How ICANN uses the .Org registry to fund the Internet Society

Editor’s note: this post is by Nat Cohen. I am publishing it because he provides a rich context for ICANN’s proposal to remove price restrictions on .org domain names. Any opinions in this post are those of the author.

ICANN awarded the .org registry to the Internet Society (ISOC) in 2002[1] with the intention that the “profits from the registry will go to ISOC”[2] to provide a reliable source of funding for its mission.  ISOC has cumulatively received hundreds of millions of dollars in funding over the intervening years from the profits of the .org registry, allowing it to grow from 8 employees and a budget of a little over $2 million in 2001[3] to over 100 employees[4] and a projected 2019 budget of over $38 million, with $34 million of that generated from the .org registry.[5]

PIR (Public Interest Registry), the organization created by ISOC to manage the .org registry, is currently operating under an agreement that limits price increases to 10% per year.  ICANN staff is proposing that all price constraints be eliminated in the new .org agreement.[6]  If approved, PIR would be able, if it so chose, to sharply increase prices on .org domains with the result that revenues from .org registrants could increase by hundreds of millions of dollars annually, with much of that revenue coming out of the operational funds of non-profit organizations.

ICANN created an unusual structure in which one non-profit, ISOC, receives most of its revenue by extracting funds from other non-profits – the community of non-profits using .org domain names.  It might strike some as unseemly that one non-profit that is well-connected within ICANN was able to leverage those connections to extract funds from other non-profits around the globe whose focus is elsewhere than on building relationships within ICANN.

ISOC and PIR are not necessary for a well-functioning .org registry.  The actual work of running the registry is outsourced by PIR to Afilias.  If ICANN had put the .org registry out to periodic competitive bid, it is likely that Afilias, Neustar, or one of the other companies that offer registry services would currently be operating the registry at a small fraction of the $9.93 that PIR now charges as a base price, thereby saving non-profits globally tens of millions of dollars.

ICANN added ISOC and PIR as a layer whose intended purpose is to increase the cost of .org domain names paid by .org registrants for the benefit of PIR and ISOC.  Now ICANN proposes to take all limits off of ISOC’s and PIR’s ability to extract funds from .org registrants.  They may soon be free to increase prices until the pain threshold of registrants is reached and the registrants simply cannot afford to continue renewing their .org domains.  The pain threshold will be different for each .org registrant.  For some it may be $50 per year, for some it may be $250 per year, for some it will be well into the thousands of dollars per year.

As a policy decision, is it good policy to allow a couple of non-profits the unconstrained power to extract funds from other non-profits?  ISOC and PIR have thrived under the current arrangement where they are limited to 10% annual increases – and to be fair, management to-date has not always imposed price increases even when given the opportunity.  But management changes, ambitions grow, and there seems little justification to expose .org registrants to the possibility of large, unpredictable price increases – especially when the .org registrants receive no benefit in return.  ICANN is on the verge of subjecting millions of long-established non-profits to destabilizing and unpredictable pricing for the benefit of a couple of non-profits.  This would appear to undermine ICANN’s core mission “to secure the stable and secure operation” of the domain name system.[7]

The Internet Society

The Internet Society (ISOC) was co-founded by Vint Cerf and Bob Kahn, both known as “Fathers of the Internet” due to their work in creating the technical foundation for the Internet.[8]   Cerf went on to assume an influential role at ICANN, joining the Board in 1999 and serving as Chair from 2000 until 2007.

According to a history of ISOC by Cerf, ISOC was created to provide a funding mechanism for the Internet Engineering Task Force (IETF), which supports the development of the technical infrastructure of the Internet:

In contemplation of the need for a mechanism for aggregating funding from many sources, it was proposed to form an Internet Society and to use its resources, in part, to provide funds in support of IETF. The plan was for the Society to engage in a variety of activities including conferences, workshops, and raise funds from industry and other institutional sources.[9]

ISOC has served to advance the beneficial growth of the Internet in four areas: (1) fostering an open and trusted Internet; (2) expanding Internet access to reach the entire world; (3) improving technical security: and (4) supporting the positive evolution of the Internet.[10]

The .Org transition

Before 2002, Verisign operated the .com, .net and the .org registries.  In 2002, Verisign’s relationship with the registries was restructured, and the .org registry was transitioned away from Verisign management.[11]  ICANN solicited proposals for a new registry operator for .org.  It received eleven proposals to evaluate.[12] The proposal from ISOC set a base fee for .org registrations and renewals at $6.00 per domain name.  Neustar made a highly-rated submission at $5.00 per domain name.  Global Name Registry’s submission also received a high rating and offered a rate as low as $3.47 per domain name depending on registration volume.[13]

The proposal submitted by ISOC contemplated the creation of a Public Interest Registry (PIR) to manage the .org registry.  PIR’s sole member would be ISOC.  PIR would be a funding mechanism for ISOC.  The surplus funds that PIR generated from operating the .org registry would be transferred to ISOC to fund its operations.

The ICANN Board, under the leadership of Cerf, awarded the .org registry to ISOC, through its newly formed entity, PIR.[14]

PIR Generates Revenues by Marking Up the Fees Charged by Afilias

PIR’s role is to generate revenues to fund ISOC from its control of .org.  As PIR, unlike Verisign, does not have the technical capability to operate a registry, it outsources those functions to Afilias, a third-party registry services provider.   The difference between what PIR charges to .org registrants and what Afilias charges PIR to provide registry functions generates the funds used to fund PIR’s operations and to support ISOC.

PIR has had the right to increase prices by 10% per year starting in 2007 but did not always choose to impose a price increase.  The base price for .org rose gradually from $6.00 in 2002 to the current level of $9.93.[15]  Afilias, under the contract in place in 2016 and 2017, charged approximately $3.75 per domain name to run the .org registry.[16]  PIR’s upcharge of roughly $5 per domain name applied across 10 million registrants generated approximately $50 million annually in available funds to PIR.  In 2016, PIR transferred approximately $30 million to its sole member, ISOC.  In 2017, PIR transferred over $74 million to ISOC.[17]  As every dollar spent by a non-profit to register or renew a .org domain name is a dollar diverted from that non-profit’s programs, ICANN has in effect determined that ISOC is more deserving of those tens of millions of dollars than are the .org registrants, many of which are non-profits.

In 2017, PIR put the contract for running the technical operations of the .org registry out for competitive bid.  Afilias, the prior operator, won the bid and the right to continue providing registry services for .org.  The new contract with Afilias took effect in 2018.  It is widely expected that Afilias offered sharply lower fees for operating the registry in order to win the new contract.[18]  This expectation is due in part to the much lower fees resulting from other competitive bid proposals conducted by other registries around the world.  For example, Neustar recently won the bid to operate India’s much more complex and much smaller .in registry reportedly with a bid of $0.70 per domain name, underbidding Afilias’s reported bid of $1.10.[19]

As there are economies of scale in running a registry,[20] the per domain cost associated with running the .org registry with its 10 million registered domain names is likely lower than that of running the .in registry with its 2 million registered domain names.[21]  Clarity into the per domain name fees charged by Afilias under the new contract should be available later this year when PIR releases its IRS 990 form in which it will disclose the amount it paid to Afilias in 2018 to run the .org registry.  PIR will enjoy the benefit of the presumed lower fees charged by Afilias under the new contract, but .org registrants will not, as PIR did not lower the base price after the new contract went into effect.

The .Org extension

.Org is one of the initial top level domains (TLDs), along with .com, .net, .gov, .mil, .edu and .us.  The .org TLD was created for use by non-profits and organizations that didn’t fit one of the other top level domains and it indeed is the online home of choice for non-profit organizations.  .Org’s association with the non-profit community is widely recognized: “.ORG’s noncommercial heritage… sets it apart from other TLDs”,[22] “the .org domain name has been a haven for nonprofits and do-good organizations for decades”.[23] Use of .org has become an important signifier for a non-profit since from the domain name alone a visitor can gain reassurance that it is likely dealing with a non-profit organization”.[24]

The association of .org with non-profits makes .org the TLD of choice for non-profits.  Anecdotal evidence of the prevalence of .org domains can be gathered by looking at various lists of non-profits and checking the domain names to see how many of them use a .org domain name.  For instance, 16 of the 18 non-profits highlighted by Philanthropia in the National Arts and Culture category use a .org domain,[25] as do 17 out of the 20 non-profits in a list of non-profits with well-designed websites,[26] as do 48 of the 50 non-profits in a list of the most influential non-profits, including all 20 of those designated the most influential.[27]

.Org has a unique role in the domain name system.

.Org is one of the two legacy extensions that is a strong signifier of the nature of the entity using the extensions, has strong public awareness, is publicly available, and that has built up a large base of prominent entities that make a home in that extension.  The other extension with similar qualities is .Com.  As .Com is to the commercial Internet, .Org is to the non-profit world.  Indeed, it may be that .Org is even more dominant within the non-profit world than .Com is in the for-profit world, for even though .Com is quite dominant and has demonstrable market power, there are many other extensions that are used by for-profit companies, though to a far lesser extent, including .net, .info, and .biz, for example.  There are no such comparable legacy extensions that were developed as an alternative for use by non-profits.   For instance, the few non-profits in the lists mentioned above that do not use a .org domain name use a smattering of other TLDs: .com, .net, .edu, and .us.  Relying on anecdotal evidence from the sample of 88 non-profits above, the share of .org exceeded 90% while no other extension exceeded a 3% share.

.Org is largely isolated from competitive pressure on pricing

.Org’s established base of non-profit users, developed over 30 years during which .org prices were price constrained, in combination with .org’s unique association in the public mind with non-profits, and taking into account the immense disruption that would result if any established non-profit attempted to move its web presence to a different domain name in another TLD, means that PIR as the operator of .Org is largely immune to competition on pricing.

PIR would maximize its revenues by raising prices on its existing base of 10 million .org registrants, many of whom are established non-profits who could not easily move and who would of necessity be forced to absorb any price increase in .org renewal rates.[28]  Even at a higher price .org would also still likely attract new registrations from non-profits that particularly value the benefits of branding on a .org domain name.

PIR would be able to impose sharply higher prices for .org domain names if it chose

As more fully discussed in the article “The Spurious Justifications for Eliminating Price Caps on .Org and other Legacy Domains”,[29] the purported justifications for eliminating price caps on legacy domain names do not survive serious examination.   Supposed competition from other domain extensions would not be sufficient to restrain pricing for .org domain names.  PIR could push through sharply higher prices for .org domain names, and those registrants, in particular the bulk of the non-profit community that have a long-standing commitment to their .org domain names, would have little choice but to pay the higher fees.

The sum raised from price increases could easily dwarf ICANN’s annual budget of $140 million.[30] For instance, an increase of the registration and renewal fee to $50 per year would extract upwards of $500 million annually from .org registrants, the vast majority of which would be passed on to ISOC.

Would PIR take advantage of its ability to increase prices?

How would PIR reconcile its role as steward of the .org name space with its mandate to raise funds for ISOC?  PIR has historically demonstrated restraint by not always imposing the 10% annual price increase currently available to it.  Going forward what will PIR and ISOC consider to be the appropriate level of funding for ISOC derived from PIR’s control over the .org registry?  How would ISOC’s funding needs change over time, and would its ambitions expand once the potential for annual budgets in the hundreds of millions of dollars become a possibility?

Since winning control of the .org registry, ISOC’s budget has grown 15-fold and its staffing level have grown commensurately.  One indication that ISOC may consider their current level of funding to be inadequate is that while ISOC received approximately $30 million from PIR in 2016, and received a similar contribution of approximately $30 million from PIR in 2017, PIR then made an additional contribution to ISOC in 2017 in the amount of $42,967,421, causing PIR to have a net asset deficiency of nearly $30 million at the end of 2017.[31]  This raises the possibility that PIR and ISOC view current funding levels to be insufficient and would seek increased funds by raising on .org registrants.

Summary

Some industry participants are taking the position that even if all price constraints are removed from .org, competition from other extensions would naturally constrain prices.  While this may be true for other extensions, .org, along with .com, are unusual in that they are 30-year-old legacy extensions with a large base of established users who are not free to switch to an alternate domain name in a different extension due to the huge disruption that would result from such a move.

PIR has the apparent market power to successfully impose significant price increases on .org domain names if given that option.  It may soon be left solely to PIR’s discretion whether to increase the funds raised annually for ISOC to $100 million or $250 million or more, with much of this funding coming from other non-profits. Does the ICANN community consider this to be a favorable or unfavorable outcome?

[1] https://www.icann.org/resources/board-material/prelim-report-2002-10-14-en#SuccessorOperatorfororgRegistry

[2] ‘Finally, the Committee notes that although it has made no commitment to support “good works,” profits from the registry will go to ISOC. On the arguable proposition that support for IAB/IETF standards processes constitutes “good works” we awarded ISOC a “Low” ranking in this category rather than a “None.”’  See: https://archive.icann.org/en/tlds/org/ncdnhc-evaluation-report-19aug02.pdf, page 16.

[3] https://archive.icann.org/en/tlds/org/applications/isoc/section1.html#c7

[4] https://www.internetsociety.org/about-internet-society/team/

[5] https://www.internetsociety.org/action-plan/2019/

[6] https://www.icann.org/public-comments/org-renewal-2019-03-18-en

[7] https://www.icann.org/resources/pages/governance/bylaws-en/#article1

[8] https://internethalloffame.org/inductees/vint-cerf, https://en.wikipedia.org/wiki/Bob_Kahn

[9] https://www.internetsociety.org/internet/history-of-the-internet/ietf-internet-society

[10] https://www.internetsociety.org/key-issues/

[11] https://www.icann.org/news/announcement-2002-10-14-en

[12] https://www.icann.org/resources/board-material/prelim-report-2002-10-14-en#SuccessorOperatorfororgRegistry

[13] “Competitive Pricing (Criterion 7): Global Name Registry has proposed the most aggressive pricing reductions of any of the applicants, with the expectation that at least some of the savings will be passed on to the registrant. Global Name Registry has proposed the largest discount, of up to 42% (US$3.47) based on volume and duration, while ISOC would maintain the US$6 price and NeuStar would charge a flat rate of US$5. Although several Board members made clear at the Ghana meeting that affordability is an important consideration, the Staff report surprisingly did not weigh proposals to reduce the registry price below US$6.”

https://archive.icann.org/en/tlds/org/applicant-comments/gnr-01oct02.pdf

[14] https://www.icann.org/resources/board-material/prelim-report-2002-10-14-en#SuccessorOperatorfororgRegistry

[15] https://blog.cloudflare.com/cloudflare-registrar/

[16] https://domainnamewire.com/2018/10/24/public-interest-registry-org-tax-return-provides-insight-into-registrar-marketing-deals/

[17] https://domainnamewire.com/wp-content/2017-PIR-Form-990-Pub-Insp-Copy.pdf,

https://www.internetsociety.org/wp-content/uploads/2017/07/ISOC-2016-Form-990-Pub-Insp-Copy.pdf

[18] https://domainnamewire.com/2016/11/14/org-sticks-afilias-backend

[19] http://domainincite.com/23976-neustar-completes-in-migration

[20] https://youtu.be/4I9u5nys73U?t=3002

[21] https://research.domaintools.com/statistics/tld-counts/

[22] https://archive.icann.org/en/tlds/org/applications/isoc/section2.html#c11.3

[23] https://pir.org/products/org-domain/

[24] The .org extension is unrestricted such that for-profit entities can register and use .org domain names.  It appears that few for-profit entities operate on .org domains, likely due to the confusion it would create among their customers.

[25] https://www.myphilanthropedia.org/top-nonprofits/national/arts-culture/2014

[26] https://topnonprofits.com/lists/best-nonprofit-websites

[27] https://www.thestreet.com/slideshow/13563458/1/the-50-most-influential-nonprofits.html

[28] https://www.youtube.com/watch?v=4I9u5nys73U&feature=youtu.be&t=2641

[29] http://www.circleid.com/posts/20190423_spurious_justifications_for_eliminating_caps_on_legacy_domains/

[30] https://www.icann.org/en/system/files/files/proposed-opplan-budget-intro-highlights-fy20-17dec18-en.pdf

[31] https://domainnamewire.com/wp-content/2017-PIR-Form-990-Pub-Insp-Copy.pdf