Problems With The Domain Industry

Problems With The Domain Industry

I published an article about ChiP (Chinese Premium) domains yesterday and received a really interesting comment from a reader that I would like to unpack. For a start I would like to thank them for the effort they took in writing the comment as it’s clear they are really passionate about domains.

Escrow.com

As the comment is public, here is what they wrote:

Your advice to sell is terrible advice. And then you offer to help CHIP owners liquidate. Four-letter .com prices are positioned to move up substantially in the coming years and you recommend getting out now. You obviously needed a better translator on your China trip. SELLING CHIPS NOW AT LIQUIDATION PRICES IS TERRIBLE ADVICE. PLEASE DON'T HEED.

Yes, my advice may be terrible for a subset of the domain community that is wanting to hold their domains in perpetuity but here’s the thing. The whole point of having an asset is either it produces dividends in the form of an income stream (eg. Monetisation) or you sell the asset for more than you paid for it (ie. capital gain).

If you always believe the price of the asset will increase and you have no need of additional cash, then logically you should hold the asset. The assumptions underpinning this strategy is that domains will be used forever and that there aren’t any market cycles that you can take advantage of.

It’s all about managing risk and everyone has a different risk profile. For example, a number of years ago I sold my traffic portfolio at the peak of the market for a crazy multiple, waited a couple of years and then bought back in at a fraction of the cost. I was managing my risk, taking some cash off the table and watching the market.

If you are running a business, then at some point in time you will sell the asset and crystalise the capital gain. If you plan on selling in the way distant future, then you essentially are saying you have an infinite appetite for risk.

One of the major aspects of risk management is diversification by taking the money off the table and then investing it elsewhere. Everyone is different. Some take the cash and invest it in the stock market while others invest it in personal relationships by having a family holiday. Wherever you choose to invest is your own business.

There is the other issue of cost of capital. What does it cost you to have cash working for you elsewhere versus leaving it in the current asset? If you want to invest in a business and don’t have the cash then it could be you end up borrowing funds…..what is the cost of this capital versus selling the domains now? These are all questions that can only be answered on an individual basis.

Which brings me to the current market cycle. All the data indicates that we have tipped over the peak of a Chinese driven market cycle. Domains I sold in December last year I can now pick up for around 70% of their sale price. Over the last twelve months the Shanghai Composite Index (see below) continues to decline which correlates with what is happening in the domain space.

Shanghai Composite Index

 

 

This does not mean that selling ChiP domains is a bad deal now. Yes, you may have received a better deal last year but in six months’ time it’s likely the market will completely cool off and you find yourself playing the really long-term hold game. Is this something that everyone wants to do? Of course not. Some will hold and some will sell based upon their own circumstances.

Let’s flip this around. If the reader who commented believes that selling ChiP domains at “liquidation prices” (for the record, they aren’t liquidation prices) is terrible advice then they must be a massive buyer of the domains themselves. They have a belief that over the years the domains will massively increase in value and therefore they should logically purchase them. What does this do? It pushes the prices of the domains up as there is more demand and reducing supply.

Now if the commenter is saying everyone is mad for selling and they are not buying then they are either being economically irrational or they themselves don’t have the cash to take advantage of the cheap opportunity.

This brings me to my final point. The lack of liquidity in the domain market as investors buy-in to the perpetual hold model is frightening. This mode of thinking drives some domain investors to reject $1,000 deals for stock-turn domains in the belief that one day they will get $20,000 for them. In comes the massive supply of new gTLD options for buyers and suddenly the potential $20,000 deal is fifty plus years away…..that’s a long-term hold.

The purpose of indicating that my company, ParkLogic has buyers of ChiP domains was an effort to solve the liquidity problem for those people that wished to manage their risk. We’ve already moved a lot of ChiP domains and continue to do so as everyone has a different risk profile.

Never forget that cash provides flexibility to take advantage of other opportunities. As an example, the other day I came across a fantastic business that was looking for investment. I’m now a shareholder and it’s rapidly moving forward….

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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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