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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