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Ethos’ .org pricing promise may be misleading

Kevin Murphy, February 10, 2020, 07:08:18 (UTC), Domain Registries

The more Ethos Capital protests that its plans for .org pricing are not as bad as its critics think, the less I believe it.
Since November, the would-be buyer of Public Interest Registry has being publicly committing to maintain what it calls PIR’s “historic practices” related to pricing.
PIR, under its last ICANN contract, was allowed to raise prices by up to 10% per year, but it did not always exercise that right. In fact, the wholesale price of .org has been fixed at $9.93 since August 2016.
Ethos has described its price increase plans in a very specific, consistent way. In November it said:

Our plan is to live within the spirit of historic practice when it comes to pricing, which means, potentially, annual price increases of up to 10 percent on average — which today would equate to approximately $1 per year.

Last month, chief purpose officer Nora Abusitta-Ouri wrote:

We committed to limiting any potential increase in the price of a .ORG domain registration to no more than 10% per year on average

Last week, she wrote:

Ethos has committed to limiting any potential increase in the price of a .ORG domain registration to no more than 10% per year on average

Over the weekend, she added:

we are not saying that we will raise prices 10% every year — our commitment is that any price increase would not exceed 10% per year on average, if at all.

Clearly, the talking point has been copy-pasted a few times, and it always includes the words “10% per year on average”.
On average.
What does that mean? What are we averaging out here? It can’t be across the .org customer base, as registries aren’t allowed to vary pricing by registrant, so we must be talking about time. PIR has a 10-year contract with ICANN, so we must be talking about prices going up no more than 10% per year “on average” over the next decade.
If PIR, under Ethos’ stewardship, decides to raise prices by exactly 10% every year starting in 2020, the wholesale cost of a .org domain will be $25.76 by 2029, a 159% increase on today’s rate.
Assuming for the sake of this thought experiment that .org stays flat at 10 million registrations (it’s actually a little more today, but it’s declining), Ethos would be looking at a $258 million-a-year business by 2029, up from today’s $99 million.
Over the course of the 10-year contract, .org would be worth a cumulative $1.74 billion in reg revenue, up from the $993 million it would see without price increases.
But Ethos is only promising that price increases will be no more than 10% per year on average, remember, and it’s even hinted that there could be some years with no increases at all.
I noted in November that this commitment could see Ethos raise prices in excess of 10% early on, then freeze them so the increase averages back down to 10% over time.
It would of course make the most sense to front-load the price increases, to maximize the return.
At one extreme, Ethos could raise the price to $25.76 a year immediately, then lock the price down until 2029. That would make .org a $258 million-a-year business overnight, and making the cumulative 10-year revenue around the $2.58 billion mark.
Or, it could raise prices by 20% in alternate years, adding up to $1.77 billion in total top-line and a price to registrants of $24.71 by 2028.
There’s an infinity of variations on these strategies, and Ethos’ modeling is certainly more complex than the envelope upon which I just jotted these simplified figures down, but it’s pretty clear that while the company may well stick to the letter of its promises, it gets its best returns if it raises prices hard and early.
The more I read “on average” repeated in Ethos’ literature, the more convinced I become that this is exactly what it has in mind.

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Comments (11)

  1. Snoopy says:
    February 10, 2020 at 9:02 am

    No way will they stick to 10% long term. Only way to hold a private equity person to anything is to have an iron clad legal agreement.
    Even still 10% a year is a huge rate of increase, prices start hitting the stratosphere after about 5 years.

    Reply
  2. John says:
    February 10, 2020 at 5:09 pm

    Keep in mind that Donuts Domains told the world in 2017 that they will not raise prices on its existing users (domain registrants.) This was their commitment. They said raising prices on its captive base of users was “not part of its business plan.”
    However, shortly after Fadi Chehade left his post as ICANN CEO – he joined ABRY partners and acquired Donuts Domains – the largest applicant and owner of gTLD’s in the world. No less than 6 months after Fadi acquired Donuts – they announced a price increase on 220 out of 241 domain extensions.
    Despite the fact that Donuts Domains previously committed not to raise prices.
    The US Department of Commerce expressed serious concerns about “ICANN Revolving Doors” and conflicts of interest and suggested cooling off periods.
    One blog posting titled: “So Donuts lied and is now increasing renewals to 220 domain extensions”
    Bottom line – as snoopy says above – “commitments” mean nothing. To protect consumers, pricing caps must be in the contract.
    Not to mention that 10% pricing increase are supracompetitive in the absence of competition.

    Reply
  3. John says:
    February 10, 2020 at 5:19 pm

    I forgot to mention above that Fadi Chehade is behind the Ethos transaction.
    Commitments mean nothing…..
    Commitments are not binding…..
    Meaning that PIR can do whatever it wants.
    Because pricing caps are no longer in the contract – PIR will have the ability to set wholesale prices however it sees fit.
    Look at history. Look at what Fadi Chehade did in the past. He is behind Ethos deal (despite his strong efforts to hide his involvement) and Ethos will raise prices.
    One thing that is guaranteed – Ethos – a private equity company and new owner of PIR – has a fiduciary duty to its shareholders – and will absolutely be raising prices on its captive base of users.
    Despite the fact that the cost to operate .org have significantly declined.
    Year Cost to operate the .ORG Registry
    2010 $27,672,049
    2011 $28,704,215
    2012 $29,081,068
    2013 $31,970,956
    2014 $33,173,705
    2015 $34,978,686
    2016 $37,978,497
    2017 $37,806,841
    2018 $18,066,321
    In a competitive market – one would consider reducing prices to be “more competitive.” But as we all know, Ethos capital will absolutely raise its prices on its captive base of users – who are held hostage to their domain name.
    There is total market failure in the DSN due to how ICANN treats is contacted registries. And ICANN continues to look the other way to protect PIR and Verisign – and ignores US Department of Justice Antitrust Division advice.

    Reply
  4. John says:
    February 10, 2020 at 5:22 pm

    .Org is one of the oldest and most legacy TLD’s with massive market power.
    Substitutes do not exist.
    PIR faces zero competition in the market for .org registry services – because of its presumptive right of renewal – meaning ICANN has granted it the ability to operate in perpetuity.
    Because there no market forces are in place to discipline pricing – ICANN must keep pricing caps in the Registry Agreements to protect consumers.
    ICANN has an obligation to do so.
    Removing pricing caps was ICANN’s biggest failure. ICANN is directly facilitating supracompetitive pricing on a captive base of users who are unable to switch.

    Reply
  5. John Berryhill says:
    February 10, 2020 at 6:21 pm

    Like any corporation, they have a responsibility to their shareholders to maximize revenue. Accordingly, they MUST increase prices to the maximum extent possible which does not reach a point of declining return. Any representation otherwise is simply a failure of the board to act in accordance with its duty to the shareholders.

    Reply
    • John says:
      February 10, 2020 at 6:33 pm

      Because consumers are locked-in and held hostage to their domain names – if this deal is allowed to go through – Ethos has stuck the mother load of all opportunities.
      Registrants can’t switch their domain names. The actual number of registrants that have switched away from .org to another extension is non-existent. As the U S Department of Justice Antitrust Division concluded – domains are not substitutes for one another because of the extraordinary switching costs.
      Thus, the registry operator can increase its prices however it sees fit to maximize shareholder value – Ethos has an obligation to do so.

      Reply
    • Kevin Murphy says:
      February 10, 2020 at 6:33 pm

      What about this idea of converting to a “Public Benefit LLC”? Does that not release them from some of these obligations to shareholders?

      Reply
      • Mitch Stoltz says:
        February 10, 2020 at 7:19 pm

        The “benefit corporation” form of business entity is fairly new and hasn’t yet been fleshed out by the courts. Mostly it’s used by corporations that want to enshrine environmental or labor standards in their charter. Ultimately, it’s not clear what happens if shareholders act against the interest of the company’s public mission, and more importantly, who gets to enforce those commitments. It’s still operating against a backdrop of hundreds of years of corporate law, in which shareholder value is always the ultimate aim.

        Reply
      • John says:
        February 10, 2020 at 7:46 pm

        I assume Ethos has the ability to covert or dissolve Public Benefit LLC anytime in the future. We do not know – because Ethos said it is not willing to disclose any confidential information. Furthermore, what happens after Ethos exits from this business and sells to another company?
        At the end of the day, we have hundreds of millions of investor and private equity money backing this deal. These investors are not stupid – and the contracts will permit them to do whatever they want with .org wholesale pricing.
        Ethos continues spin this in positive light – but none of their flimsy justifications hold any weight.

        Reply
  6. John says:
    February 10, 2020 at 7:53 pm

    The larger issue is ICANN.
    ICANN decided to remove all pricing caps in the legacy .org domain extension.
    ICANN worked with PIR behind closed doors, in a non-transparent manner, outside of the multistakeholder model. ICANN did not first seek stakeholder input on this important pricing change. ICANN simply decided that it was going to move one of the most important legacy extensions (with massive market power – where substitutes do not exist) to the new version of the gTLD agreement – with NO pricing caps. Despite the fact that ICANN is on record saying that much greater consideration and community input must occur before considering moving any of the legacy TLD’s over to the new version of the agreement. ICANN has acknowledged legacy TLD’s are different from the new gTLD’s – and committed to stakeholder input before moving legacy TLD’s to the new version of the agreement (fyi – the new version of the gTLD agreement was never intended for the legacy TLD’s anyhow.) But ICANN did not follow through with this commitment.
    ICANN should have maintained the existing price caps – which were originally put in place more than 20 years ago to prevent the registry operator from acting opportunistically on a captive base of consumers. Even if ICANN’s desire was to move over to the new version of the gTLD agreement – it could have simply kept two very simple sentences which preserved pricing caps of 10% per year. But ICANN gave absolutely no consideration to registrants and if the prices they will pay is reasonable.
    ICANN put the proposed agreements out for public comment – but completely ignored 99.9% of the opposition and executed the agreements anyhow. When several parties filed a reconsideration request with ICANN – the ICANN’s Ombudsman – who is supposed to remain impartial and neutral – labeled all of the comments as “spam” and sided with ICANN. The fact that the Ombudsman justified ICANN’s actions – is a clear sign that the office of the Ombudsman is a total joke and is in place to shield ICANN from any accountability. Herb Wayne should be investigated and has materially breached his duties.
    Probably the worst part in this whole situation – ICANN claims it is a multistakeholder model. But this is completely contradictory to its actions. It did everything behind closed doors – and ignored 99.9% of the opposition.
    It appears ICANN did absolutely no work before it removed pricing caps. ICANN did absolutely no analysis – did not conduct an economic study – did not look at PIR’s financials – did not consider the actual cost to operate .org DECREASED by more than 50% in 2018 because PIR put the back-end technical operators out for competitive tender.
    ICANN is telling the world it no longer wants to regulate prices – but ICANN has and continues to engage in price regulation……….
    ICAN is a regulator – it is in charge of one of the largest global resources in the world – the DNS and the Internet. ICANN claiming it is not a regulator is entirely misguided. Some of ICANN’s decisions impact the industry to the tune of billions and billions of dollars. It regulates and it is s a regulator.
    ICANN’s decision to remove all pricing caps in .org is absolutely foolish and it benefits nobody other than PIR. ICANN is putting the financial interest of PIR ahead of 99% of other stakeholders.
    Why does ICANN treat its contracted registrars with so much favoritism?
    It is time to call ICANN what it is – it is a Registry Trade Association – that continues to make decisions in the best interest of PIR and Verisign and does not consider any other stakeholders.

    Reply

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