Has Nominet UK been captured?

Nominet UK would make Spock emotional
Do Nominet care more about silencing their enemies than the interests of the public?

Under most election systems, if you come in last place you lose.  Nominet UK’s combination of weighted voting and the Single Transferable Vote system ensured that in its most recent elections, the last place candidate (in the first round)+ won a board place.

My husband, Lucien Taylor, stood in those board elections. To be honest, no one really thought the “outside candidates”, Lucien and Graeme Wingate, stood a chance of getting elected.  On the morning before Nominet UK’s AGM, BBC Radio 4’s John Waite interviewed me and Lucien for a program about whistleblowers.  He asked Lucien “Do you have a hope in hell of being elected?”  Lucien replied “Not a hope”.  This wasn’t false modesty.  He’d done the maths.

In the event, I was surprised at how well both Graeme Wingate and Lucien did.  They came in third and second place respectively, and both gained a respectable share of the vote.

Nominet UK and the public interest

The reason why I’ve been motivated to write this piece is that while insiders are familiar with the quirks of Nominet UK’s voting policies, and their links to financial contributions to the company, most outsiders are not.  At a point where many are questioning Nominet’s public interest credentials, when even Minister Ed Vaizey is reported to have asked the company to explain itself over porn names, it is important to consider how financial and voting power of a small group of (mostly foreign) registrars must inevitably place a constraint on the board’s decision-making.

My conclusion is that Nominet UK’s voting system is dangerously institutionalising the commercial power of its top 20 customers.

Follow the money

Nominet is company limited by guarantee, a corporate vehicle used by charities or other organisations with a public purpose.  Nominet UK has a public purpose, stated in its company constitution.

But if you look beneath the surface, you soon discover that Nominet UK is not your average not-for-profit.

Most not-for-profit companies don’t make a profit.  Most rely on grants, donations, and few have a trading income at all. Most live a depressing, hand-to-mouth existence.

Nominet is different. It has a trading income of about £25 million per year, and makes an operating margin of 35% (before donations to its charity). It has enviable profits, and cash reserves of £55 million (including deferred income).  Despite these riches, Nominet UK has not lowered its prices since 1999.

Pie chart showing Nominet's turnover
Nominet’s turnover 2012
Looking at the contribution of Nominet UK’s customers to its turnover*, it soon becomes clear that Nominet has a problem.  Pareto’s law suggests that 20% of your customers will provide 80% of your income. In Nominet UK’s case, that 80% of income is provided by less than 1% of its customers.  More worrying, the top two – 123reg and 1&1 Internet – provide nearly half the company’s turnover.  That’s a lot of commercial power in the hands of a few people, one of whom has their CEO on the board.

Nominet UK’s members are its customers

In most not-for-profit, membership organisations, people join because they support the organisation’s objectives. Think, the National Trust.  With Nominet UK, if you’re in the domain industry there’s a great big financial incentive to becoming a member: a reduction in the registration fees for .uk domains.  Back in the day, instead of paying the non-member’s fee of £80, you pay £5 by becoming a member.

So, right from the start, Nominet incentivised those in the downstream industry to become its members.  It has nearly 3,000 members now. Some may well have joined for the traditional reasons, to support the organisation’s objectives, but most are – to a greater or lesser extent – domain name registrars, or involved in managing domain name portfolios.

Weighted Voting

Most guarantee companies operate a one member one vote system, and this makes sense given that many have a public purpose.  The norm is that the voting system recognises each member’s equal right to have a say in the direction of the organisation.

Nominet UK does not do this.  It operates a weighted voting system.  The voting rights munge the distinction between members and customers.  So, as a member, you get an extra vote for each domain name on your account (as a customer).

The justification is that the system of weighted voting rewards those who have made the greatest investment in the company with the greatest influence over its governance.  Otherwise you’d have the lunatics taking over.

Seriously?  Not since the days of rotten boroughs has mainstream politics in Britain tied voting power to income. These days, it’s the norm for each person affected by government policy to have equal power in an election.

Another flaw in this argument is that big customers are influential on any business as customers. Once you also award them with weighted constitutional power, that compounds an already worrying level of influence.

Just 1% of Nominet UK’s membership controls over 60% of its voting power.  That’s enough to pass an ordinary resolution, and certainly to block any constitutional change.  Effectively, then, the only true accountability that the board has is to its top 1% of customers.  It is easy to see how this could place a strain on its public interest objectives.

Pie chart of Nominet's voting rights
Nominet members’ voting rights

Secondly, I’m told that it is unusual to combine the Single Transferable Vote  (STV) system with weighted voting. STV is a respected system, and its advocates believe it to be the fairest system of all.  It was the system that the Liberal Democrats proposed should be adopted in UK general and local elections.  Whatever its merits, it works better where every voter has equal power.  Within a system where less than 1% of the electorate have many thousands of times the voting power of the smallest member, STV risks distortion.

The voting influence of the big customers is slightly lessened through two mechanisms.  First, the weighted voting policy boosts the relative influence of the smallest members.  This means that while the bottom 99% of Nominet UK’s membership only contributes 20% of the company’s income, it has nearly 40% of the voting power. The second is that a cap of 3% of votes cast is applied to the larger members (in the most recent election that was the top 17 members).

So, why don’t these protections work? Two reasons.  First of all, very few of the members vote at all.  Only 500 out of nearly 3000 voted in the last election.  Secondly, it is clear from the latest election results that 10 of the capped members voted the same way.  So, together they controlled enough of the vote to get the bottom place candidate elected.  It appears that those 10 voters controlled the outcome of the election.

Why should we care?

Trying to understand the complexities of Nominet UK’s voting systems is not everyone’s cup of tea.  And most people are, understandably, deterred from participating in systems they don’t understand.

But we should care, because the .uk is one of the largest domain registries in the world. It has over 10 million registrations, and is in many ways the engine room of the UK’s internet industry.  So, it’s important that it is run, and seen to be so, in the public interest.

With so much power concentrated in so few hands, Nominet UK has self-created an elite of less than 1% of the electorate. When its own voting system means that elite can, through coordinated action, thwart the will of the majority, that should concern us all.

It’s not just that voices of criticism risk being stifled.  It’s that change which threatens the commercial interests of that elite could simply not happen.  It’s that we could start to see the registry pursue policies which are baffling if looked at through the lens of public policy, and only understandable as helping the top 1% of customers/ members/ directors.  Some believe that this is already happening, whether it’s the proposed reworking of the registrar structure to hand the market for expired domains to (you guessed it) that elite, the proposed opening up of direct registrations under .uk.  The only obvious winner from these proposals is  Nominet’s largest registrar, 123-reg which controls over 20% of the voting power, 25% of Nominet’s turnover and whose CEO sits as a non-executive on Nominet’s board.

Now, many will dismiss this as the ravings of conspiracy theorists.  To you, I ask, are you comfortable with how the voting power is allocated; are you comfortable that there is potential for distortion through the commercial interests of a few?  Do you think that having comparatively so much money and influence in the hands of so few can be in the public interest?  I believe that many within Nominet UK genuinely seek to pursue the public interest, but with the company’s structure and commercial reality, coupled with poor relationships with the wider membership, they’re operating with both hands tied behind their backs.

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+ with thanks to Kevin Murphy of Domain Incite for helping me to clarify this point

* Contributions to turnover have been derived from the 2013 voting rights, which award 25% of the vote equally to members, and 75% weighted one vote per fully paid domain name on the member’s tag.  By stripping out the 25% equal vote element, a contribution to turnover is derived.  As a check sum, Thomas Vollrath’s related party transactions (2012 Annual Report) indicate that his companies contributed £5.5 million of Nominet’s registration fee income of £25 million in 2012.

One Response to “Has Nominet UK been captured?”

  1. oxil

    I’m interested that the driver to correct facts in this article was Domain Incite and not Nominet themselves – who’s working for who :)

    Reply

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