The Longest Now


The .Org Fire Sale: How it sold for less than half its valuation
Monday December 02nd 2019, 12:13 am
Filed under: %a la mod,fly-by-wire,international,meta

Part 2 in a series.  (See also Part 1: The Great Dot Org Heist.)
Updates: Moz letter, El Reg, registry agreement, ISOC forumletter, Wyden

Ethos Capital seems on track to complete their takeover of .org early next year.  ICANN claims it is powerless to stop the acquisition. ISOC president Andrew Sullivan suggested nothing but a court order would make ISOC change their minds. (If the sale concerns you, you can write to the Virginia state DA, who has to approve the sale via the Orphans Court.)

There are still many unanswered questions. Sullivan’s presentation of the offer to the ISOC Board highlighted a need for speed and secrecy. Details were redacted from the board minutes, and have been released grudgingly. Only last Friday did the price of the acquisition ($1.1B) finally emerge, which ISOC insists is a good price (or was before the price caps were lifted), but which most consider well below the market value of .org. (For reference, here’s PIR’s 990 and annual report:  $90M revenue, $60M gross margin, 77% renewal rate).

Sullivan shared some conflicting thoughts in an interview with The Register: he thinks not many people care about the sale; public pushback has been strong; the sale would not have happened if there had been public discussion.

Mozilla has compiled Questions about .org into a public letter, asking both ISOC and ICANN to answer them before concluding this sale.

Measuring the worth of a legacy registry

While there is a range of estimates out there for the true value of .org, the sale price is on the low end under conservative assumptions. 

Lance Wiggs (investor, consultant, former councillor for InternetNZ) estimates that the sale undervalues the registry by $1B-10B, depending on how it is managed, and that the investors are taking almost no risk, for a chance at a 5x return and ample opportunities to flip the registry to a new buyer in the next few years.

How did this happen?  Among other things:

  • No competitive bid.  (ISOC suggests that they had at least two bids. But the first public mention of bids was in the minutes of their 10/28 board meeting, and by the next day Sullivan entered into exclusive talks with Ethos. ISOC says they considered a public auction, but Ethos said they would not participate in such an auction(!) )
  • No public market / sale analysis.  (This makes it hard to determine whether the parties involved built in incentives to close a deal quickly, even if it was well under the market rate for the registry. At least one independent assessment put the value closer to $4B)
  • No public story of how the deal came together.  (The outline: Nevett is approached by Ethos for the first time in September, and has a complete offer to put before the ISOC board by late October, developed in private.)
  • No discussion of alternatives to financing an endowment.  (National bond funds and other options have been suggested that could have allowed ISOC to diversify its investments without selling PIR outright.)
  • Analyses based on an assumption of no future growth in price or revenue. (Sullivan mentioned that the purchase price was a high multiple of EBITDA, but that’s a poor metric when the buyer is doubling prices every 7 years. And all TLD agreements now have 10-yr terms and presumptive right of renewal, so there’s no reason to expect the registry to change hands in the future.)
  • No assessment of future impact or development of the registry.  (Many questions about pricing, censorship, and squatting need addressing, for Ethos and for whoever it sells the registry to later. The impact on people + orgs in less-developed parts of the world bears addressing in detail.)
  • ISOC as an entity never embraced running a registry, and may have been looking to get out of the business. (per Kieren McCarthy, Afilias convinced them to do it in 2002 – and have managed the registry for a cut of gross revenue, ever since.  On the other hand, Sullivan ran ops and name services at Afilias for years…) 

How to monetize .org if you must

Once the acquisition is finalized next year, there will be no constraints on Ethos short of their name, and people talking with their feet.  They offered to try to keep price hikes predictable and only 5x the US interest rate… but there is no enforcement or even monitoring of this. The cost of switching domains for established organizations is large, so they can experiment boldly without denting their user base. So what might they do?

  • Maintain a 10% annual increase for domains with the least demand.
  • Create multiple price tiers for popular domains, up to 100x the base rate.
  • Open a registry-owned registrar and start undercutting competition.
    • Encourage current holders to renew for 10 years, to soften the blow of price hikes, and raise cash up front to offset the cost of the acquisition.
  • Package and sell data about domain holders and purchases to third parties
  • Explore a merge with Donuts.  .org is more valuable in combination, saving on overhead and data analysis, raising the price floor for other TLDs when .org prices rise.  Cross-sell across domains.  Take the new entity public.
  • Explore a sale back to Verisign.
  • Explore acquisition by  other investment groups.  Some nations have venture arms that might have extra reason to run .org, for even the chance of influencing what can be hosted on those domains.

Managing an ISOC endowment

Meanwhile, the Internet Society will have a $1.1B endowment to look after, something they have never done before. (Though they did just open a grant-giving Foundation earlier this year.)  At a community forum, ISOC representatives said that they were committed to setting up this endowment, but have made no decisions regarding how the endowment would be set up or invested.

Sullivan suggested that their goal is to return roughly the same annual revenue as they had gotten that year from PIR — around $45M.  Of course this time without the possibility of expanding an underlying business year by year.

As with the sale details, details about the endowment remain private. Board minutes suggest they may stand up a new entity, the “Connected Giving Foundation”, to invest the endowment with guidance from Goldman Sachs, who advised on the acquisition.

Ongoing commentary

Senator Ron Wyden: “[Extremely concerning. I’m looking into how this sale happened, what can be done, and what it will mean for non-profits and users.

The ISOC board held a public forum in which it again stated that only a court order would change its decision, and published a regretful letter in which they promised to show more empathy for community concerns.

 


6 Comments so far
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[…] The .Org Fire Sale: How it sold for less than half its valuation 2 by metasj | 1 comments on Hacker News. […]

Pingback by New top story on Hacker News: The .Org Fire Sale: How it sold for less than half its valuation – Hckr News 12.02.19 @ 10:04 pm

Fricking disgrace! Taxpayer gets fleeced yet again.

Comment by Anonymous 12.02.19 @ 11:02 pm

[…] The .Org Fire Sale: How it sold for less than half its valuation 374 by metasj | 67 comments on Hacker News. […]

Pingback by New best story on Hacker News: The .Org Fire Sale: How it sold for less than half its valuation – protipsss 12.03.19 @ 4:35 am

Follow the incentives

Comment by Anonymous 12.03.19 @ 5:15 am

[…] to budge on the sale to Ethos. Despite criticism that Ethos was able to buy .org management for a song thanks to a lack of competitive bidding or transparency, ISOC president Andrew Sullivan has […]

Pingback by The Quest To Save .Org From Being Ruined By Private Equity – Shirley Coyle 12.03.19 @ 5:34 pm

> “no constraints on Ethos short of their name”

Quoting Walter in The Big Lebowski, “Say what you want about the tenets of National Socialism, Dude, at least it’s an ethos!”

There’s no a priori reason to assume Ethos’s ethos is any better than the National Socialists’.

Comment by Nathan Myers 12.04.19 @ 1:48 pm



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