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Critical Insights Into the Domain Industry – Part 5

Critical Insights Into the Domain Industry – Part 5

Check out the previous articles in this series on the domain name industry.

We now need to leap forward in time to 2014 when the first new gTLDs were launched. What does this mean for domain investors that has adopted a sales model? How will the price of .com domains be impacted by the new gTLDs?

I personally believe that the prices that .com domains receive for the stock-turn-model of selling domains will be maintained as the demand from the renewed interest in domains offsets the effects of a massive oversupply. As time goes by and the new gTLDs become more mainstream the prices of the .com domains and all other extensions will fall. If you’re a cash constrained small business why spend $1500 on a domain name when you can pick up something very similar for $10?

Escrow.com

This would suggest that if you have adopted this business model for your .com domains then brace yourself for a decline in sales prices. I should say that this excludes the top-shelf single-word generics.

After the initial flurry of interest in the ngTLDs it will take around 7 years until we start to see them selling for prices at the current levels. What it does mean is that an investor buying today will need to factor in the renewals for 7 years before they can even start to see a return on their investment.

So if I’m buying a portfolio of ngTLDs for $10 each then I need to work my ROI around 7 years of re-registration fees before I can hope to sell them on a stock-turn business model of 1-2% per year. I would consider any sales prior to this time frame as an element of good luck. It should be noted that most of the domains will not have any traffic and this will contribute to the depress demand.

For many of the ngTLDs I’ve seen investors enter the market and snap up a lot of the quality domains. This surge in investor demand will have the impact of increasing the length of time for a ROI to beyond 7 years as the general public won’t see the gTLD being used by real businesses.

We saw an example of this behaviour when domain investors purchased the majority of the great generic .eu domains. It took years for .eu domains to be seen in traditional advertising. The length of time meant that many domain investors dropped their investments as the hoped for pot of gold didn't materialise quickly enough.

The renewed interested in the domain market has meant that many new investors have purchased large portfolios of domains and have not considered the sales time horizon. This is a big mistake. I would not be surprised if a lot of domains begin dropping in 3-4 years as investor cash reserves run dry. In fact, I’m banking on this happening and sitting on the side lines, cashed up and waiting for the opportunities to fall. The goal of every investor should be to hold an asset for the least amount of time as possible prior to selling that asset.

Let's explore what I'm mean from a very high level. Each year there are roughly 1,000 domains sold above $10,000 each. If we were to ignore the portfolio “quality” argument (ie. single word generics etc.) then the odds of selling a domain over $10,000 is roughly 0.0003%. Think of it as 1,000 divided by 300 million domains. The maths could be out a little but I don’t believe that it’s out by orders of magnitude.

If 0.0003% is the average figure then on a normalised distribution of quality then with great domains constantly getting offers domains at the entreme ends of the curve will rarely, if ever, receive meaningful offers. So if you do get an offer then my advice is to sell immediately.

What is amazing is that despite the decline in the PPC landscape it is still 2-3 times bigger than the total sum of domains sold each year. The difference between domain traffic and selling domains at the top end of the market is that domain traffic is monetisable now and it will ALWAYS be valuable for advertisers. An individual domain is only valuable to a small select group of businesses.

Let me return to the ngTLD market. Over the next few years there will be three successful business models adopted by the various registries. The first is those that have scaled vertically (eg. .club) and have poured all of their resources into making the single extension fly. The second is those that have scaled horizontally (eg. Donuts) and have several hundred ngTLDs under the one administrative structure. The third business model will be for specific market niches (eg. .cpa) which will adopt the extension as part of an overall global brand.

The balance of the extensions will either barely succeed or fail. Those in this camp that realise this first will be able to sell their businesses/contracts to one of the three successful models. The remainder will enter a frenzy of fire sales. The delay until this happens will really depend upon the length of time it takes for the cash to run dry for each of the registries.

From a domain investment perspective choosing the right ngTLD that will survive will be as important as choosing the right domain. It will be interesting to see what will happen to registries that no one wants to buy or can’t continue. Ifully admit that I’m unaware of the ICANN contractual details around this eventuality.

The bottom line is that ngTLD's are a very long-term investment and given this they have a LOT of risks associated with them for domain investors.....so if you end up buying up a portfolio then make sure that you choose wisely and have very deep pockets.

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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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