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Over the past few weeks I’ve been doing a lot of thinking. What I’ve been thinking about is how the new Yahoo/Microsoft alliance can beat Google and what strategy they could adopt that would place them on a stronger footing than Google.
 Surprisingly I believe that Google’s Achilles heel is the fact that although it has the mantra of “do no evil” domain owners are no longer sure that this is actually the case. While the going was good and everyone was making a lot of money domainers were all prepared to overlook the fact that there was no justification or proof of why we were paid what we were paid. Now this is no longer the case.
The Global Financial Crisis (GFC) has rolled around the world impacting industry after industry and over the last twelve months the domain traffic monetization industry suffered a sharp 40-50% drop. This decline is despite the fact that dollars continue to pour into online advertising at an ever increasing rate. This topic should be the subject of an intriguing article in itself!
 The GFC has caused some remarkable changes to the ethos of domain owners the most notable of which is a migration from a revenue to a profit mentality. You can see the direct results of this change in the domain drop market where domains that would have been held onto in the past are let go.
Over the past few years Yahoo has been consistently losing market share in the domain space as Google’s made inroads in proportion to its advertising revenues. In comparison to Yahoo, Google has an enormous number of advertisers pumping money into its huge network. I believe that the problem that Yahoo has been facing is that to compete against Google’s advertising strength is not a very successful strategy.
As a weakened competitor one of the most important things that Yahoo could do is to change the game on Google and take a bold strategic direction that would place Google in a difficult position. I believe that this direction is transparency.
There are huge ramifications to opening up and introducing levels of transparency that have never before been seen in the domain industry. The most important feature that transparency fosters is a true marketplace that has bona fide audit trails and justifications to revenue lines etc. The industry needs this transparency to provide justification to significant amounts of new capital into the domain industry. The influx of new capital would subsequently inflate the values being attributed to all domains that ultimately have their advertising provided by Yahoo.
The game that Yahoo would now be enabling is the “capital value” game rather than the straight revenue game that Google is so good at. By altering the rules Domainer’s are then faced with a choice. Park with Google backed parking companies and potentially receive higher revenues or park with a Yahoo backed parking company and potentially lower revenues BUT have an increased capital value. In terms of parking revenues it is important to note that I’m speaking generically and that in many cases Yahoo parking companies outperform Google and vice versa.
The choice that a domain owner would be faced with is an interesting one. For example, let’s imagine that you had a domain that was earning $10 a day at Domain Sponsor (ie. Google backed) and $7 at Parked (ie. Yahoo backed). Normally it would be a no brainer and you would go with the revenue.
Now let’s change the rules a little. Let’s imagine that due to transparency the domain at Parked received a revenue multiple of 6 times while at Domain Sponsor it only received a 3 times multiple. The valuations would then look like the following:
|
|
Daily Revenue
|
Revenue Yearly |
Purchase
Years Revenue |
Valuation |
|
Google
|
10
|
$3,650 |
3 |
$10,950 |
|
Yahoo
|
7 |
$2,555 |
6 |
$15,330 |
Now where do you park the domain? An interesting by-product is that if an external investor purchases a traffic domain for $15,330 then they are unlikely to park it at a company where the valuation potentially instantly drops.
A potentially virtuous spiral forms where domains that have been parked at a Yahoo company will never leave Yahoo again. The scary thing about this concept is that Yahoo would then be perfectly positioned to be the one stop marketplace for the whole domain industry.
So what did this actually cost Yahoo in terms of real dollars? Nothing, other than a will to play the game differently. It’s incredible to consider that a company born out of the crucible of the Internet age could continue its success until it failed. I believe that Yahoo has almost reached the limit of its success and it will eventually fail against a much larger and surprisingly more agile competitor unless someone at Yahoo changes the game.
One of the really interesting things about transparency is that you get to seriously mess with the business models of those people that try to insist on not playing the game fairly. When you have made the decision to hide nothing then it really puts the other guy on the back foot.
So far I’ve been picking on Google as the bad guy and Yahoo has the good guy. There is no reason why Google couldn’t do the same thing and mess with Yahoo. All I know is that the player that decides to change the game will have a huge jump on the other.
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