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

Sun Jan 12 00:43:56 UTC 2020

A really good summation of what has happened, and why.  The outstanding question for ALAC in this context is whether it was ever in ICANN’s mandate to preserve the non-commercial mission of PIR - or whether it should have been - and whether there are steps that can be taken that can mitigate the for-profit nature of the takeover  - in Katherine Maher’s words, preserve the long term commitment to the open and non-commercial nature of PIR  - now in  the hands of a for-profit corporation.

Holly

> On Jan 12, 2020, at 3:48 AM, David Mackey <mackey361 at gmail.com> wrote:
> 
> Roberto,
> 
> "I believe that our two assessment by and large coincide"
> 
> Agreed!
> 
> On Sat, Jan 11, 2020 at 11:27 AM Roberto Gaetano <mail.roberto.gaetano at gmail.com <mailto:mail.roberto.gaetano at gmail.com>> wrote:
> David,
> Just a point of clarification.
> When I was talking about valuation, I was not talking about the sale price but about an assessment of the PIR assets according to financial standards. Although I am not an expert, and therefore I might be wrong, I do believe that the sale price was higher than the objective valuation of the company, considering the assets including reserve funds, that have been drastically reduced in the last couple of years.
> The reason why Ethos is ready to pay more than the valuation is that it has a strategy that could extract more value from PIR than ISOC was able to, and this is, IMHO, a key element in the understanding of the importance of the operation. My personal opinion is that Ethos wants to change the business model of PIR - the question is how, and my answer is that this will be realised through vertical integration with Donuts. This might well be done via a sale to a different entity that ensures this vertical integration - in this case I believe that our two assessment by and large coincide.
> Of course, this is just a personal opinion, and I do not have any information for drawing this conclusion other than what is currently public.
> Cheers,
> Roberto
> 
> 
>> On 09.01.2020, at 01:19, David Mackey <mackey361 at gmail.com <mailto:mackey361 at gmail.com>> wrote:
>> 
>> 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 <mailto: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 <mailto: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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