[CPWG] A white knight on the horizon for .ORG?

[David Mackey]

Roberto,

I am not an expert of finances either. However, from a broad historical
perspective, I can see the following...

.ORG established in 1985. Estimated Value = $0.
.ORG transferred from Verisign to PIR in 2003. Estimated Value = $0 plus
right for Verisign to maintain .COM contract
PIR sold from iSOC to Ethos in 2019. Value = $1.135 billion (yet to be
closed)

I don't have any reason to doubt the valuation of the proposed transaction.
I trust Ethos has done their financial homework properly. I also have no
reason to doubt that iSOC has not done their homework too. Ethos and iSOC
seem to believe they have found fair market value.

I think it's irrelevant to worry about the valuation of the transaction in
2019, as agreed to between Ethos and PIR. It's up to the buyer and the
seller to establish a fair market price. I also think it's a red herring to
worry about any potential .ORG domain price increases. That ship has sailed.


I do think end users have an interest in whether PIR is sold as an asset
from iSOC (non-profit) to Ethos (for-profit). The mission of those two
organizations are very different. It is well accepted that for-profit
companies only have one mandate to their shareholders and that is to make
money. It's simple and should not be controversial in, and of, itself. They
may want to protect the value of their asset, PIR, but their overriding
mission serves the interests of their shareholders.

I think many people are missing the nature of Ethos's investment. Although
ICANN may add guard rails to protect against pure-profit behaviour, I
suspect the investment payoff to Ethos is when they sell their asset in the
future. A metaphor that can be used is when a company purchases a building.
They maintain it and collect rent for a number of years, but the big payoff
is when they sell it for capital gains in the future. Capital gains is the
profit motive, not the rent/revenue that's earned each year while managing
the asset. Hence, it is highly likely that Ethos is making a $1.135 billion
bet that it can maintain and grow the value of PIR, so that it will make
more than $1.135 billion in the future. This is what private equity
companies do. If Ethos is successful, PIR will be worth more than $1.135
billion in the future. Still the current and future valuation of PIR is not
relevant to end users. End users are often well served by properly
functioning capital markets in the right context.

However, in this case, it's the switching of the organizational mission
from a non-profit, iSOC, to a for-profit, Ethos, which causes problems and
risks for many Internet stakeholders and end users. Current .ORG
registrants are switching from assumed stakeholders to Ethos/PIR customers.
The nature of the relationship is changed during the transaction.

Regardless on how this is done, I believe Katherine Maher, CEO and
Executive Director of the Wikimedia Foundation, makes a valid point in
wanting to preserve "a longterm commitment to the open and noncommercial
internet". Hence, I believe At-Large End Users interests do not align with
iSOC organizational interests for purposes of this transaction.

Cheers,
David

On Wed, Jan 8, 2020 at 4:06 PM Roberto Gaetano <
mail.roberto.gaetano at gmail.com> wrote:

> Hi David.
> One sentence in your email prompts another element that we want to
> consider if we want to build a complete picture.
>
> > On 08.01.2020, at 20:51, David Mackey <mackey361 at gmail.com> wrote:
> >
> > < ….. >
> >
> > I guess it's not totally surprising as we've seen the Internet expand
> over decades across the globe to the point where organizations like PIR are
> valued in the billions of dollars.
> >
> > < ….. >
> >
>
> I am not an expert of finances, but I believe that the sale price of PIR
> is appropriate for granting ISOC a steady income - once invested - that is
> at least what PIR was providing.
>
> OTOH, I am not convinced that the current value of PIR is above a billion
> - but I may be proven wrong. Whatever the case, we should wonder why Ethos
> believes to be able to extract from PIR a higher revenue than what PIR
> produces today.
> IMHO, the ability to raise price is not the good answer. This ability is
> provided by the contract with ICANN, and predates the sale - so it is
> something that ISOC has without doubt factored in the sale price.
> The best chance to increase the profitability comes from a different
> business model or a different corporate structure (or both, obviously). The
> first thing that comes to my mind, that I have hinted already in my early
> comments - but then not elaborated upon - is vertical integration. I am not
> claiming to be an expert on the domain name business, but as co-chair of
> the Vertical Integration Working Group I have learned a lot.
> PIR, as registry, has to treat all the registrars equally. When PIR owned
> a registrar, it was obliged to provide to all other registrars the same
> information given to it. However, a registrar can pick and choose
> registries to partner with and with whom to share information even of
> strategic nature. Considering the relationship that folks in Ethos have
> with Donuts, it would not be surprising to see in the future a
> collaboration where - to be compliant with ICANN rules - Donuts is running
> the show, and PIR would set its business accordingly.
>
> Should we take this also into account to assess the situation? Maybe we
> should. But maybe the first step could be to discuss whether this is a
> reasonable scenario or whether I am off the mark.
>
> Cheers,
> Roberto
>
>
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