Blogs about the domain industry and the various players and companies within it.

Critical Insights Into the Domain Industry - Part 2

This article continues directly from Part 1 in the series "Critical Insights Into the Domain Industry"

Google’s response to the aggregation of traffic by parking companies was to instantly grant a number of additional domain feeds to new parking companies. Some of these feeds had a honeymoon clause that allowed them to have a competitive advantage versus the larger incumbents. Many domain investors flocked to these new companies as they were seen as their salvation to paying renewal fees. This instantly re-fragmented the marketplace.

Escrow.com

Now that the market was split up again, Google instituted DRID’s (Domain Registrant ID) to reduce fraud (this was a good move IMHO) and CAF (Custom Ad Frame). CAF is where Google controls everything on the lander for a parked page.

Personally, I think that this overall strategy was a really clever part on Google. It allowed them to decrease PPC rates and completely control the entire domain channel without the threat of a wounded Yahoo stepping up to the plate. Some people get really upset by Google’s behaviour. What domain investors need to understand is that Google is obligated to behave in such a fashion on behalf of their shareholders.

In fact, if you look at the Google TAC (Traffic Acquisition Costs) graph over the last years you can see the TAC in a constant decline as Google buys traffic at cheaper and cheaper rates. The domain channel is but one part of the overall TAC number....sadly, this is not broken out as a separate number. It would appear that the TAC is now at the point where tier 2 players are a serious contender for the traffic. This has really made zero click a feasible option for domain traffic. The challenge for individual domain investors is to actually take advantage of this...

TAC

 

So let’s get back to the story. So who bought the domains being sold by investors and how did they buy them? Many of the buyers of the traffic domains did so with debt or investor backed money raised just before the financial crash. Post the GFC this became problematic as:

1.            Promised investor returns weren’t realised.
2.            Debt payments couldn’t be funded.

A number of funds that raised a lot of money found themselves in the awkward situation of dealing with boards that were screaming for results. Here’s what’s interesting. In the past it was good enough to buy a domain and get phenomenal returns from the traffic but now things were different. A different set of skills were required to extract every bit of value from the domain traffic.

A good way of thinking about the problem is like this. Previously you could bend down and pick up a nugget of gold while now you need to drill three miles deep and run a shaft two miles horizontally to find the seams of gold in the traffic. The gold is still there but it just takes more effort to get it out.

The individuals and companies that raised cash to acquire domains now needed a different set of skills to extract the value. For most companies the individuals have skills to find domains, do deals and do basic monetisation. Very few, to none of them had the skills necessary to extract every dollar out of the traffic.

The problem then became one of ego. For the years before the GFC many of the individuals that had established these domain funds had been lauded as geniuses. They were partying like there was no tomorrow and almost overnight they were completely out of their depth. Picking gold up off the ground is very different from driving shafts into the bedrock.

I remember being in a meeting with one such fund where my company, ParkLogic, had increased the revenue by 32% (versus a direct Google feed). The company refused to admit that this was possible and turned their back on the additional revenue. It turned out that there was massive political infighting and egos were being threatened because they didn’t have the skills to produce the same results. Lesson learned, it’s always easier to deny the facts then to admit you’re wrong.

These same portfolios are now being broken up into pieces as investors (and debtors) endeavour to get some of their money back. Domains that were purchased for 40+ months revenue are now being sold for 12-18 months.

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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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Critical Insights Into the Domain Industry - Part 1

I’ve spoken and attended a lot of conferences over the years….and clocked up quite a few airline miles in the process! During this time I’ve seen so many people come and go, businesses launched only to vanish and domain investments completely mismanaged.

So why am I reflecting on these things? I was speaking with a client this morning and the conversation caused me to journey down memory lane and review a few of my old presentations that I’ve shared at conferences.

Escrow.com

I had a bit of a laugh when I looked at a presentation that I did at TRAFFIC Vegas 2008. One of the slides predicted the recession and the collapse of domain valuations and PPC revenue. Guess what….it happened.

Am I a living genius? My wife would be the first to say, not at all! What I try and do is take in what is happening in the complete industry and then ask the reason “Why?” This is quickly followed up by, “So what does this mean?”

So let’s take a look at the state of the domain industry with these two questions in mind.

Why do many people think that domain parking is dead? Back when the revenue squeeze came on many domainers were left holding two types of domains, traffic and brandable domains. At the time brandable domains weren’t in fashion because there was a global recession. Despite this everyone believed that they knew their domains would be worth a fortune (wink, wink).

Many investors convinced themselves that PPC rates were declining and that soon all of their traffic domains would be worthless. So they sold them off at discount prices to help fund the registrations of the brandable domains.

You see, brandable domains are like a ticket in the lottery. You have to have a ticket if you will have any chance of winning….the only problem is that the domain lottery ticket has to be paid each year. When you don’t have the funds to finance registrations you have no choice but to look at selling the one thing that does have value now……that’s traffic domains.

As PPC rates decreased there was pressure to sell while you still could. Very few people thought about how to increase PPC rates and maintain their revenue lines. A herd mentality developed and traffic domains began flying out the door while at the same time domainers dropped more speculative domains.

I want to say upfront that although PPC rates did decrease they have not decreased as much as many domain investors have experienced. Here’s some data that I think you’ll find interesting. The most that ANY parking company wins is 25% of the traffic. This means that in the absolute best case scenario, if you left all of your domains with one parking provider then 75% of the time the domains can perform better elsewhere!

Some domain investors caught onto this and began manually moving their domains around to find the best monetisation solution. Here’s another stat that most people aren’t going to like. After nearly nine years of running what I believe is one of the most sophisticated optimisation system in the world I have found that around 33% of domains move providers every 3 months. The problem is that it’s a different set of solutions and a different set of domains!

So why did PPC rates decrease? It was really simple, because they could. Google is the dominant provider of PPC revenue to the entire domain channel and to maintain its position in the industry it logically did two things. To fully understand this we need to first understand the industry at the time.

Traffic had begun consolidating around several large hubs of monetisation providers, the largest two of which were Domain Sponsor and Sedo. The problem with a consolidating market is that the tail could end up wagging the “Google dog”.

While traffic was spread throughout the industry Google could play one player off against another. The problem became when Domain Sponsor raised a lot of capital via Oakhill Capital Partners and Sedo became part of United Internet and developed a domain sales revenue stream that was not dependent upon Google. Both these actions meant that the companies could now buy vast amounts of traffic and potentially break the Google exclusivity stranglehold.

The next article will continue the story of the domain industry and how Google responded to this threat.

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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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Brandon and Matt Discuss the Escrow/Freelancer Deal

A few days ago I wrote an article on the acquisition of Escrow.com by Freelancer.com. This morning, I had an opportunity to speak with both Brandon Abbey from Escrow.com and Matt Barrie, the CEO of Freelancer.com about the why the deal was good for both companies.

Although he is an Australian, Matt completed his Masters in Electrical Engineering at Stanford 1998. It was during this time that he found himself immersed in the burgeoning technology boom. Matt said, “I remember using Google because it happened to be on one of the universities servers and it seemed pretty cool at the time.”

Escrow

His Stanford background helped provide him with a unique insight into what makes tech companies really flourish. “It’s all about providing a superior customer result,” he said.

For the last 11 years Freelancer has been acquiring companies (over 19 to date) within the crowdsourcing and freelancing marketplace. Since listing on the Australian stock exchange at the end of 2013 Freelancer.com now has a market cap of more than $460 million.

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Freelancer.com Acquires Escrow.com

In breaking news, Australian company, Freelancer.com has reached an agreement to acquire Escrow.com for $7.5m in cash. Freelancer.com is the world’s largest freelancing and crowdsourcing marketplace by number of users and projects.

For many years, Escrow.com has been the company of choice used by many domain investors for their sales and acquisitions. Escrow also partners with eBay, GoDaddy, AutoTrader.com and Flippa.com and has a strategic partnership with the U.S. Commercial Service (USCS) in support of President Obama’s National Export Initiative designed to significantly grow US export volume.

Escrow.com

Since Escrow.com has been a private company this is the first time that we’ve had a glimpse into the financials driving the business. As can be seen from the chart below, Escrow.com has experienced continued growth even in the downturn years of 2012 and 2013. According to the press release announcement, for the FY14, Escrow.com has facilitated a gross payment volume of US$265 million, net revenue of just over US$5 million, US$1.2 million in EBITDA.

Escrow.com Revenue

What's really interesting is where all the revenue is coming from and the fact that  only 41% is coming solely from the US market. This really shows that the Escrow.com team is viewing the world as their marketplace rather than just the USA.

Revenue sources

Given the $7.5 million price tag this means that Freelancer is paying at least a multiple of 6.25. This seems reasonable given the strength, sustainability and market position of the Escrow.com business.

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Recent Comments
impulse
That seems like a much lower price for escrow.com than I would have imagined. It is a business with growing sales and a large annu... Read More
27 April 2015
mgilmour
It could be argued that it's a bit of a steal but at the same time my guess is that the single shareholder was a motivated seller.... Read More
27 April 2015
impulse
Yes, that is very true. That is exactly why I sold Bored.com for $4.5 million in 2008, see my reasons at http://www.impulsecorp.co... Read More
27 April 2015
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3 Comments

Moving Forward in 2015

In 2015 the domain industry was launched with Namescon but there's a lot more on it's way. Domaining Europe, ICANN conferences and The Domain Conference being run by Howard, Barbara and Ray Neu are just a few of the topics discussed on this video.

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