An explanation of Demand Media’s deal with Donuts

SEC filing sheds (some) light on relationship for new top level domains.

A lot of fuss has been made about the connection between Demand Media and Donuts and the new TLD program.

What exactly is the relationship between the two companies? Demand Media’s latest 10-Q, filed today, explains the terms of the agreement:

As part of its initiative to pursue the acquisition of gTLD operator rights, the Company has entered into a gTLD acquisition agreement (“gTLD Agreement”) with Donuts Inc. (“Donuts”). The gTLD Agreement provides the Company with rights to acquire the operating and economic rights to certain gTLDs. These rights are shared equally with Donuts and are associated with specific gTLDs (“Covered gTLDs”) for which Donuts is the applicant under the New gTLD Program. The Company has the right, but not the obligation, to make further deposits with Donuts in the pursuit of acquisitions of Covered gTLDs, for example as part of the ICANN auction process. The operating and economic rights for each Covered gTLD will be determined through a process whereby the Company and Donuts each select gTLDs from the pool of Covered gTLDs, with the number of selections available to each party based upon the proportion of the total acquisition price of all Covered gTLDs that they funded. Gains on sale of the Company’s interest in Covered gTLDs will be recognized when realized, while losses will be recognized when deemed probable. Separately, the Company entered into an agreement to provide certain back-end registry services for gTLD operator rights owned by Donuts for a period of five years commencing from the launch of Donut’s first gTLD. Demand Media is not an investor in Donuts nor involved in any joint venture with Donuts or its affiliates.

Note the last line of the explanation, which may have been added to diffuse any suggestions of a tighter relationship between the companies.

So far Demand has made $18.2 million in capital investment in the new TLD program, most of which was paid to Donuts. The company’s $185,000-per-application fee for its 26 own TLD applications represents less than $5 million of the capital investment.

Demand has already incurred formation expenses of $4.3 million through the end of March related to new TLDs. It expects up to spend an additional $5 to $10 million on formation expenses in 2013.

In a somewhat unrelated note regarding to the company’s 10-Q, it appears there’s an error in its filing. The filing refers to the cost of .com domains and Verisign’s latest agreement with ICANN. The note in the 10-Q says the new agreement allows Verisign to hike prices 7% in four of the six years of the contract. That’s not the case; the prices are fixed for the term. I suspect this information was inserted when the contract was agreed to by ICANN but before the Department of Commerce got involved. It was never updated after the final agreement was inked.