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Ethos volunteers for .org pricing handcuffs

Kevin Murphy, February 25, 2020, 11:33:37 (UTC), Domain Registries

Ethos Capital has volunteered to have price caps written back into Public Interest Registry’s .org contract, should ICANN approve its $1.1 billion proposed acquisition.
The private equity firm said Friday that it has offered to agree to a new, enforceable Public Interest Commitment that bakes its right to increase prices into the contract under a strict formula that goes like this:

Applicable Maximum Fee = $9.93 x (1.10n)

The $9.93 is the current wholesale price of a annual .org registration. The “n” refers to the number of full years the current .org registry agreement has been in play, starting June 30, 2019.
In other words, it’s a 10%-per-year increase on average, but PIR could skip a year here and there and be eligible for a bigger price increase the following year.
For example, PIR could up the fee by 10% or $0.99 to $10.92 this coming June if it wanted, but if it decided to wait a year (perhaps for public relations reasons) if could increase the price to $12.13 in June 2021, an increase of $2.20 or roughly 22%.
It could wait five years before the first price increase, and up it from $9.93 to $16.53, a 66% increase, in year six.
While price increases are of course unpopular and will remain so, the formula does answer the criticism posed on DI and elsewhere that Ethos’ previous public statements on pricing would allow PIR to front-load its fee hikes, potentially almost doubling the price in year one.
But the caps have a built-in expiry date. They only run for eight years. So by the middle of 2027, when PIR could already be charging $18.73, the registry would be free to raise prices by however much it pleases.
It’s a better deal for registrants than what they’d been facing before, which was a vague commitment to stick to PIR’s old habit of not raising prices by more than 10% a year, but it’s not perfect and it won’t sate those who are opposed to increased fees in principle.
On the upside, a PIC is arguably an even more powerful way to keep PIR in line after the acquisition. Whereas other parts of the contract are only enforceable by ICANN, a Public Interest Commitment could theoretically be enforced via the PIC Dispute Resolution Procedure by any .org registrant with the resources to lawyer up. Losing a PICDRP triggers ICANN Compliance into action, which could mean PIR losing its contract.
The PIC also addresses the concern, which always struck me as a bit of a red herring, that .org could become a more censorial regime under for-profit ownership.
Ethos says it will create a new seven-person .ORG Stewardship Council, made up of field experts in human rights, non-profits and such, which will have the right to advise PIR on proposed changes to PIR policy related to censorship and the use of private user/registrant data.
The Council would be made up initially of five members hand-picked by PIR. Another two, and all subsequent appointments, would be jointly nominated and approved by PIR and the Council. They’d serve terms of three years.
The proposed PIC, the proposed Council charter and Ethos’ announcement can all be found here.
Correlation does not necessarily equal causation, but it’s worth noting that the proposal comes after ICANN had started playing hard-ball with PIR, Ethos and the Internet Society (PIR’s current owner).
In fact, I was just putting the finishing touches to an opinion piece entitled “I’m beginning to think ICANN might block the .org deal” when the Ethos statement dropped.
In that now-spiked piece, I referred to two letters ICANN recently sent to PIR/ISOC and their lawyers, which bluntly asserted ICANN’s right to reject the acquisition for basically any reason, and speculated that the deal may not be a fait accompli after all.
In the first (pdf), Jones Day lawyer Jeffrey LeVee tells his counterpart at PIR’s law firm in no uncertain terms that ICANN is free to reject the change of control on grounds such as the “public interest” and the interests of the “.org community”.
Proskauer lawyer Lauren Boglivi had told ICANN (pdf) that its powers under the .org contract were limited to approve or reject the acquisition based only on technical concerns such as security, stability and reliability. LeVee wrote:

This is wrong. The parties’ contracts authorize ICANN to evaluate the reasonableness of the proposed change of control under the totality of circumstances, including the impact on the public interest and the interest of the .ORG community.

Now, the cynic in me saw nothing but a couple of posturing lawyers trying to rack up billable hours, but part of me wondered why ICANN would go to the trouble of defending its powers to reject the deal if it did not think there was a possibility of actually doing so.
The second letter (pdf) was sent by ICANN’s new chair, Maarten Bottermann, to his ISOC counterpart Gonzalo Camarillo.
The letter demonstrates that the ICANN board of directors is actually taking ownership of this issue, rather than delegating it to ICANN’s executive and legal teams, in large part due to the pressure exerted on it by the ICANN community and governments. Botterman wrote:

It is not often that such a contractual issue raises up to a Board-level concern, but as you might appreciate, PIR’s request is one of the most unique that ICANN has received.

He noted that the controversy over the deal had even made ICANN the target of a “governmental inquiry”, which is either a reference to the California attorney general’s probe or to a letter (pdf) received from the French foreign office, demanding answers about the transaction.
It’s notable from Botterman’s letter that ICANN has started digging into the deep history of PIR’s ownership of .org, much as I did last December, to determine whether the commitments it made to the non-profit community back in 2002 still hold up under a return to for-profit ownership.
Given these turns of events, I was entertaining the possibility that ICANN was readying itself to reject the deal.
But, given Ethos’ newly proposed binding commitments, I think the pendulum has swung back in favor of the acquisition eventually getting the nod.
I reserve the right to change my mind yet again as matters unfold.

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Comments (4)

  1. JM says:

    But do 10% annual increases truly qualify as handcuffing a business?
    There are plenty of businesses that operate in a declining price environment, or closer to the rate of inflation – 2%. They must compete on quality and innovation to attract repeat customers, and even then their pricing power is limited. They certainly don’t get to codify their own generous annual price increases.
    Further, one must consider the cumulative effects of compound interest year after year. By year eight this will already have added to the cost of dot org’s significantly, and from that steep plateau all price upward restraints will then be removed from dot org.
    Even Verisign’s 7% increases in the back 4 of 6 seem tame in comparison.

    • John says:

      JM – 10% annual increases is a golden opportunity. It is a gigantic windfall for Ethos Capital because PIR has a monopoly on the .org namespace. Yes, I believe the word “handcuffs” is the wrong term. A better word may be “golden handcuffs”
      Imagine if you operated a company – and that you had the ability to increase your prices by 10% per year – but each price hike would have no corresponding impact on end user demand and your customers. Meaning your customers would continue to pay the fees no mater how much you charged – or how significant a rate hike.
      .org registrants are locked in and unable able to switch. This is because PIR has a monopoly on the .org domain extension – where substitutes do not exist.
      Furthermore, it was publicly reported that PIR’s actual cost to operate the registry declined by more than 50% in 2018. In a competitive environment, PIR would want to lower its prices to complete in the marketplace.
      But because it does not face any competition – its new operator wants to have the ability to increase its prices however it sees fit, to maximize shareholder value and its return on investment.
      10% compounded is a significant rate increase.

  2. John says:

    Even though Ethos said they would not raise prices by more than 10% on average per year, they have now REDUCED that commitment to only apply for the first 8 years?
    Previously they committed to “no more than 10% per year, on average” – with no end date.
    But now they are now saying they will only agree to this for 8 years? And they want to backdate the start date to June 2019?
    What happens in 7.3 years from today? PIR will be able to increase it prices however it sees fit – because it operates a monopoly – that will never be subject to a competitive bidding process – and it has a captive base of users, where substitutes do not exist?
    So in 7 years – Ethos can do whatever it wants with regards to pricing? Increase prices and harm consumers.
    When Ethos exits in 7 years (as all private equity factors exit price on its return on investment), it has every incentive to increase prices by the maximum extent possible (or pass along the ability to increase prices in an uncontrolled and unchecked manner to the new operator.)
    Thus, in 7 years, ICANN will be in the same exact situation as today – but prices will be at $18.73
    What a mess!

  3. john1 says:

    This deal is DEAD.

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