The Development Scam

The Development Scam

I’ve seen so many online scams in the world and none bigger then convincing domain investors that they should build out a website for each of their assets. I put the “build-out” strategy out there as a scam because so many investors have fallen for the trap.

What normally happens is that an investor looks at their portfolio and says, “WOW! Look at all these awesome domain! If I could build out 1,000 websites then I will make a killing!”

What’s actually happened is that the investor has drunk the kool-aid that all you need is a good domain and you’ll have a great business. Heck, that’s why all the domains in their portfolio are worth at least $200K each. If you build a business with a great domain then it’s an unstoppable combination and people will flock to the website.

Escrow.com

I hate to rain on many investors parade but that’s just not going to happen. For a start, you can’t build 1,000 domains out and expect to seriously run them as businesses. From a management time perspective there are 40 hours in the week divided by 1,000 domains mean that you can only spend just over 2 mins per week on each domain. In other words, you can probably look at the website, think about making a change and not have the time to do it.

Just because you have a great domain doesn’t mean the target market will jump onboard. People tend to be pretty sceptical and giving out their email address in a sign-up process is a major event for them. Unless you are actually running a real business then trying to get them to actually part with some cash then the odds of doing so are next to zero.

This means that you need to develop a brand. Why do you need a brand? People trust brands that consistently provide them with value. Branding is not just about a logo. It’s the whole essence and ethos of the company that is behind the brand. Coke isn’t just about a beverage, it’s about fun and a lifestyle. Apple is about technology that is artistic, sophisticated and easy to use.

The challenge with developing a new brand is that it takes effort, time and money. No matter what you do on the advertising front developing a quality brand demands that you produce a consistent message on a regular basis. Sure, there are some exceptions but let’s leave them as outliers.

If you only have just over 2 minutes for each domain how the heck are you going to develop a brand? You just can’t do it.

Right now I’m developing my own brand as a science fiction author and to be quite honest with you it’s REALLY hard work. It takes so much time and the rewards are next to nothing but what I do know is that if I’m consistent then over time I’ll get there.

Last year I spoke with a guy who had developed over 5,000 travel websites. He’d literally spent millions of dollars building systems and putting it all together. He didn’t make a cracker, let alone get a sensible ROI and has now dropped just about every domain. This should be a big warning to everyone that has similar thoughts.

The problem is that it’s all about the traffic. The purpose of a brand is to attract the right traffic to your website and encourage them to spend/transact/read or whatever. The goal of developing a brand is to lower your acquisition cost and get the revenue up as people are confident in what you are offering is what they want.

When I say it’s all about the traffic I really mean it. You can build the most awesome series of websites for your domains that mankind has ever seen and if you don’t have the traffic then it won’t be long until they are mothballed. Coining Rick Schwartz, traffic is business!

It’s the rare domain that has enough traffic that allows it to naturally grow over time into a sustainable business. By sustainable I mean a business that will allow a person to work in it at least part-time.

The solution to this problem is to build-out a single market vertical (eg. Travel) and direct all of your travel domains to this website. The problem here is that the majority of domainers would still not have enough traffic for the market vertical website to flourish.

So what should a domain investor do? For a start, build ONE and ONLY ONE domain out that you’re passionate about into a real business. I love what Morgan Linton and his wife are doing with fashionmetric.com. He’s focused and busily working his butt of to make it a success.

BTW – I should mention that even if you focus on a single website it’s unlikely to succeed. Around 80% of businesses fail in the first year of operation so don’t expect a roaring success out of your very first domain build-out. Think of it as the most incredible training course that you’ve ever been on and that your second attempt has a much greater chance of success.

This means that you should be prepared to kill a project that just isn’t working. Too many people get so heavily invested that like a poker player that ends up going all in with a garbage hand. I’m all for going “all in” but I feel a lot more comfortable when I’m holding 2 aces.

Let me say that web developers love it when someone comes to them with all these domains to build out. This will keep them busy for ages so there’s a big win for them. The hosting companies love the fees as well. At some stage the accountants and lawyers normally get involved, so they just love all this activity as well.

Be really careful when you find that you are about to put your hand in your pocket to fork out a heap of cash. Each of the above groups of people provide incredibly valuable services if they are accessed appropriately but don't let the build out europhoria go to your head. Remember that it's not their fault that they are doing what you asked them to do!

I've seen a number of investors that don't have the cash to build-out all of their domains try and do fancy equity/loan deals to access the skills they require. It's the rare equity deal that actually ends up working. The biggest problem is the decision making becomes a lot more difficult and exits typically become impossible as each party has a different objective. Even though there are great intentions going into the deal their are typically tears going out. Inevitably, both parties feel ripped off and no longer have a friendship. Please, please be very careful about this sort of thing.or better yet, just don't do it!

There’s an old saying…..How do you make a small fortune in the aviation industry? Easy, start with a big one. It’s the very same with many domain investors. They’re losing their shirts because the underlying metrics and sustainability of their developments are really suspect. Before you do any development make sure that you have the end in sight and know how you will get your ROI.

I’m sure that there are some exceptions to my observations but after so many years in the domain industry I’ve seen this "scam" played out again and again…..so whatever you do, please be careful.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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Saturday Musings - Rowing is a Pain

Saturday Musings - Rowing is a Pain

I made the big decision this week to purchase a rowing machine. After using it I’m sure that it’s one of those devices of torture that was first inspired by the Roman galleys that used to ply the Mediterranean Sea. I could have sworn that I heard the beating of the slave master’s drum as I pulled back on each stroke.

So why did I part with some of my hard cold cash for such a device? It’s really simple. Like many domainers I end up sitting in front of my PC for endless hours each day. It’s a sure fire way to increase weight, reduce health and lower my overall enjoyment of life. According to the salesman that sold me my rowing machine he said that I will feel so much better for having it…..but there is just one problem, I have to use it.

Escrow.com

If I’d purchased the machine and gazed lovingly at it for hour after hour then it wouldn’t do me any good at all. I could tell all my friends about my new gym equipment and wax lyrical about how I’m on my way to becoming an Adonis (I wish!) but nothing would happen until I actually used it. This is really similar to business.

I’ve heard lots of great plans by people explaining in detail how they are going to make a fortune doing this and that. Some of them even had a deck of powerpoint slides and a cashflow (only some of them) that proved they were going make a lot of cash. The one thing that they forgot was that they actually had to execute on the plan. Talk is cheap, results speak volumes.

In a similar manner, I’ve had a lot of different companies want ParkLogic to integrate them into our platform so that they can get access to our large volumes of traffic. What they are really telling me is that they want me to spend a whole lot of money to help them earn advertising dollars.

I’m polite but I would much rather talk to them in 12 months’ time and see if they are still in business. Why should I spend money trying to help them and only to discover that they aren’t in business a few months later? If they were smart they would put $10K+ down on the table and say, “Here’s the money for the integration.” The chance of me diverting the team to do what they asked has now increased dramatically.

Starting any business is hard, hard work. I’ve founded a heap of them and not once have I thought, “That was just so easy!” Like my rowing machine, I can talk about a new venture until the cows come home but nothing will happen until I actually do something.

So many domainers talk about developing domains out. My advice is to stop talking and start doing. The first site will likely be a mess but you will have learned heaps!

Anyway, I think that I hear the drums beating and my task master calling….cheers!

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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mgilmour
What I great idea! LOL....although I'm not sure that it would be a good idea to provide my wife with a whip. LOL!
05 July 2015
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Critical Insights Into the Domain Industry – Part 5

Critical Insights Into the Domain Industry – Part 5

Check out the previous articles in this series on the domain name industry.

We now need to leap forward in time to 2014 when the first new gTLDs were launched. What does this mean for domain investors that has adopted a sales model? How will the price of .com domains be impacted by the new gTLDs?

I personally believe that the prices that .com domains receive for the stock-turn-model of selling domains will be maintained as the demand from the renewed interest in domains offsets the effects of a massive oversupply. As time goes by and the new gTLDs become more mainstream the prices of the .com domains and all other extensions will fall. If you’re a cash constrained small business why spend $1500 on a domain name when you can pick up something very similar for $10?

Escrow.com

This would suggest that if you have adopted this business model for your .com domains then brace yourself for a decline in sales prices. I should say that this excludes the top-shelf single-word generics.

After the initial flurry of interest in the ngTLDs it will take around 7 years until we start to see them selling for prices at the current levels. What it does mean is that an investor buying today will need to factor in the renewals for 7 years before they can even start to see a return on their investment.

So if I’m buying a portfolio of ngTLDs for $10 each then I need to work my ROI around 7 years of re-registration fees before I can hope to sell them on a stock-turn business model of 1-2% per year. I would consider any sales prior to this time frame as an element of good luck. It should be noted that most of the domains will not have any traffic and this will contribute to the depress demand.

For many of the ngTLDs I’ve seen investors enter the market and snap up a lot of the quality domains. This surge in investor demand will have the impact of increasing the length of time for a ROI to beyond 7 years as the general public won’t see the gTLD being used by real businesses.

We saw an example of this behaviour when domain investors purchased the majority of the great generic .eu domains. It took years for .eu domains to be seen in traditional advertising. The length of time meant that many domain investors dropped their investments as the hoped for pot of gold didn't materialise quickly enough.

The renewed interested in the domain market has meant that many new investors have purchased large portfolios of domains and have not considered the sales time horizon. This is a big mistake. I would not be surprised if a lot of domains begin dropping in 3-4 years as investor cash reserves run dry. In fact, I’m banking on this happening and sitting on the side lines, cashed up and waiting for the opportunities to fall. The goal of every investor should be to hold an asset for the least amount of time as possible prior to selling that asset.

Let's explore what I'm mean from a very high level. Each year there are roughly 1,000 domains sold above $10,000 each. If we were to ignore the portfolio “quality” argument (ie. single word generics etc.) then the odds of selling a domain over $10,000 is roughly 0.0003%. Think of it as 1,000 divided by 300 million domains. The maths could be out a little but I don’t believe that it’s out by orders of magnitude.

If 0.0003% is the average figure then on a normalised distribution of quality then with great domains constantly getting offers domains at the entreme ends of the curve will rarely, if ever, receive meaningful offers. So if you do get an offer then my advice is to sell immediately.

What is amazing is that despite the decline in the PPC landscape it is still 2-3 times bigger than the total sum of domains sold each year. The difference between domain traffic and selling domains at the top end of the market is that domain traffic is monetisable now and it will ALWAYS be valuable for advertisers. An individual domain is only valuable to a small select group of businesses.

Let me return to the ngTLD market. Over the next few years there will be three successful business models adopted by the various registries. The first is those that have scaled vertically (eg. .club) and have poured all of their resources into making the single extension fly. The second is those that have scaled horizontally (eg. Donuts) and have several hundred ngTLDs under the one administrative structure. The third business model will be for specific market niches (eg. .cpa) which will adopt the extension as part of an overall global brand.

The balance of the extensions will either barely succeed or fail. Those in this camp that realise this first will be able to sell their businesses/contracts to one of the three successful models. The remainder will enter a frenzy of fire sales. The delay until this happens will really depend upon the length of time it takes for the cash to run dry for each of the registries.

From a domain investment perspective choosing the right ngTLD that will survive will be as important as choosing the right domain. It will be interesting to see what will happen to registries that no one wants to buy or can’t continue. Ifully admit that I’m unaware of the ICANN contractual details around this eventuality.

The bottom line is that ngTLD's are a very long-term investment and given this they have a LOT of risks associated with them for domain investors.....so if you end up buying up a portfolio then make sure that you choose wisely and have very deep pockets.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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Personal Musings - Travel Tips for the Frequent Flyer

Personal Musings - Travel Tips for the Frequent Flyer

I’ve just completed reviewing my travel plans for the next six months and it looks like I’m going to be doing a lot of international flying. This is good because it means more business but bad because I’m away from home. So where am I going?

Date Reason Destination
Sept 4 – 7 DomainFest Asia Macau
Sept 26-29 The Domain Conference Fort Lauderdale
Oct 18-22 ICANN  Dublin
Dec 31 – Jan 7 Vacation (Yeah!) Queenstown New Zealand
Jan 10-13 Namescon Las Vegas

 

As you can see the second half of the year is going to be pretty busy. I really don’t know what happened between NamesCon in January this year and DomainFest Macau…..nothing that I attended. Seems to me there is an opportunity for a conference to be organised around May.

Escrow.com

I love catching up with all of my friends at the various domain conferences around the world but what I really don’t like is the journey. Being from Australia, every flight is well over 10+ hours and sitting in a tin can for that long is never fun!

After clocking up way too many air miles over the years I‘ve developed a bit of a routine.

  • Do whatever I can to ensure that I have a spare seat next to me. When I say, whatever, I really mean it.
  • Hydrate with lots of water in the Qantas club
  • Be nearly the last person to enter the plane
  • Insert noise cancelling headphones into ears and put on some nice music
  • Assume the foetal position
  • Close eyes and pray for sleep

Every so often I open my eyes to check out the best movie on the plane. I’m sure you know the one, it’s the picture of the little aircraft moving on the map. Trust me when I say that if I can possibly move the plane icon by force of will alone I would. Anything to get the journey over with!

A few other things about the way I travel. I never take check on bags. A good friend of mine was traveling to LAX and said to the person at the check-in counter, “Do you mind sending my bags to London.”

The check-in person replied, “We can’t do that as you’re traveling to Los Angeles.”

At which my friend replied, “You seem to be able to do it last time.”

Flying with carry-on bags is the ONLY way to go. This is especially true if you’re on a business trip and jumping from one city to another. If you have check-on then you may be in the position that your bags never catch-up with you and you can kiss them good-bye. In fact, even when I travel with the family I insist that we leave home only with check-on.

For those of you that are from a country that is a member of APEC (Asia Pacific Economic Cooperation) then you really need to get an APEC business card. This little beauty allows you to travel in the crew line and bypass the massive immigration queues…..it also allows you to be pre-approved for visas in countries such as China. It’s a hassle to apply for and requires that you get a police check etc. but if you travel a lot then it’s a must have.

A few other hints to help you in your own travels. Go to seatguru.com It’s a website that has a seat map of every aircraft used on every airline. Each seat is rated by travellers as to whether it is any good or not. For instance, seat 71D on a Qantas A380 has the crew escape hatch in front of you so it is always clear.

Assuming that you have the frequent miler points always put in for an upgrade. Cost wise, it’s the best option to spend your points on. For example, a business class airfare from Melbourne to LA costs around $8-9K while you can get an upgradable economy ticket for around $1.8K. You can then spend around 70,000 points to upgrade the ticket to business class. An economy ticket costs 100,000 points so clearly you get more bang for your buck with the upgrade option.

BTW, when you’re at the check-in counter always ask for the possibility of an upgrade…..even if an upgrade wasn't previously available you can sometimes get one due to someone else cancelling.

If I’m going to a conference, the first thing I do when I get to the hotel is have a shower and check in my dirty clothes to be cleaned for the return journey home. I then force my body into the local time zone….yep, it hurts but you’ve just got to do it if you want any chance of dealing with the jetlag. I always sleep with the curtains open so that the sun wakes me up in the morning (my wife hates this BTW). This also helps with the jetlag and triggers some sort of biological response to move my body as fast as possible into the local time zone.

Just on jetlag….I typically don’t drink alcohol when traveling on business. It completely messes up my routine for getting into the local time zone. I know that there is free drinks on the plane but in my opinion stick to bottled water. Alcohol dehydrates the body and so does flying at high altitudes….so drink lots of water. Whatever you do, don’t drink any water out of the airplane tanks….you’re very likely to come down with some sort of illness.

A few years ago I flew around the world in 12 days. The itinerary was a shocker! I ended up traveling from; Melbourne to Singapore, Singapore to Frankfurt, a train to Koln, train back to Frankfurt, Frankfurt to Madrid, Madrid to Barcelona (for a conference), Barcelona to Miami, Miami to New York, New York to Toronto, Toronto to Denver, Denver to San Francisco, San Francisco to LA and then LA back to Melbourne. BTW – this was all flying economy.

When you have this sort of schedule you end up learning to sleep on the airplane, exist in the local time zone and do whatever you can possibly do to make the travel experience easier. It also causes you to groan when the person in front of you forgets to take their shoes and belt off when going through airport security. Cheers!

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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Critical Insights Into the Domain Industry – Part 4

Critical Insights Into the Domain Industry – Part 4

This is the fourth part in the series on the Domain Industry and it continues directly on from the previously three. Even with the decline in traffic revenues they have continued to underpin the entire domain industry since its inception. Everyone from the registry through to the parking company are dependent upon this steady relatively consistent stream of cash.

The one bright spot during this time was that domain investors began to set more realistic prices on their assets. This drastically improved the problem of domain liquidity and injected more funds into the industry.

Before the industry downturn domain investors honestly believed that every domain they owned was almost priceless….they were waiting for that magical pot of gold to appear at the end of their domaining rainbow. I remember one prominent investor publicly declaring that he automatically turned down all offers less than $200K!

Escrow.com

With the squeeze on returns really biting, investors were now looking for another business model to help them out. This was the birth of the stock-turn model of selling domains.

Think of this business model as more like the supermarket rather than the boutique store. The supermarket has much lower margins but sells a greater volume of goods. It survives on these margins because of the masses of people that purchase through them….this was the problem that the domain industry needed to solve.

To join the stock-turn revolution, domainers had to realistically look at their portfolio and then price the majority of their domains at around the $1500 mark. The goal was then to sell 1-2% of their portfolio each year. Like the supermarket, this is effectively an eyeballs game. For the model to work domainers needed to get their assets in front of as many people as possible who are currently seeking to buy a domain name.

This was a seismic shift for the industry and really illustrates the pressures that domainers were under financially at that time. Domains that were once priced at $200K were now being sold at 1% or less of that value. These were desperate times.

In the entire domain value chain the end user eyeballs were all going to registrars to find the domain for their business. For the first time, registrars found themselves in the box seat to exploit this opportunity.

When end-users went to purchase a domain name rather than saying that it was unavailable a message would pop-up that the domain could be purchased for $1500 (as an example). A business wanting to secure their domain wouldn’t think twice at paying 150 times the registration cost of the domain.

The biggest challenge for this model to work was that domains that were registered with one registrar needed a fast way to be transferred if another registrar sold them. This was the birth of the multi-listing-services model that allowed fast transfers of domains between registrars. The streamlining of the fast transfer process has meant that consumers could now more easily purchase domains that are owned by domain investors.

Not surprisingly, there was a huge rush to get into this space by many of the registrars. Why sell a domain for $10 when you could sell the same domain for $1500? The profitability of a registrar now had the potential to dramatically increase. A virtuous cycle came into play as the major domain marketplaces sought the valuable eyeballs provided by the registrars and matched them with their existing marketplaces.

Here’s the interesting challenge. Everything, and I mean all domain sales hinge on traffic. Whether the traffic is generated by a registrars brand (eg. Godaddy, Afternic, Sedo etc) or from the domains themselves. If a consumer doesn’t know a domain is available then they can’t purchase it.

The decline in PPC rates impacted the sales market in two ways:

1.            Less liquidity in the domain space for domain investors to purchase domains.

I remember writing an article around 2008 about the fact that there were a number of large domainers that were market makers. In other words these individuals had amassed such a large amount of traffic revenue that they directly influenced the price of domain sales. As an aside, in the then relatively immature domain aftermarket, the prices dropped almost overnight when these players stopped buying domains.

2.            Less traffic as domains were dropped

This second impact is somewhat hidden. What many people haven’t considered is that the traffic domains would often be the conduits for potential buyers to the domain marketplaces. To date, the domain marketplaces have received this traffic for $0…..not a bad deal when you think about it.

For example, the major marketplaces do not pay anything to a domain owner when a buyer clicks on the “this domain maybe for sale” link. This makes sense, because the domain owner wants the person to buy their domain. What is interesting is that the buyer may go and then search the marketplace and purchase an entirely different domain. The owner of the domain that generated the lead gets paid nothing. In my opinion, this is an embalance in the industry that will eventually be ironed out by an innovative company.

What happened several years ago is that many of the marketplaces that are also tied to parking platforms became desperate for the traffic that also generated buyers. Domain parking was starting to be seen almost as a loss leader. Suddenly traffic became valuable not for its PPC value but for the potential buyers that it also brought.

This series on the history of the domain industry will continue.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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