In private auctions, applicants bid less than the valuation they place on the string.
There have been two rounds of private auctions (that we know about) to settle top level domain contention sets.
The first one included six TLDs and totaled $9.01 million. The second included 8 strings and totaled $9.65 million.
That’s an average of $1.5 million per string in the first auction and $1.2 million in the second. So are the applicants in these auctions valuing the typical string in this range?
No, not at all.
The key element to these private auctions is that the loser walks away with the proceeds, less service fees. That means that applicants were actually valuing the domains at higher than they were willing to bid.
Let’s say you won an auction for .example at $1.2 million. If fees were $0.1 million, then the losing bidder took home $1.1 million. The difference in your bank account from winning to losing is $2.3 million: $1.1 million plus $1.2 million.
Suppose that you value .example as having a net present value of $2.0 million excluding the cost of the auction and application fees. Would you bid $1.2 million in a two party private auction? You shouldn’t. If you bid $1.2 million, then your NPV is now $0.8 million, less application fees. If you lose the auction your NPV is $1.1 million.
Of course, there’s a lot more going on in every bidder’s strategy. Some expect economies of scale, others want to block competition, etc.
But when you look at the results of the private auctions, calculating the average paid does not accurately reflect how companies are valuing the strings.
The game is changed in ICANN’s “auctions of last resort”. If you place an NPV on .example of $2.0 million, then you’d be willing to bid much closer to that amount. If you lose, your NPV is basically zero. If you win, your NPV is still positive as long as you don’t bid more than the calculated NPV.