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In a previous blog I discussed the size of the domain name industry and how it's growing at a very rapid rate. In fact the domain parking industry is set to grow from $800m in 2006 to $1.1b in 2007. This is a staggering 37.5% increase in gross revenue.
The scary part of this increase is that the online advertising industry is only set to grow by 15.1% this year which suggests that the domain channel is soaking up a large amount of the increase. What is also interesting is that the above figures are only for the US market and many of us know that the ccTLD space is really beginning to hot up.
So how much is a domain actually worth? Given that the revenue generated by parking is 4.7% of Google's and Yahoo's (G&Y) revenue for last year then 4.7% of their market capitalisation of $196b is $9.26b. In other words, the domain industry should be valued at $9.26b.
Given that the industry did $800m in revenue last year then 9.26b divided by $800m is 11.6 years. In other words if someone purchased the whole industry for $9.26b then they should expect a 100% payback in 11.6 years. Obviously this method of valuation is flawed but it does provide an interesting benchmark.
When we look at specific domains then there will be other issues to consider, such as typos, trademarks, one or two word generics, brandability etc. What the 11.6 years number does provide is a reason why many domainers are holding out for better offers. So if you're sitting on a large portfolio of domains and you're unwilling to sell then here's a methodology you can use for potential purchasers.
The problem that domainers will be experiencing next year is that we are adding increased levels of traffic through additional purchases (according to Verisign 23% of all domains are parked) which is driving up the revenue line. This is great but the EPC is trending down which means on a domain by domain basis their value is decreasing and that the only reason why your own portfolio is worth more is because of your reinvestment.
We don't know many domainers that keep static accounts of domains to monitor the macro-changes in the domain industry and then interpret those changes. I would highly recommend that you partner with someone that does this work (ParkLogic does this) or you implement a strategy for yourself. The classic symptoms of a bubble is, constant reinvestment which provides growth while the underlying metrics are decreasing.
I would recommend that every domainer sell down a portion of the portfolio that your personal affairs are shielded from any potentially sharp declines in the industry (ie. bubble bursting). This way you can enjoy the ride and be secure at the same time :-)
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