Over the last few years there has been a rush of capital into the domain industry from two major sources, Chinese investors and speculators. I have written quite a lot on the Chinese investors but have largely ignored the speculators.
Speculators have hoped to win the lottery by having a domain that a cashed up major company wants to desperately buy. They hear about the successes of “old-time” domainers and dream about find the pot-of-gold at the end of one of their domain rainbows. I don’t mean to rain on your parade but this is unlikely to happen and here’s why.
The question that needs to be explored is, “How much is a domain actually worth?” I know that we all believe that our domains are worth an absolute fortune but in terms of the profit and loss how much are your individual domains actually making you each year? In most cases, they aren’t a revenue item but an expenditure (ie. renewals).
What many people confuse themselves with is income versus assets. You may have awesome domains and a really big number in your balance sheet for assets but your income can still be zero. Worse than that, for each of those awesome domains you actually have an expenditure associated with them. So given that your assets are actually costing your business each year we need to really dig into whether our valuations are realistic and more in particular whether the domains are priced to sell.
Just because you paid $10,000 for a domain name does not mean that its worth that much. It could be you were the last patsy in a long line of people that are part of a global Ponzi scheme!
You may be carrying a $10,000 valuation in your balance sheet but the domain hasn’t earnt anything (ie. no traffic revenue) and there aren’t any buyers coming through the door. Since there aren’t any regular enquires this means the domain is actually worth $0 but strangely speculators are still putting their hope in a big payday.
Speculators tend to do is say to themselves, “I know that I’m going to sell this domain for an absolute fortune one day…..I just need to wait it out.” They’ve actually convinced themselves that it’s just a matter of time. The problem with this strategy is that the time may be a LONG way off (if at all) and the expenses keep on clocking up year after year.
Convinced that they are right and the market is wrong, what speculators often do at this point is ante-up. They take a portfolio approach and buy not one but a whole suite of domains with the belief that given enough time they will get enquiries from the domains across their entire portfolio that justify their buy prices. In the case of hand-registered domains, they are really hoping that the lower quality domains available for registration are good enough that some of them will sell.
Let me say that the vast majority of domains (not all) are worthless and in many cases what the industry has actually done is assign “Shadow valuations” that are largely based upon conjecture. Other than market vertical category killers, on the whole, domains are extremely targeted marketing tools that apply to very specific markets. If the markets aren’t buying, then the domains are worthless but NOT necessarily valueless.
What this means is the balance sheet has a big fat $0 for assets but they may still have value. The difference between worth and value is demand. If domain investors could spark demand for their domains, then there is now an underpinning metric to associate with their worth.
I've seen some people register 1,000 domains for $10 each and then since the average domain sells for around $1,000 then believe they now have $1m in assets. Taking a conservative approach they then discount their portfolio by 50% and have instantly taken a $10,000 investment and turned it into a $500,000 value. It's numerical magic (almost like sub-prime loans)! Either I'm missing something here or many speculators are smoking something I'm not.
To put all this in stock market terminology, domain investors need to generate a market depth for their stock of domains. As soon as you have a market depth you have demand and since you have demand you can attribute worth.
The problem is that other than listing their domains on Sedo and Afternic, most speculators make no effort whatsoever to generate demand for their stock. The reasons for this are multitude, including; domaining is part-time, no money, it’s difficult, introverted personality type, not cost effective etc.
In fact, those speculators that have jumped into the new gTLD market are now complaining that the registries aren’t generating demand from potential premium buyers. Last time I checked, many of the registries are doing a great job of convincing the speculators to buy their product. From the registry perspective, they are doing a brilliant job.
So if domains are actually worthless (ignoring premium domains), due to lack of demand, then how do you price them? More on this in the next article in this series.