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Gambling on Domains

20181009_gambling Are you gambling on domains?

I must admit that I’ve never really understood the business model underpinning domain sales. I know that in this article I may rain on your parade and for that I’m sorry….but please help me out in getting over some of my possibly faulty logic

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The state of the market for domain names is that it has fallen from a peak growth of 11.7% in 2015 to 1.2% in 2017. The 2015 peak was spurred on by two factors:
•    The Chinese domain boom
•    Greater release of new gTLDs

When you begin to drill down into the data it becomes even more interesting. For instance, .COM grew by 6.4% in 2015 and is growing by 2.8% in 2017. The legacy TLDs (eg. org, net etc) grew by 1.5% in 2015 and slipped backwards by -1.9%. The surprise was the ccTLDs (country codes). In 2015 they were growing by 14% while in 2017 they are beating .COM out with a growth rate of 3.9%. I must admit that I love ccTLDs and have made a lot of money from them over the years.

The sorry tale is the new TLDs. After exploding out of the blocks in 2015 with a growth of 196% they are now contracting by 14.6%. Many have stated that this is not surprising as speculators leave the market but when you consider that over 50% of the domains are parked then you’ve got to ask what’s actually happening. The simple answer is some of the extensions (eg. XYZ) are experiencing massive drops which is influencing the numbers overall…..so no panic here for the truly good extensions.

Ignoring the decline in the new TLDs the overall growth in the market is around 4.8% or approximately 9 million more domains from 2016 to 2017. This is an important number as it represents the demand side of the market and should dynamically influence the sale price of domains.

The other curve is a little frightening…..the supply curve. Since the new TLDs were released, the market has been swamped with a massive level of supply. This is not the early days of the Internet where there was .COM, the CC’s and a few others. We are now in an environment where the supply is so large that it MUST impact the sales price.

Less demand combined with greater supply is a nasty combination that I think many sellers haven’t considered in their pricing decisions.

Andrew Allemann from Domain Name Wire wrote a great article titled “Quantifying GoDaddy’s aftermarket”. What it boiled down to was GoDaddy earned between $25-$40 million in aftermarket sales per quarter. This is about $100-160 million per year. Not a bad number but in the global scheme of things it’s small.

Given that GoDaddy’s market share is about 34% then this means the entire aftermarket is worth between $300-$480 million per year. You would have to provide a discount to this figure as GoDaddy has built the largest online marketplace and has an army of brokers trying to sell domains. If I was to take a guess (yes, it’s a guess) I would say the maximum size of the aftermarket is around $400 million.

Of the 342 million domains registered around 30% have been purchased for investment purposes which makes 114 million domains. If the average renewal price was $10 (which is cheap considering the ccTLDs) then this means $1.14 billion is spent on renewals.

Just think about this for a second. $1.14 billion dollars is spent chasing $400 million in top line revenue. This is before time or any other costs are taken into consideration…..this is looking a little concerning for investors.

Of course, we have ignored the income from domain monetisation but since everyone thinks this area is dead then let’s assume it’s a small number. Just for the record, I don’t believe it’s a small number at all and I know plenty of people that are making a fortune from the nice regular income generated by monetisation.

What I’m saying is that domain investors that focus solely on domain sales have multiple problems on their hands. They have declining demand, massive supply and need to invest a huge amount to get some sort of economy of scale. So why do they do it?

There are the exceptional portfolios out there that have value and will continue to have value into the foreseeable future. We all want to have the million-dollar sale but let’s face it, without the high roller ticket you’re not likely to be playing in the high stakes game. Let’s put these exceptional portfolios aside.

I believe the reason why the vast majority of people invest into domains is because they provide hope. They have their lottery ticket and each and every day they check their email in the hope that their numbers come up with a buyer making an offer.

Domains are funny things because even as a hobby you can get an incredible amount of satisfaction from just collecting them. When you work out the return on your investment of an individual sale you tell all your friends about it. “I just sold a domain for $10,000 that cost me $10 last year to renew.”

Everyone gets really excited and happy for you and asks how they can get into the business just like you. The problem is that you have 1,000 domain and you’ve been spending $10,000 per year for the last 5 years to get that sale…..This is the reason why many domain investors aren’t really investors at all but small-time gamblers who also have a full-time job. That’s OK…there’s nothing wrong with that but realize that you aren’t actually running a business…..you’re enjoying a hobby.

When you look at your own portfolio one of the things that is likely to be well overdue is a cull. My guess is that in the current market around 30% of the domains should be dropped immediately. More than that…..try and work out your profitability over the last 12 months. If you’re in a loss then keep dropping until you’re into a profit.

Now let’s compare domain sales only investors to the traffic portfolio owner that people have been deriding for the past 5 years or so. They only keep domains if they’re profitable and they seek greater ways of making money outside of the regular Google solutions. Right now, if you're smart, 50% of your traffic should be monetised by non-Google sources. This provides an uplift in revenue and diversifies risk.

More than this, for traffic portfolio owners money comes in each and every month regardless of whether a sale is made. A repetitive revenue stream means you can plan as you know roughly what your revenue line will be next month. There’s also a level of security in the knowledge that no matter what, advertisers will always want your traffic.

These reasons and a whole lot more are why I love the domain industry. You can take a domain, build a website, monetise the traffic or even sell the domain itself. There are so many ways to slice and dice domains.

As I said in my opening remarks.....I'm sorry if I have offended anyone with the numbers or my conclusions. I'd more than welcome any comments and experiences you may want to share about your own portfolio.

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Comments

Guest - Steven on 10 October 2018
Aftermarket sales market share?

How did you quantify that Godaddy has an aftermarket sales market share of about 34% when so many aftermarket sales are private?

How did you quantify that Godaddy has an aftermarket sales market share of about 34% when so many aftermarket sales are private?
mgilmour on 11 October 2018

I based this roughly on overall market share. Yes, many domains are sold privately but I think not as many as people would have you believe.

I based this roughly on overall market share. Yes, many domains are sold privately but I think not as many as people would have you believe.
Guest - Steven on 11 October 2018
hmm

I think this estimation is the most flawed part of your post's logic (which is otherwise mostly good), and your later numbers flow from this inaccurate point.

According to DomainIQ, Godaddy's NameFind portfolio of aftermarket domains for sale is about 400k names. Godaddy's reported aftermarket revenue is a combination of its commission on other people's sales through the GD/Afternic platform + its Namefind sales. We can't accurately break down the ratio of others people's sales versus Namefind sales, but to work some numbers, let's say 10:1 since over 4 million names are listed on Afternic (I think? not sure where to verify this number).

So if we're saying $150 million in aftermarket revenue for GD, that's $135 million from commissions (which are 20% or lower) - so the gross sales would be $135mil / .2 = $675 million, + $15 million from the namefind names.

A name not mentioned is HugeDomains which has a portfolio of over 2 million domains for sale and likely puts up much bigger aftermarket numbers than Godaddy's NameFind portfolio, but probably lower than the Afternic distribution sales...

Anyways, this part of your data is likely far off and it affects your other points which flow from this one... I would expect the annual global aftermarket sales number would be closer to a Billion... lots of estimations in all of this so who knows.

I think this estimation is the most flawed part of your post's logic (which is otherwise mostly good), and your later numbers flow from this inaccurate point. According to DomainIQ, Godaddy's NameFind portfolio of aftermarket domains for sale is about 400k names. Godaddy's reported aftermarket revenue is a combination of its commission on other people's sales through the GD/Afternic platform + its Namefind sales. We can't accurately break down the ratio of others people's sales versus Namefind sales, but to work some numbers, let's say 10:1 since over 4 million names are listed on Afternic (I think? not sure where to verify this number). So if we're saying $150 million in aftermarket revenue for GD, that's $135 million from commissions (which are 20% or lower) - so the gross sales would be $135mil / .2 = $675 million, + $15 million from the namefind names. A name not mentioned is HugeDomains which has a portfolio of over 2 million domains for sale and likely puts up much bigger aftermarket numbers than Godaddy's NameFind portfolio, but probably lower than the Afternic distribution sales... Anyways, this part of your data is likely far off and it affects your other points which flow from this one... I would expect the annual global aftermarket sales number would be closer to a Billion... lots of estimations in all of this so who knows.
mgilmour on 11 October 2018

Many thanks for the extensive comment!
My understanding was the $150m was the revenue line to GoDaddy not the net revenue. Maybe I'm wrong with this but it was my understanding.

Many thanks for the extensive comment! My understanding was the $150m was the revenue line to GoDaddy not the net revenue. Maybe I'm wrong with this but it was my understanding.
Guest - Steven on 11 October 2018

I realize the logic of my last reply is off related to the 10:1 ratio of 20% commissions earned on afternic/partner sales versus namefind portfolio sales. It'd mean more like $50 million from namefind sales + $500 million gross partner sales with 20% commission = $150 million total reported.

But my overall point is that 34% market share of "aftermarket sales" figure is likely nowhere close to being accurate.

I realize the logic of my last reply is off related to the 10:1 ratio of 20% commissions earned on afternic/partner sales versus namefind portfolio sales. It'd mean more like $50 million from namefind sales + $500 million gross partner sales with 20% commission = $150 million total reported. But my overall point is that 34% market share of "aftermarket sales" figure is likely nowhere close to being accurate.
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