that the same domain name was not billed for twice by the two InternetNZ companies.

It would also mean that Domainz would not be required to undertake large numbers of credits to registrars and registrants. This solution was greed by all those who met and discussed this matter.

Unfortunately the solution proposed above was not suitable to the Domainz Board. I was forwarded an email from Derek Locke to Nick Griffin in which Derek says:

• Unfortunately we are going to have to revise our plans on this following the Domainz Board meeting this week. My board are adamant that the Domainz billing must not be changed. Billing in arrears will affect the cash flow and my instructions are to avoid this.

Derek then goes on to outline the process that Domainz "are" going to follow. These include:

• For customers invoiced directly by Domainz and where that invoice has already been paid for prior to the transfer taking place, the new registrar can apply for a refund from us. We will refund the $24.

This is not acceptable. Domainz have indicated they will refund $24 but they had no power to accept the money in the first place as the domain name at the time of renewal was not allocated to Domainz. It was however with Domainz at the start of the month when the invoice was produced. The effect is that Domainz have restricted the ability of the proper registrar to earn their own level of revenue from their customer and have been offered only the wholesale registry rate as compensation. In the meantime, Domainz have profited by the difference between their retail rate and the SRS wholesale rate. This is profit for a domain name that was not theirs to 'renew'. I do not believe any new registrar will find this situation acceptable.

The process proposed by the Domainz Board will, in my opinion, cause huge issues between Domainz and the new registrars and could potentially prove embarrassing to InternetNZ with its two subsidiaries perceived to be double-dipping at the expense of registrars. The proposed process also puts Domainz in the position of controlling any credits or refunds and is likely to create a lot of confusion with registrants. This is contrary to the Stabilising Registrar Agreement that requires Domainz to restructure their systems and procedures to accommodate an efficient and effective transition to the SRS.

I do not agree with the position of the Domainz board and consider their reasoning weak as to why the solution put to them, as detailed above, is not acceptable.

I acknowledge there is an impact to Domainz for December 2002. However, this is not a major problem as the money will still be payable to Domainz only it will be due in January and not in December as is the current situation. This is because there will be no change to Domainz's invoice system which requires payment the 20^th of the month following the date of the invoice.

After December is over, the revenue obtained by Domainz reverts back to being regular and calculable as invoices generated in January would be payable in February etc. Therefore the only impact on revenue collection for Domainz is in December. This situation can be covered off by way of an overdraft arrangement with the bank until the revenue is received in January. I acknowledge there may be some ongoing impact depending on the level of revenue against expenditure over the period from January.

The likely financial cost to Domainz of changing from invoicing renewals in arrears from 7 December 2002 can be calculated as follows:

The number of domain names renewing in December 2002 total 6,663 from a report produced by the SRS.

Of these, 1,442 are due for renewal between 1 December and 6 December 2002. These are able to be invoiced as usual on 30 November with payment due 20 December 2002.

This leaves 5,221 names that would not be invoiced until later in December with receipt expected on 20 January 2003.

Using an average price of $39.80 per domain name (calculated from the latest Domainz annual report) a total of $207,795.80 would be received 31 days later than originally planned by Domainz. At an approximate overdraft interest rate of 12%pa the total cost in interest terms would be $2,117.81. There may also be a bank fee on top of this.

This is the worse case scenario as some clients will pay Domainz before 20 January 2003, with some possibly paying on receipt of their invoice in December.

Below is a brief calculation sheet summarising the above information:

I would recommend, that to ensure an effective and efficient implementation of the SRS, the Domainz Board be directed to implement the solution put to them by their Chief Executive, as per discussions with NZRS and the DNC.

Should the Domainz Board be concerned with the cost of implementing this change, then I would propose that the DNC SRS contingency budget cover the cost of this change by way of paying the interest payable for the month concerned, plus any related bank charges. This sum can then be repaid to the DNC at the sale or wind-up of Domainz planned for later in 2003.

I believe the proposed solution is an easier process for the Domainz staff as they will not have to process a lot of credits or refunds, and Domainz will not find themselves in disputes about what is due to who. Most importantly however, I consider this to be in the best interests of the SRS.

The Stabilising Registrar Agreement detailed responsibilities on the various parties to the Agreement. For reasons outlined above, I consider Domainz is acting contrary to that Agreement.

As part of my role, I am overseeing the performance of NZRS and Domainz against this agreement and, as I report through to you, I would like you to consider the concerns I have outlined above. If you agree that the issues do need to be addressed, I request that you raise them with the President of InternetNZ. Given the nature of the second issue above, this would need to be done as a matter of urgency.

I have included recommendations in this letter. If required, I can provide more information and am able to meet with you at any time to discuss this.

Yours sincerely
Debbie Monahan
Domain Name Commissioner