What you really need to know about the sale of .Org to private equity

Let’s cut through the clutter and falsehoods.

A lot has been said and written about Internet Society’s (ISOC) sale of Public Interest Registry, the group that runs .org, to Ethos Capital. Some of it is true, some of it is false, and some of it is up to interpretation. This goes both ways; ISOC and Ethos have some bad (or at least misleading) talking points, but much of the fuss on the internet is wrong or based on questionable data.

Here’s what you need to know.

The deal solidifies ISOC’s financial future

It’s hard to debate that this deal doesn’t make sense for ISOC, at least financially. It’s trading in an annual revenue stream for an endowment. As long as it has a reasonable way to invest that endowment, it should be able to generate steady cash flow going forward.

While the domain name business has been on a steady, mostly upward trajectory for .org, there is certainly risk that this could change in the future. I understand why ISOC views this as a good financial move for its organization. I’m sure it knew it would get some pushback, but it decided that the opportunity was too good to pass up.

PIR is not cash-strapped and and can easily reinvest in .org

One of ISOC’s and Ethos’ talking points is that, because PIR has to give its profits to ISOC, it is cash-strapped and can’t reinvest in the registry or new products and services.

There are two questions at play here: (1) is .org declining? and (2) is PIR cash-strapped?

First, let’s look at the so-called decline of .org. Advocates for the deal have argued that .org is declining, which appears to be true on a domains under management (DUM) basis. On NPR’s On Point this week, Ethos Chief Purpose Officer Nora Abusitta-Ouri said:

“If you look at the numbers, the sales of .org have been declining. The reason they have been declining is because, you know, PIR has not been able to, you know, invest in growing the business.”

This is misleading. The decline in domains under management is on purpose. Much of .org’s growth was from discounted, low-quality domain name registrations. In 2018, PIR shifted its strategy to focus on high-quality registrations and explained that top-line DUM numbers would decrease while profitability increased.

This leads to the claim of PIR being cash-strapped because it has to give all of its profits to ISOC.

First, it rarely hands over all of its profits. In 2017 it gave an extra gift to ISOC, but neither party has been struggling to keep the lights on.

Second, PIR has an easy mechanism for adding $10 million, $20 million or more to its bank account within a year or two: raise prices. If PIR needs money to reinvest in the registry or to create new products or services, it doesn’t need private equity backing. It just needs to raise prices a dollar or two.

It would be difficult for ICANN to stop this deal

Here’s what the contract between ICANN and Public Interest Registry for running .org says about a change of control:

“Except as set forth in this Section 7.5, neither party may assign any of its rights and obligations under this Agreement without the prior written approval of the other party, which approval will not be unreasonably withheld.”

So ICANN must give written approval for this transaction to proceed, but it can’t unreasonably withhold it.

What’s unreasonable? I’m not a lawyer, but I doubt, “I can’t believe our lawyers gave up so much in this contract, so we’re going to withhold consent” will work.

This section of the contract refers to ICANN verifying that the assignee has the financial wherewithal to run the registry and that its owners pass background checks. Certainly, if ICANN thought Ethos Capital didn’t have enough money or found out that its principles were crooks, it could reasonably withhold its approval. Beyond that, I doubt it.

If ICANN withholds its approval, we’d likely see a lawsuit. That might delay the deal, and if it’s delayed long enough, Ethos might reallocate capital elsewhere.

ICANN can’t just decide to transfer the .org contract to another party

The original ICANN Chairwoman Esther Dyson has teamed up with a couple of other people and organizations to form a cooperative that it says should run .org. It isn’t putting in a rival bid; it seems to be asking ICANN to just hand over the registry contract.

The only thing in the .org contract I see that refers to such a possibility is this:

…any consummated change of control shall not be voidable by ICANN; provided, however, that, if ICANN reasonably determines to withhold its consent to such transaction, ICANN may terminate this Agreement pursuant to Section 4.3(g)…

This says that ICANN can terminate the agreement if it withholds consent and PIR still goes through the change of control. That won’t happen. ISOC and Ethos won’t move forward with a deal until they get ICANN’s written approval.

It won’t cost PIR a lot more to run .org as a for-profit

The idea that PIR’s costs will go up seems to stem from a letter Packet Clearing House sent to ICANN. The letter suggests that for-profit companies are essentially subsidizing the operation of .org because it’s a non-profit. Afilias, the company that runs the technical aspects of .org, uses Packet Clearing House’s (PCH) services. PCH suggests that, as a for-profit, these other companies would stop subsidizing services to .org.

This is why you see some claims that it would cost PIR about $30 million a year for technical services to run the registry.

I emailed with PCH’s Bill Woodcock for clarification. He explained more of the thinking here, and I simply don’t buy it. There are plenty of capable registry providers that would charge less than the $18 million a year Afilias is charging Public Interest Registry. In fact, I suspect some bid less for the contract when Afilias retained it.

I predict that PIR will renegotiate its deal with Afilias or move to another provider as soon as it’s contractually able to because the fees paid to Afilias are PIR’s biggest line item.

Keep in mind that Ethos founder Erik Brooks is, or at least was, on top level domain company Donuts’ board. He led the deal for Abry Partners to acquire the company. It makes a lot of sense to strike a deal to combine these two entities, or to at least use the same technical registry.

I’d bet $1.135 billion that Ethos’ financial projections include cutting technical costs, and this should be easy to accomplish.

The idea of monetizing .org registry data seems overblown.

I don’t see this as a huge opportunity. I can’t imagine it’s a big, if any, part of Ethos’ investment thesis. I’m willing to listen to the other side, but they need to provide specific examples of how Ethos could (mis)use this data.

Censorship is certainly an issue, but it’s also overblown.

At play is a constant battle between intellectual property interests and internet libertarians. The former want every player in the internet ecosystem to take down websites. The latter don’t think any website should be taken down, at least not without a court order.

Admittedly, PIR has done some stuff to cause concern. But I think private equity backers will be more careful about these things than PIR has historically been.

Government censorship could be a more significant concern, though. We’ve seen many companies bow to Chinese requests in order to serve Chinese citizens. If China demands that .org engage in censorship in order to sell domains in China, would PIR operating as a for-profit bow to this pressure? Many domain registries have bent over backward to obtain Chinese approval to sell domains in the country.

And if you want to go down that path, an even bigger concern is if .org is sold to another (foreign) entity.

This would be a nightmare scenario, and it doesn’t seem like one that people are paying attention to. What if Ethos decides to sell out to Chinese investors, Russian investors tied to Putin, or a Saudi sovereign wealth fund?

That would be a huge deal. It wouldn’t just be partisan displeasure in Washington. .Org is a huge part of the internet’s infrastructure.

Which gets me thinking…is there anything in the contract between ICANN and PIR right now that would prevent a sale to foreign investors? It brings me back to how ICANN has fumbled its contracts for legacy TLDs. It has turned them into saleable assets rather than limited “stewardship” agreements.

For what it’s worth, I think .org’s next step will be to combine with Donuts and some other domain assets, followed by an IPO or packaged sale to another private equity firm. But if another investor comes along with deep pockets, Ethos would be tempted.

.Org prices will go up; it’s just a matter of how much

OK, let’s dig into pricing. Hold on tight.

First, Ethos has said that it won’t raise prices too much. 10% a year on average. Possibly. Maybe less.

Here’s what it wrote on KeyPointsAbout.org:

“…Ethos Capital has stated that it plans to live within the spirit of historic practice when it comes to .ORG pricing. This means, potentially, that any annual price increase could be no more than 10 percent on average — which today would equate to approximately $1 per year.”

There’s a semantics issue here. Saying it will live within “the spirit of the historic practice when it comes to .ORG pricing” is false if it equates this to 10% per year. The historic practice has been to not raise prices every year, and even then, not by 10%.

What I think Ethos means is that it will live within the spirit of the historic contract, not practice. That contract allowed PIR to raise prices up to 10% per year.

If Ethos raises prices 10% per year, .org prices will escalate much faster than under ISOC’s control.

I’ve read several reasons why Ethos won’t raise prices much even though PIR’s contract with ICANN has no price caps.

1. “Ethos won’t raise .org prices much because people can easily switch domains” – this is the worst argument I’ve read. I’d encourage anyone making this argument to switch the domain their company uses for its website and email. Switching costs are high.
2. “Ethos won’t raise .org prices much because it will kill the domain” – it depends on how much it raises prices. Sure, $5,000 overnight would kill the domain. But I think it could easily raise prices to $15 next year and $20 the next without losing many registrations. And on from there.
3. “Ethos can’t raise prices too much because registrars would balk” – this argument might hold some water. While PIR has a monopoly on registrars when it comes to selling .org, registrars can push their customers to other domain extensions. Registries try to stay on registrars’ good sides. In fact, PIR paid Godaddy over $1 million in 2018 to promote .org to the registrar’s customers. If Ethos suddenly changed prices to $1,000 a year, this would be a bad customer experience for GoDaddy’s customers and the registrar could downplay .org on its site. It’s worth pointing out that .org has some market power, though, particularly for non-profits. And .com has full market power; registrars that downplayed .com would lose a lot of business.

I’ve also read claims that PIR could introduce variable pricing in which it charges some domain owners more to renew their domains. For example, they could tell NPR that it’s now $5,000 to renew the NPR.org.

This is contractually forbidden. PIR can introduce variable pricing, but it has to get the registrant’s agreement at the time of the initial registration. So we are likely to see variable pricing added for domains that expire and are re-registered, but if PIR wants to hold NPR’s domain for ransom, it has to hold everyone’s domain for ransom at the same price.

I’ll end the pricing discussion on this note: while Ethos can say it won’t raise prices over 10% a year on average, this isn’t in the contract with ICANN. Even if Ethos is true to its word, the next company to own .org won’t be held to that. Ethos could assuage these concerns by agreeing to have ICANN re-introduce the price cap in the contract. But it won’t do that; it would make the asset less valuable.

PIR’s employees are stuck in the middle

Lost in much of the discussion about ISOC selling PIR to Ethos is PIR itself. It’s kind of stuck in the middle. If I worked for a non-profit serving the greater good and then woke up one morning to find out I was working for a private equity firm, I would be disillusioned.

PIR has a good staff that does a good job. Hopefully, they don’t get the short end of the stick on this.

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Author: Andrew Allemann