ISOC’s broken funding model and profligate spending: Guest editorial
[Editor’s note: The following is a guest editorial from Nat Cohen, who provides interesting details regarding the birth of Public Interest Registry and its role with Internet Society. While I don’t necessarily agree with all of the conclusions, I think it’s a good contribution to current discussions regarding the sale of Public Interest Registry to Ethos Capital.]
The Internet Society (“ISOC”) generates tens of millions of dollars for itself each year through its control of the .org registry, Public Interest Registry (“PIR”), which makes money each time a .org domain name is registered or renewed. Running .org has become so lucrative that PIR is now a target for buyout by private equity firm Ethos Capital. Much of ISOC’s revenue comes from nonprofit organizations[1] which predominantly use .org domain names.[2] As a consequence, funds needed by those nonprofit organizations to pursue their own worthwhile missions are transferred to ISOC. This raises the question as to whether ISOC’s control over .org serves the public benefit.
The way the nonprofit funding model usually works is that the nonprofit does good work and raises funds from contributors who voluntarily wish to support the mission of the nonprofit. A nonprofit, such as Doctors Without Borders, must demonstrate that it is a good steward of donated funds in order to be able to attract continued contributions.
In contrast, ISOC uses its modest financial support of the Internet Engineering Task Force (“IETF”), where most of the actual work is carried out by “thousands of volunteers from around the world”,[3] to justify fat compensation packages for its own executives, while imposing a $70 million upcharge on its base of .org registrants, and enjoying control of a public resource valued at over a billion dollars. The funds it extracts are not contributed voluntarily but come from compelled payments from those wishing to use .org domain names.[4] It spends vast sums of money without needing to justify that the money is being put to a worthwhile or efficient purpose and with no accountability to discipline its spending.
ISOC’s Purpose and its Profligate Spending
ISOC’s primary mission is to support the modest funding needs of the IETF.[5] The IETF is an Internet standards body made up of thousands of people volunteering their time and effort[6] to accomplish the IETF’s goal of “making the Internet work better.”[7] The IETF conducts three meetings per year, runs mailing lists and publishes Internet standards documents. ISOC contributed $3 million to the IETF in 2018,[8] yet most of that was merely passing along outside contributions earmarked[9] for the IETF.[10]
ISOC raised more than $70 million in 2018 from its control over the .org registry. ISOC paid $18 million to Afilias[11] to do the work of actually operating the registry, paid $2.65 million in fees to ICANN, and yet charged .org registrants $93 million for the right to register or renew their .org domain names.
Where did the bulk of the $70 million go?
- Nearly $7 million went to pay PIR staff and executives. PIR contracts with Afilias to do the actual work of running the .org registry; PIR handles marketing and registrar relations and it lobbies ICANN to look following ISOC’s interests. PIR has ten key employees, counting top executives, each compensated in excess of $200,000 per year. The combined compensation for the CEO position[12] exceeded $770,000 in 2018.[13] In contrast, Doctors Without Borders, whose size and scope of operations dwarfs that of PIR, paid its executive director less than $300,000 in 2018.[14]
- ISOC pursues a number of vaguely defined initiatives:[15] [16] global engagement, such as removing impediments to Internet growth in developing countries ($9 million), communicating regarding what it does ($4 million), providing briefings on policy issues ($4 million),[17] reaching out to fresh stakeholders ($2 million), and elevating “identity” to a core issue and educating end-users to the importance of Internet security ($3 million).[18]
- $17 million in compensation[19] was paid to a staff of over 100 people in 2018.[20]
- $7 million was spent on travel and attending conferences.[21] [22]
The Controversial Award of .org to ISOC
How did we get into this situation? ISOC leveraged its role in partially funding the IETF to gain control of .org with the help of its connections at ICANN.
In the early 2000s, ISOC faced “a looming financial crisis”[23] – it needed funds for itself. Meanwhile, ICANN needed a fresh manager for .org. ICANN put .org up for bid in 2002.[24] ISOC was one of eleven bidders. ISOC did not fare that well in the initial evaluation process. ISOC received poor marks from the bid evaluators on the “good works” criterion, with its support for the IETF being its only saving grace:
“the Committee notes that although it has made no commitment to support ‘good works,’ profits from the registry will go to ISOC. On the arguable proposition that support for IAB/IETF standards processes constitutes ‘good works’ we awarded ISOC a ‘Low’ ranking in this category rather than a ‘None.’”[25]
The bid evaluators noted that ISOC’s public support came primarily from ISOC itself:
“The Internet Society demonstrated support for its proposal by mobilizing its own membership and chapters. With one late exception, the British Computer Society, it does not seem to have sought or received organizational endorsements from outside of ISOC.”[26]
Another bidder, Unity, ranked far higher in the evaluation performed by the nonprofit constituency than did ISOC’s bid, and received far broader support from the nonprofit community.[27]
ISOC, still, had influence at ICANN. Many of the founders and early leadership of ICANN had ties to ISOC. At the time the .org bid process was run, the ICANN Board included Vint Cerf, the former head of ISOC, as the Chair and another ISOC member as the Vice Chair.[28] In addition, eight more ISOC members sat on the Board.[29] The ICANN Board awarded .org to ISOC.[30] [31]
Commenters at the time decried the outcome as an “insider deal”.[32] They recognized that ISOC was proposing a parasitic arrangement in which ISOC would bleed .org registrants to feed itself: the “ISOC proposal nakedly states it will take money from .org registrants to support ISOC”.[33] ISOC’s relationship to .org was essentially rent extraction. As Bret Fausett noted at the time in his ICANNWatch blog, “the idea that funds from .org registrants will be skimmed to support ISOC programs is not only bad policy but contrary to what the Board has previously expressed.”[34]
The Lull Ahead of the Storm
ISOC’s early years in control of the .org registry imposed a fairly modest burden on .org registrants. The price of .org domain names was fixed at $6.00 for the term of the 2003 agreement,[35] which retained the existing pricing. In 2004, ISOC generated around $5 million in disposable funds,[36] from which ISOC contributed $1.25 million to the IETF, such that 25% of the funds at ISOC’s disposal reached the IETF.
As is often the case when ICANN renews registry agreements,[37] the terms that ICANN and ISOC negotiated in the 2006 renewal of the .org agreement resulted in more money for ICANN, more money for the registry, and an increased financial burden imposed on registrants without their meaningful participation in the decision and without any increase in benefit to them. The 2006 .org agreement renewal introduced a fee surcharge for ICANN, and gave ISOC the ability to increase .org prices by an aggressive 10% per year.[38] No safeguards were included in the agreement to ensure that the amount of money extracted from .org registrants corresponded to the funding needs of the IETF, nor did it couple prices to operational expenses, nor did ISOC need to provide any justification for raising .org prices. The first 10% price increase took effect on November 9, 2008, when ISOC increased the price of .org domain names to $6.75 (counting a $0.15 ICANN fee). Prices stayed at this level for around two and a half years, until April 1, 2011, when ISOC raised the .org prices to $7.21.[39]
Things changed following 2011. ISOC developed an appetite for extracting substantially more revenue from its control of .org. ISOC raised .org prices in 2012, 2013, 2015 and 2016, when it reached the current level of $9.93 per year. A combination of growth in .org registrations, sharply lower fees negotiated with Afilias for running the registry, and the leap in .org prices produced an ever-rising river of funds to ISOC.
By 2018, ISOC’s surcharge had grown to $75 million, a fifteen-fold increase over the $5 million level in 2004, while ISOC’s contribution to the IETF had somewhat more than doubled, to $3 million. ISOC pocketed 25 times the amount it needed to fund the IETF and passed along around 4% to the IETF of what it took from .org registrants.
A Broken Funding Model
Awarding ISOC control of the .org registry as a means to raise funds for the IETF may have been done with good intentions, but following 18 years it is a funding model run amok. A structure intended to deliver a few million dollars per year in funding to the IETF is now pulling in more than $70 million per year in excess funds. The money flowing to PIR will grow rapidly even if annual price increases are limited to 10% per year.[40] Ethos Capital has placed a (low end)[41] valuation of $1.135 billion on future cash flows from PIR.[42] This valuation is a measure of the harm that ICANN is causing .org registrants as a consequence of the ISOC/PIR funding structure. The good done in ensuring that a volunteer-run organization covers a modest budget shortfall,[43] is dwarfed by the tens of millions of dollars of financial burden placed each year on .org registrants to accomplish this modest goal.
ISOC’s ability to overcharge .org registrants, through its control over PIR, is now dangerously unconstrained as a result of its perpetual control of the registry and the recent lifting of price caps. It is this power to exploit .org registrants that has attracted Ethos Capital. That a private equity firm finds operating a name space intended for nonprofits to be a compelling investment opportunity demonstrates that the resource is being grossly mismanaged.
While ISOC’s stated mission is to promote the Internet “for the benefit of all people throughout the world”,[44] much of the $70 million extracted by ISOC is skimmed from the charitable contributions intended for nonprofits working to address pressing global social needs – hunger, disease, climate change, homelessness, intolerance, the refugee crisis, among countless other worthwhile missions, as well as from the tithes and other donations made to religious institutions and local houses of worship.
ICANN ought to recall its own mission[45] and purpose and restructure how .org is managed
ICANN has a duty to act in the public interest. Blocking the sale of PIR to Ethos Capital,[46] while necessary, is insufficient. Ethos Capital’s interest in PIR is due to the underlying defects[47] in the .org registry agreement negotiated by ICANN. ICANN took a stable, growing namespace and destabilized it by removing protections from registrants and making them vulnerable to financial exploitation by the registry. Rejecting Ethos Capital’s purchase offer, without taking further steps, would merely perpetuate the current broken system in which ISOC extracts enormous sums from .org registrants and dissipates those funds to enrich its own executives with no public benefit commensurate to the resources consumed.
It is time to put an end to the financial exploitation of .org registrants. If at all possible, it is time to end the PIR/ISOC funding model which has long outlived its usefulness. Now is the time for ICANN to rethink the operation of .org so that, at long last, it represents and supports the nonprofit community rather than being parasitic upon it.
I’d like to express my gratitude to those who reviewed and provided feedback on this article.
[1] See here
[2] In the United States, at least, the majority of 501(c)(3) websites are on .org domain names. See also.
[3] See here
[5] “In contemplation of the need for a mechanism for aggregating funding from many sources, it was proposed to form an Internet Society and to use its resources, in part, to provide funds in support of IETF.” See here.
[6] ISOC notes the involvement of 4,096 volunteers on its 2018 990, see pdf.
[7] See here
[8] See here
[9] See, for instance, “Mirjam Kuehne (RIPE NCC) stated the RIRs contribute membership money into ISOC specifically earmarked to support IETF and wondered what will happen with that.”
(https://www.ripe.net/participate/ripe/wg/services/minutes/ripe-71-ripe-ncc-services-working-group-minutes)
[10] ISOC’s $3 million grant to the IETF was nearly offset by $2.6 million in outside contributions and grants received by ISOC, over and above the funds received through PIR, as noted on ISOC’s 2018 990, Part VIII, 1f. These additional contributions are nearly sufficient to cover ISOC’s grant to IETF, even in the absence of any funds received as a result of PIR’s control of .org. See pdf.
[12] PIR transitioned to a fresh CEO in 2018, with a Director serving as interim CEO for a number of months. The $770k figure represents the total salary and benefits provided to the former CEO and interim CEO in 2018.
[13] See here
[14] See pdf
[15] “ISOC has a reputation for being a bit of a hammer looking around for nails.” at https://medium.com/savedotorg/well-that-was-a-surprise-1d8d8d3d3dfa.
[16] Figures noted net out grants reportedly given to other organizations, so that expenses shown better reflect expenses incurred by ISOC itself.
[17] See pdf
[18] See here: The “stakeholder” and “identity” initiatives were broken out in the 2017 990 but are lumped together in a $14.6 million program in the 2018 990 (Part III, 4b) that also includes support for the IETF. The 2017 figures are used here.
[19] See pdf
[20] See here
[21] See pdf
[22] See also Ayden Féderline’s detailed review of ISOC’s spending in this Twitter thread.
[23] See here
[24] See here
[25] See here
[26] Ibid
[27] Ibid
[28] See here
[29] “Ten of the ICANN Directors are members of the Internet Society”
[30] Notes at the time accused ICANN staff of reweighting the results, in effect “lying with statistics”, to enable ISOC to come out on top in the ICANN staff evaluation.
[31] ICANN’s General Counsel addressed allegations of conflict of interest in his note on the award. He found no impropriety: “Directors are members of the Internet Society, but none of them would financially benefit in any way, directly or indirectly, from the selection of the Internet Society as the successor .org operator.” He further found that ICANN’s conflict of interest policy “does not prohibit Directors from voting on matters merely since those matters involve a philanthropic society which the Directors may philosophically support”. See here.
[32] See here
[33] See here
[34] Brett Fausett cited here.
[35] See here
[36] ISOC paid Afilias around $4.00 per domain name, generating regarding $5 million for itself on a growing base of 2 – 3 million .org domain names. Disposable funds refers to the revenues ISOC receives in excess of what is required to pay Afilias for performing the technical functions of operating the .org registry and to pay fees imposed by ICANN for its own support.
[38] See here
[39] See pdf
[41] See here
[43] Or as little as $400,000, as much of the funding for the IETF comes from outside contributions earmarked for the IETF. See footnote 9 above.
[44] See pdf
[45] “ICANN’s mission is in part to preserve the operational stability of the Internet. Eliminating price caps and endangering the online credibility of the global nonprofit community is not consistent with ICANN’s mission.”, ASAE comment on the proposed renewal of the .org registry agreement.
[46] See here.
[47] “In its attempt to justify this current proposal, ICANN is pushing the misguided rationale that registry operators of legacy gTLDs ought to effectively be treated as owners entitled to whatever fees they deem appropriate even though they did not create the legacy domain names they right now manage.”, ASAE comment on the proposed renewal of the .org registry agreement. See also: PDF, comment, comment.
