ICANN blocks controversial sale of .org domain to a private equity firm

The Internet Corporation for Assigned Names and Numbers, the non-profit organization that oversees the Internet’s domain name system, has rejected a controversial proposal to sell the .org domain to a private equity group for more than $1 billion. It’s a serious—quite possibly fatal—blow to a proposal that had few supporters besides the organizations that proposed it.

Currently, the .org domain registry is run by the Public Interest Registry, a non-profit subsidiary of another non-profit called the Internet Society. PIR was created in 2002 to run the .org domain and has been doing so ever since. But last fall, the Internet Society stunned the non-profit world by announcing it would sell the PIR—and, effectively, ownership of the .org domain—to a new and secretive private equity firm called Ethos Capital for more than $1 billion.

The announcement created a swift and powerful backlash. In its resolution formally rejecting the transaction, ICANN says it received its first letter opposing the deal just two days after it was announced. The group would eventually receive letters from at least 30 groups opposing the deal, as well as numerous negative comments during public hearings. Meanwhile, ICANN says, the deal has received “virtually no counterbalancing support except from the parties involved in the transaction and their advisors.”

ICANN didn’t have unlimited discretion to block the deal. ICANN’s contract with the PIR required PIR to seek ICANN’s approval for a change in control of the registry, but it stated that ICANN’s “approval will not be unreasonably withheld.” The big legal question, then, was whether it was reasonable for ICANN to withhold its approval. On Thursday, ICANN’s board concluded that it was.

“We are disappointed that ICANN has acted as a regulatory body it was never meant to be, as laid out in Article 1 of its bylaws,” the Internet Society said in an email statement. “The outcome seems inconsistent with prior decisions made by ICANN in similar cases. We stand by our decision in favor of the transaction to unlock the full potential of the Internet Society, PIR, .ORG community, and ultimately the Internet.”

Too much debt

A significant factor in ICANN’s deliberations was a recent letter from California Attorney General Xavier Becerra. ICANN is a California-based non-profit corporation, and California law gives the attorney general authority to ensure non-profits uphold the terms of their articles of incorporation. In ICANN’s case, that includes a promise to make decisions “for the benefit of the Internet community as a whole.” ICANN’s board mentions Becerra’s letter—and his arguments against the deal—multiple times in its disapproval of it.

One big concern shared by both Becerra and the ICANN board was the prospect of loading the PIR up with debt. Ethos Capital was planning to do a leveraged buyout of the .org registry, requiring the PIR to take out a $360 million loan to help finance the transaction. So PIR would have needed to generate enough revenue to pay off the loan on top of the fees required to simply run the .org registry.

This wasn’t necessarily going to be a problem for PIR. The .org registry generates millions of dollars in extra revenue every year that help to finance the operation of the Internet Society. ICANN’s board notes that in 2018, PIR generated $95 million in revenue, with “nearly $50 million of that revenue distributed as grants.” Ethos submitted financial projections showing that the registry would continue to be profitable enough for PIR to comfortably pay down the $360 million loan.

But of course financial projections might be wrong. If things go worse than expected for PIR, having an extra $360 million in debt will make it more likely the company will run into financial difficulties that could endanger the stability of the .org domain.

“The incurrence of this debt was not for the benefit of PIR or the .org community, but for the financial interests of the Internet Society, Ethos Capital, and other investors in the transaction,” ICANN’s board wrote. “Burdening PIR with significant debt obligations could create uncertainty as to the long-term financial stability of PIR, particularly in light of the current and likely ongoing economic uncertainty.”

ICANN questioned Ethos Capital’s qualifications to manage a registry with over 10 million registered domains. Ethos had pointed out that Ethos founder Fadi Chehade had previously led the acquisition of the domain registry company Donuts. That argument didn’t impress ICANN. This “only demonstrates a track record of acquisition and does not demonstrate an ability or track record of successfully operating a registry operator, particularly one the size of .org.”

Not enough transparency

ICANN also faulted Ethos Capital for refusing to provide ICANN with full details about who owns Ethos.

“PIR declined to provide the specific ownership interests of the investors in the transaction,” ICANN notes. “ICANN has not been provided detailed information concerning various minority investors (many of whom are entities, likely with additional investors), including vehicles through which significant minority investors (the apparent second largest investor to Ethos Capital) will make its investment.”

A final factor working against the proposed deal, ICANN said, was a “lack of meaningful engagement” with the .org community “in the design of the proposed transaction.” As a non-profit focused on Internet governance issues, the Internet Society has a number of mechanisms for accountability to .org domain holders and the Internet at large. Obviously, a newly created private equity firm has much less ability or incentive to be responsive to Internet stakeholders.

“The public interest is better served in withholding consent as a result of various factors that create unacceptable uncertainty over the future of the third largest gTLD (generic Top Level Domain) registry,” ICANN’s board wrote.

ICANN’s decision isn’t necessarily the final word on this issue. ICANN left the door open for the Internet Society to address ICANN’s concerns and submit another proposal. Theoretically, the group could also take ICANN to court, arguing that its decision to withhold consent was unreasonable—and therefore barred by the contract governing the .org domain.

But the controversy over the .org sale has already done serious damage to the Internet Society’s reputation. And there’s little reason to think the group would get a sympathetic ear either from ICANN’s board or the courts.

But the Internet Society’s initial reaction shows little sign of contrition. The group writes that “despite ICANN’s decision, our work to connect the unconnected and strengthen the Internet will continue.” But it isn’t clear about whether it will make another attempt to sell off the .org domain.