Domain Drama

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Article from Issue 235/2020
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Some dramatic stuff is going down right now for a few of the powerful organizations that run the Internet.

Dear Reader,

Some dramatic stuff is going down right now for a few of the powerful organizations that run the Internet. The .org top-level domain, as you probably know, is home to many charities and nonprofit organizations. Traditionally, the price of a .org domain has been kept low to make it affordable for small-time community organizations and charities. But sometime last year, the Internet Society (ISOC) announced a plan to remove the price caps. They put the question up for public comment and received more than 3,000 comments opposing this idea and 6 in favor of it. In spite of the resounding level of disapproval, they went ahead with the plan. A new contract that removed the price caps was announced in July 2019.

Before going on I should expand a few of these nested acronyms: The Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit corporation that contracts with the nonprofit Internet Society (ISOC) for maintaining the .org namespace. ISOC created a nonprofit corporation called the Public Interest Registry (PIR) to manage .org. So PIR was the entity that actually removed the price caps.

No sooner had the dust settled from the price-cap announcement (relatively speaking – some would say the dust never settled), but anyway, sometime in November, the ISOC had another surprise: they announced they were going to sell PIR, along with the responsibility for the .org namespace, to a private equity firm. Why would a private equity company buy a nonprofit corporation? It soon emerged that the company, Ethos Capital, intended to transform PIR from a nonprofit to a for-profit corporation, and they were willing to pay US$1.1Billion to get control of PIR and the .org domain. Some of that money would be put up in cash, and the rest of it, approximately US$300Million, would be a loan leveraged against PIR.

It turns out that lifting the price caps for .org suddenly expanded PIR's potential for revenue, because they could raise the rates charged to the organizations that register .org domains. The .org registry was suddenly much more valuable, and most of the world hadn't realized it yet, which is exactly the kind of pool that private equity firms like to swim in. But it all happened so quickly.

Observers began to ask, "Who is Ethos Capital," and what are they doing here? According to the reports [1], former ICANN CEO Fadi Chehade personally registered the domain used by Ethos Capital exactly one day after ICANN announced that it was approving the plan to lift the .org price caps. Another Ethos Capital employee, Chief Purpose Officer Nora Abusitta-Ouri, once served as Senior Vice President of ICANN and is a long-term associate of Chehade. In other words, the value of the .org domain radically increased, and a private company associated with a pair of former ICANN executives bought it through a closed-door contract.

It was enough to attract attention, and it did attract the attention of California attorney general Xavier Becerra. (The ICANN headquarters is located in California, so ICANN is subject to California law.)

Becerra intervened in January to ask for more information, and, as this issue went to press in April, he sent a scathing letter to the ICANN president and CEO urging them to reject the deal.

The attorney general pointed out the ICANN and ISOC incorporation documents call for them to act for the benefit of the Internet community as a whole, but their actions appear contrary to this mission. He also noted that the financial picture following the sale is still unclear. PIR is financially stable now – will it still be after it loses its nonprofit tax-exempt status and takes on $300Million in debt? Other concerns arise in a flurry of questions. "If ISOC was concerned about diversifying its revenue streams, what did ISOC do, if anything, before deciding to sell the .ORG registry agreement? Why did ISOC not conduct a competitive bid process for a new registry operator if it wanted a change in the registry operator? Did ISOC explore options other than a sale to a private equity firm, given that its nonprofit status was key to PIR becoming the .ORG registrar? What consultation, if any, did ISOC conduct with its stakeholders prior to proceeding with the proposed sale?" [2]

I must admit, there is something almost surreal about a leveraged buyout of a nonprofit that maintains the domain name registry for other nonprofits, but the whole controversy could be over by the time you read this message. ICANN has said it will delay the purchase until May 4 in order to consider the arguments raised in the attorney general's letter. [3]

I think it is fair to add (and most of the commentaries are not so generous) that it is possible the people involved with this deal could have been well intentioned. It appears that ISOC had the goal of establishing an endowment using the $1.1Billion in proceeds from the sale, so by giving up .org, they would be shoring up other parts of their operation and creating some kind of permanent funding source (the details of which are yet undisclosed). ISOC has also argued that it has put safeguards in place to protect the public interest.

But even if this whole deal is not as bad as it looks, still, it is safe to say that the process lacked transparency. Any deal this big should have been negotiated openly with competitive bids, and the insider relationship of former ICANN employees should have caused the participants to err on the side of more information and not less.

Whatever the outcome, I hope the Internet community learns something from this dysfunctional divestiture. Nonprofits need open processes to maintain public trust, and any nonprofit, Internet or otherwise, should practice some healthy skepticism whenever a private equity firm offers a helping hand.

Infos

  1. Internet World Despairs as Non-Profit .Org Sold for $$$ to Private Equity Firm, Price Caps Axed: https://www.theregister.co.uk/2019/11/20/org_registry_sale_shambles/
  2. Becerra's Letter to ICANN: https://www.icann.org/en/system/files/correspondence/becerra-to-botterman-marby-15apr20-en.pdf
  3. ICANN Delays .Org Sale Again After Scathing Letter from California AG: https://arstechnica.com/tech-policy/2020/04/icann-delays-org-sale-again-after-scathing-letter-from-california-ag/

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