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

[Greg Shatan]

I think it's critical that At Large focuses on what the future of .org will
look like, and how we get there.

I don't think there is any legal basis for the .org contract to be
terminated with PIR.
Similarly, I don't think there is any legal basis for ISOC's control of PIR
to be terminated against the will of ISOC.
It's a waste of time to consider solutions based on these end results,
whether from the Coalition or otherwise.

However, it is entirely realistic (even it seems unlikely) to think that
ICANN could block the sale to Ethos Capital.
If ICANN does block the sale, the result will be the *status quo ante*:
ISOC will continue to control PIR and PIR will continue to be the registry
operator for .org.
Same thing if the sale doesn't go through for other reasons (e.g.,
Pennsylvania Attorney General review, which appears to be required under
these circumstances).  ISOC/PIR/.org remain linked.
At that point, ISOC either ends this exploration or looks at other options.

Alternatively, it's realistic to think that ICANN could put binding
conditions on its approval of the sale.

Therefore, I suggest that we concentrate on providing advice to the ICANN
Board on how it should review and analyze this sale.  We should consider
what criteria ICANN should use, and how these relate to ICANN Bylaws, the
.org contract, etc. This analysis could result in ICANN blocking the sale
or imposing conditions on the sale.  If the latter, we should advise what
those conditions are, and how they would be enforced.

There are multiple legitimate reasons to critique the sale, the seller and
the buyer -- both the process and the result, and the actions and
statements throughout.  Unfortunately, there are also multiple criticisms
driven by self-interest, score-settling, animus, stereotype, exaggeration
or lack of information; the latter type tends to obscure the former,
because the latter are more sensational.  We need to separate the wheat
from the chaff -- a frustrating but necessary step -- and provide the best
advice we can based on legitimate concerns about this transaction.  And
it's not a bright line between the two.

Take, for example, the non-profit status of the .org registry operator. I
see no reason or evidence to show that ICANN or PIR or ISOC were mandated
or required to preserve the non-commercial status of PIR.  Claims that they
were have led to some fairly scorching allegations.  But this is a
distraction.  The better question is forward looking -- being confronted
with this fork in the road, should the .org registry operator be required
to remain a non-profit?  If so, on what basis?  If not, on what basis?  In
either case, what are we trying to protect and preserve about .org as it is
and as it should be (but not as some wish it had been but wasn't -- e.g.,
an official non-profit registry)?

If we can keep our discussion on track, we will get to a result more
quickly.

Best regards,

Greg





On Sat, Jan 11, 2020 at 7:44 PM Holly Raiche <h.raiche at internode.on.net>
wrote:

> 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> 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> 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> 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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