Gambling on Domains

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.

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Recent Comments
mgilmour
I based this roughly on overall market share. Yes, many domains are sold privately but I think not as many as people would have yo... Read More
11 October 2018
mgilmour
Many thanks for the extensive comment! My understanding was the $150m was the revenue line to GoDaddy not the net revenue. Maybe I... Read More
11 October 2018
mgilmour
Thanks for the correction of .tk.....I forgot to take them into consideration. What is for sure is the domain market is mature and... Read More
11 October 2018
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Where’s the Innovation Revolution?

One of the most frustrating things about the domain industry is the complete lack of innovation. This isn’t necessarily because companies don’t want to innovate but more because they are caught in a bind and can’t innovate. What do I mean by this?

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Every company should be evolving. Evolution has the sense of slow change over a long period of time where internal processes are streamlined, website made “snappier” and customers are being looked after. These are all important things to do but they stem from the evolutionary basket not the revolutionary.

A revolutionary change is where a company completely transforms an industry, and everyone looks up and says, “Why didn’t we think of that?” It’s looking at domains and saying, “I think there is an aftermarket for them.” In its day, this was a revolutionary concept. It’s looking at domain traffic and matching it up with advertisers…..again, another revolutionary concept.

The problem the domain industry has is it’s been caught in the revenue bind. This is where the bean counters look at resourcing a new idea as a cost rather than as an investment into a competitive advantage. Serious innovation often means cannibalising existing revenue streams and this is regarded as a “no go zone” by managers that are given quarterly targets.

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Industry Leaders Survey - Have Your Voice

The 2017 Industry Leaders survey responses are continuing to come in and the top three contenders so far are Frank Schilling, Rick Schwartz and Jothan Frakes. If you haven't filled in the survey then make sure you share your opinion.

Click Here to do the Industry Leaders Survey

I've had a number of questions raised since I launched the first industry leaders survey a few days ago and I thought that it would be worthwhile answering the questions.

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How long will it take to fill in the survey?
There are only 10 questions with a slider from zero to ten next to each so it should only take a few minutes.

What if I don't know how to answer some questions?
The questions look at how YOU feel about the person that you are nominating. This means there are no wrong answers. Also, if you don't know how to answer some questions then just move the slider to zero.

Since the survey is looking at your experience with the person then this would be a reasonable response if you have not had any personal business experience with the nominee but have viewed there community activity.

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Interview with Stevan Lieberman

Stevan Lieberman is well known to the domain industry in his capacity as an intellectual property lawyer. What not many people know is he is also an investor and entrepreneur.

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In this interview Stevan shares about some of his investments and the progress he is making with his latest business - Digital Candy. I hope you enjoy watching the video as much as both Stevan and I did sharing from one side of the world to another.

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Critical Insights Into the Domain Industry – Part 4

This is the fourth part in the series on the Domain Industry and it continues directly on from the previously three. Even with the decline in traffic revenues they have continued to underpin the entire domain industry since its inception. Everyone from the registry through to the parking company are dependent upon this steady relatively consistent stream of cash.

The one bright spot during this time was that domain investors began to set more realistic prices on their assets. This drastically improved the problem of domain liquidity and injected more funds into the industry.

Before the industry downturn domain investors honestly believed that every domain they owned was almost priceless….they were waiting for that magical pot of gold to appear at the end of their domaining rainbow. I remember one prominent investor publicly declaring that he automatically turned down all offers less than $200K!

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With the squeeze on returns really biting, investors were now looking for another business model to help them out. This was the birth of the stock-turn model of selling domains.

Think of this business model as more like the supermarket rather than the boutique store. The supermarket has much lower margins but sells a greater volume of goods. It survives on these margins because of the masses of people that purchase through them….this was the problem that the domain industry needed to solve.

To join the stock-turn revolution, domainers had to realistically look at their portfolio and then price the majority of their domains at around the $1500 mark. The goal was then to sell 1-2% of their portfolio each year. Like the supermarket, this is effectively an eyeballs game. For the model to work domainers needed to get their assets in front of as many people as possible who are currently seeking to buy a domain name.

This was a seismic shift for the industry and really illustrates the pressures that domainers were under financially at that time. Domains that were once priced at $200K were now being sold at 1% or less of that value. These were desperate times.

In the entire domain value chain the end user eyeballs were all going to registrars to find the domain for their business. For the first time, registrars found themselves in the box seat to exploit this opportunity.

When end-users went to purchase a domain name rather than saying that it was unavailable a message would pop-up that the domain could be purchased for $1500 (as an example). A business wanting to secure their domain wouldn’t think twice at paying 150 times the registration cost of the domain.

The biggest challenge for this model to work was that domains that were registered with one registrar needed a fast way to be transferred if another registrar sold them. This was the birth of the multi-listing-services model that allowed fast transfers of domains between registrars. The streamlining of the fast transfer process has meant that consumers could now more easily purchase domains that are owned by domain investors.

Not surprisingly, there was a huge rush to get into this space by many of the registrars. Why sell a domain for $10 when you could sell the same domain for $1500? The profitability of a registrar now had the potential to dramatically increase. A virtuous cycle came into play as the major domain marketplaces sought the valuable eyeballs provided by the registrars and matched them with their existing marketplaces.

Here’s the interesting challenge. Everything, and I mean all domain sales hinge on traffic. Whether the traffic is generated by a registrars brand (eg. Godaddy, Afternic, Sedo etc) or from the domains themselves. If a consumer doesn’t know a domain is available then they can’t purchase it.

The decline in PPC rates impacted the sales market in two ways:

1.            Less liquidity in the domain space for domain investors to purchase domains.

I remember writing an article around 2008 about the fact that there were a number of large domainers that were market makers. In other words these individuals had amassed such a large amount of traffic revenue that they directly influenced the price of domain sales. As an aside, in the then relatively immature domain aftermarket, the prices dropped almost overnight when these players stopped buying domains.

2.            Less traffic as domains were dropped

This second impact is somewhat hidden. What many people haven’t considered is that the traffic domains would often be the conduits for potential buyers to the domain marketplaces. To date, the domain marketplaces have received this traffic for $0…..not a bad deal when you think about it.

For example, the major marketplaces do not pay anything to a domain owner when a buyer clicks on the “this domain maybe for sale” link. This makes sense, because the domain owner wants the person to buy their domain. What is interesting is that the buyer may go and then search the marketplace and purchase an entirely different domain. The owner of the domain that generated the lead gets paid nothing. In my opinion, this is an embalance in the industry that will eventually be ironed out by an innovative company.

What happened several years ago is that many of the marketplaces that are also tied to parking platforms became desperate for the traffic that also generated buyers. Domain parking was starting to be seen almost as a loss leader. Suddenly traffic became valuable not for its PPC value but for the potential buyers that it also brought.

This series on the history of the domain industry will continue.

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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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