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Vint Cerf and Mike Godwin follow bad talking points for .Org deal

by — Policy & Law 22 Comments

Pricing and investment arguments are wrong.

Logo for .org domain, featuring a blue circle with white letters spelling ORG
Ethos Capital and Internet Society are working overtime to spin the deal to sell .org for $1.35 billion as a good thing. There are certainly some good things about it, but I cringe when I read certain talking points.

One is around pricing. Yesterday, from ISOC board member Mike Godwin:

But could it be at the public’s expense? What about the argument that the prices for domain-name renewals will soar? This argument ignores common sense — you don’t take over a successful business and price most of your customers out of the market or spur a mass migration to an alternative product. Not only would that permanently destroy any faith in .ORG — the business you just bought — but it also would undermine TLDs generally. (I’ve suggested, not entirely jokingly, that the proper response if anybody tries to extort huge renewal fees for .ORG is to launch a mass one-time conversion to the .WTF top-level domain. I’d happily lead any charge in the .WTF Resistance.) In any case, demand for TLDs isn’t inelastic, despite what the deal’s critics say — there are hundreds of TLDs and customers aren’t locked in. It takes only a few minutes of studying PIR’s year-by-year financials to see that jacking up domain-name renewal prices in the way the critics fear would be suicidal for PIR or any other registry that depends primarily on predictable renewal rates, and it would destroy the value of .ORG as well. I don’t think any of the companies that sought to buy PIR were dumb enough to invest a billion dollars in buying the .ORG business in order to destroy it.

And from Vint Cerf:

Moreover, as a for-profit company, PIR has a clear rationale for not driving away its customer base by any excessive raising of prices. Given current .org pricing, a 10% increase in price would be less than $1. Even if an organization had registered a dozen .org domain names, it is hard to believe that such an increase would be viewed as unsustainable for most non-profits. Of course, companies that hold domain names in the tens of thousands for speculative purposes might find such increases more troubling, but I don’t have much sympathy for that business model in the context of the organizations the .org brand is intended to serve.

This thinking ignores the economics of domain names. Godwin suggests that .org customers aren’t locked in. OK, then ISOC should figure out what would be involved with switching from InternetSociety.org to InternetSociety.charity. It would cost lots of money and time, and the headaches from switching email would last for years. True, there is price elasticity to domain demand. But for renewals, it takes a huge price increase to change demand.

Cerf is correct that most charities won’t blink an eye at a $1 increase in the cost of renewing their domain name, at least in the first world. But this assumes that Ethos and whoever owns .org in the future won’t raise prices more than 10% per year. Calling on Godwin’s words, jacking up .org renewal prices would not be ‘suicidal’ to .org. Even if renewals were $100 a year, it wouldn’t be worth the pain for most non-profits to switch.

The other issue I have is with the idea that Ethos can invest in .org to create new products and services for non-profits. It certainly can, but there’s no reason PIR can’t under the current arrangement. Cerf writes:

Second, when the operation of .org was transferred to the Internet Society, it created the non-profit called Public Interest Registry, or PIR. PIR’s primary objectives were, first, to operate .org and, second, to provide significant support for the Internet Society by essentially allocating any surplus from the operation of PIR to fund the Internet Society’s work in promoting a more accessible and secure Internet. This amounted to about $50 million a year, which was hugely helpful to the Internet Society but limited PIR’s ability to invest in improvements to the operation of .org or even the creation of new products and services for the non-profit community.

The idea that Public Interest Registry is cash-strapped because it has to send its profits to ISOC doesn’t hold water. PIR has been able to increase prices 10% per year for the past decade but hasn’t always done so. If it raises prices 10% this year, it gets another $10 million in its bank account that ISOC isn’t depending on. That’s not enough to invest in new products or services?

This isn’t to say the deal isn’t good for ISOC. Godwin does a good job explaining that domain name revenues aren’t certain, and this endowment gives ISOC certainty. That’s a selling point for ISOC and its constituents. But let’s be honest about possible ramifications of this deal.

Top Stories: Private equity company acquires .Org

by — Policy & Law 4 Comments

Ethos Capital acquires .org for $1.135 billion.

Graphic rectangle with blue and black background and the words "PE Company Acquires .org" and "Top Stories"

The biggest shock to many people in the domain industry in 2019 was Ethos Capital acquiring the .org registry contract from Internet Society for $1.135 billion.

The deal was announced soon after ICANN removed price caps on .org domains, meaning that Ethos can charge whatever it wants when people register or renew a .org domain.

Non-profits, including some of Internet Society’s own chapters, are obviously upset about this. So are registrars and registrants.

The deal was put in motion by former ICANN Fadi Chehadé. He left ICANN and joined private equity company Abry Partners as an advisor. He advised the company on its acquisition of Donuts. On the Abry side, partner Erik Brooks worked on the Donuts deal and became a board member. Then Fadi advised Brooks on acquiring .org, which Brooks is running through Ethos.

That the former ICANN CEO is now profiting from the industry he oversaw (and some of the things he put in place) leaves a bad taste in many peoples’ mouths.

For its part, Ethos has said what it needs to say to get the deal done. It will maintain reasonable prices. It will work with the community on their concerns about censorship. It plans to hold this investment for a long time.

But, so far, none of this is contractual. Once ICANN gives the green light, Ethos can do whatever it wants. It can flip the registry in a year for more money. It can raise prices as high as it wants to.

ICANN has postponed its approval, but I expect this deal to ultimately go through.

It won’t be the end of the world as long as Ethos and subsequent owners keeps prices in check. If it doesn’t, the stability of the DNS will be impacted.

4 U.S. lawmakers question .Org sale

by — Policy & Law 12 Comments

Presidential candidate Elizabeth Warren among those concerned about sales of .org registry.

Signatures of four U.S. Senators who are questioning the deal to sell .org, including Elizabeth Warren

Four Lawmakers sent a letter with questions about the sale of .org to Ethos Capital.

Three U.S. Senators and a U.S. Representative have sent a letter to Ethos Capital, Internet Society and Public Interest Registry questioning the decision to sell .org to Ethos.

Ron Wyden, D-Ore., Richard Blumenthal, D-Conn., and presidential candidate Elizabeth Warren, D-Mass., with Rep. Anna Eshoo, D-Calif. sent the letter that includes nine questions about the proposed sale.

Among the group’s concerns are:

  • Censorship
  • The potential that .org will move jurisdictions outside the United States
  • How prices will be controlled
  • How the proposed .org stewardship council will work, and if it will have veto power of decisions such as pricing

The Senators and Respresentative also want the registry transfer request and answers to ICANN’s latest questions to be made public.

Non-Commercial users ask for three changes to .Org contract

by — Policy & Law 3 Comments

Constituency addresses pricing and censorship issues.

Logo for .org domain, featuring a blue circle with white letters spelling ORG

The Non-Commercial Stakeholders Group (NCSG) has sent a letter to ICANN, asking it to make three changes to the .org registry contract if it is to be sold to Ethos Capital.

The group points out that the contract to be the steward of .org was awarded to Internet Society (ISOC) based, in part, on ISOC’s reputation and goals. It was a competitive process.

Now, ISOC wants to sell it to a strictly for-profit private equity group.

(I find it perplexing that ICANN has shoehorned provisions of new top level domain contracts into legacy extensions without considering the history of these legacy extensions and how they were awarded to their current operators.)

NCSG wants to see three changes to the contract before it is transferred to Ethos:

  • A revised notification procedure in which wholesale price increases of any amount give ORG registrants 6 months to renew their domains for periods of up to 20 years at the pre-existing annual rate. Implementation of this revised notification procedure must be obligatory to both PIR as well as any registrar through which .org domain names are registered and/or renewed.
  • A strong commitment that the administration of the ORG domain will remain content-neutral; that is, the registry will not suspend or take away domains based on their publication of political, cultural, social, ethnic, religious, and personal content, even untrue, offensive, indecent, or unethical material, like that protected under the U.S. First Amendment.
  • An elimination of the URS procedure within the ORG domain, as the rights protection mechanisms specific to the URS were appropriate only for new domains.

While the price cap change requested in item #1 is helpful, it ignores two issues.

First, most .org registrants are unlikely to know the price is increasing until it comes time to renew. Therefore, they can’t lock in the original price for 20 years.

ISOC CEO Andrew Sullivan has noted that only a minority of .org users are speaking out against selling .org. That’s not because they don’t care, but because they don’t know about it. Likewise, they won’t know about price increases until it’s too late.

Second, it just kicks the can down the road another ten years.

 

Should GoDaddy acquire .Org?

by — Domain Registrars 8 Comments

Other companies should now circle .org, and GoDaddy is one of them.

Picture of person examining financial analysis and the words 'should godaddy buy .org'

There’s a lot of consternation about Ethos Capital’s proposed takeover of the .org registry. It will move from a non-profit entity that’s out to help organizations to one that is profit-motivated.

It’s also clouded by the involvement of former ICANN CEO Fadi Chehadé in Ethos’ bid.

The door is open for a white knight. A company with deep pockets can come in and offer terms that are better than Ethos’. The terms would be better in two ways:

1. More money.
2. Setting up a contractual price limitation with ICANN.

Several businesses would pay more than what Ethos’ is paying. Based on what Internet Society CEO Andrew Sullivan said on this webcast last week, it seems that Ethos put strict time constraints on Internet Society to get this deal through, making it difficult to shop it. I also assume ISOC didn’t want the fact that it was selling .org to go public before a deal was consummated, giving further advantage to Ethos.

I’ve talked to multiple private equity groups that were disappointed that they weren’t invited to the table.

But another private equity company swooping in to buy .org doesn’t alleviate the community’s concerns, especially when it comes to pricing. Someone needs to do more than offer its assurances that it won’t jack up prices.

Enter GoDaddy (NYSE: GDDY).

GoDaddy has avoided becoming a registry, preferring to stick to the registrar side. It has flirted with becoming a registry, though. It unsuccessfully bid for the .Us contract. It applied for .home and .casa, only to later withdraw.

Now could be the time to reconsider. Here’s why.

First, GoDaddy wants to make sure that it doesn’t have to jack up prices on domains from one year to the next. It halted selling Uniregistry domains after the registry significantly increased wholesale prices.

Mike McLaughlin, who was GM of the GoDaddy’s domain business at the time, said:

GoDaddy works to deliver a great customer experience. We now have customers who will be paying up to 3,000 percent more for their renewal. That’s an extremely poor customer experience and does not reflect well on the domain name industry in general.

Drastic price increases definitely lead to a poor customer experience and hurt the domain industry.

Ethos Capital says it’s not going to raise .org prices a lot. But so far that’s just talk. Even if it’s true to its word, someone could come to Ethos next year and offers it $2 billion for .org. The new owner could increase prices substantially.

That would be bad for .org registrants. Bad for GoDaddy. Bad for domain names in general.

GoDaddy accounts for nearly 40% of all registered .org domain names, so it has a lot to lose if .org prices shoot through the roof. (It also has a lot to gain by owning 100% of the sale!)

Second, GoDaddy’s valuation is currently very high. It is valued at over $11 billion. That’s on forecasted 2019 revenue of about $3 billion and unlevered free cash flow of $730 million to $740 million.

The markets would like to see another $100 million in revenue with almost all of it falling to the bottom line.

GoDaddy’s cost of capital is cheap right now, too.

Third, owning a major registry could put pressure on .com and .net registry Verisign (NASDAQ: VRSN) to keep prices in check. In the short term, I expect .org to continue to cost more than .com. But if the U.S. government lifts the lid further on .com prices, GoDaddy would have another domain it could promote as an alternative.

(Note that Verisign’s new agreement with the U.S. government clarifies that Verisign can also become a retailer for non-.com domains.)

Would GoDaddy’s competitors be concerned about it owning .org? Probably. It could also be referred to the competition authorities.

But GoDaddy could assuage these concerns. It could keep .org’s management separate. It could limit its price increases contractually with ICANN. And it could state a minimum price at which it would offer .org as a registrar, ensuring it doesn’t undercut rivals.

A lot of groups could swoop in and offer better terms than Ethos. They can offer ISOC more money, which, in and of itself, should force ISOC to rethink its deal. They can also offer to contractually restrict pricing, which would eliminate much of the blowback ISOC is getting over its deal.

One of those bidders should be GoDaddy.