A number of domain owners have come to the misconception that I don’t believe in the new gTLDs. This couldn’t be further from the truth! What I’m wrestling with is the when not the if the new gTLDs take-off.

In the last 12 months there has been a lot of growth off a small base with the new gTLDs. According to ntldstats the numbers have grown from around 3.6m to just over 10m so far this year. This is around 270% growth this year (off a small number compared to the incumbents) and pretty good when you consider it wasn’t long ago when there were none. Yes, I know these numbers have to be taken with a grain of salt.....but let's ignore that for the time being.

The number one problem for the new gTLDs isn’t the initial flurry of sales and trying to hit yet another quarterly target. The problem is getting accepted by society as a means to navigate the Internet. Most people have been scripted to automatically type in .com or their ccTLD extension. To change this behaviour is going to take time.

You also can’t compare the new gTLDs to the early days of .com. They’re completely different. When .com was released, it and a handful of other extensions were all that you could get. It was a case of a limited supply and a massive latent demand fueled by billions of dollars of investor funds and media hype.

If you tried to compare .club to the early .com rush you would say that it’s not growing fast enough. But this would be a completely wrong conclusion. Dot Club is ultimately competing against 1,000+ other extensions all vying for a slice of the domain market....let alone the entrenched players. To already have 348,000 plus registrations is nothing short of phenomenal.

Just for the record, I picked dot club as an example because they do an amazing job at marketing and in my opinion will be one of the winners in the new gTLD registry race. I didn’t pick them because they sponsor the my blog!

What all of this is telling me is that the growth rates for the top ten new gTLDs are impressive but the bottom 690,000 are lagging behind. Is it their product, their marketing or something else?

I’ve heard people say that the registries should spend a lot more on marketing….in my opinion, this is really muddy thinking. The registries are selling a low value item and crossing their fingers that renewals in future years will yield them an ultimate return on their investment. Besides, if you’re tackling a global marketing anything less than about $100m for a marketing budget is not enough. The fact they are spending anything is a real miracle.

So what are most of the registries doing? Really simple, they’re growing, maybe not as fast as they might want to but the growth is still there. So my guess is that many of them are keeping their cash in the bank as they effectively buy time to become profitable. The ones that can't stretch the cash will fall by the wayside (ie. be sold) and the ones that reach profitability effectively have a license to print money. It really doesn't cost that much to update an entry in a database....so costs per unit sold trend towards zero. Verisign proved that this model worked and in the case of the new gTLDs they just need time.

So now I want to put my domain investment hat on to decide whether to invest or not. Here’s my challenge, other than through blind luck in a market that is saturated in supply it’s really unlikely that I’ll pick up the right domain now that I will sell for a fortune in the years ahead. So I’m waiting….

I’m waiting for the general public to start using them, not the odd showcase. I’m waiting for my kids to use them and my wife to tell me about a new website she’s just been to that happens to use a new gTLD. At that point in time I’ll have done all of my analysis, picked what I believe is the right extensions and buy in big time. Up until then, it’s a bit of a crap shoot.

In a market where there is a massive excess in supply there is no rush to buy. Just be patient and wait….let the market settle down and see what happens to the different registries. Do your own analysis and pick off what you believe will be winners. After all, what’s the point in investing in an extension if the registry is sold to someone else and they change some of the rules about your investment?

It will be really interesting to see what happens over the next 12 months and how many of the new gTLDs get picked up by people in some of the underdeveloped countries. They haven’t been born and bread on .com so it is likely to be a bell-weather of the future of the Internet.....so my advice, look to the newbie Internet users and how they navigate to help guage the timing for your investment.

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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.

Rightside, a publicly traded registrar/registry, released their quarterly earnings statement this past week and it made really interesting reading. What I found fascinating was the picture that was being played out in the domain sales space and how it reflected on the new gTLDs.

The Rightside share price (chart above) has suffered at the hands of investors as they struggled to come to grips with the new gTLD phenomenon. The slide down from a height of $15.85 per share as ICANN dragged its feet was momentarily bolstered by the April quarter results from actual release of a number of extensions. Right now, investors are still wrestling with the potential financial windfall from new gTLDs as the share price now languishes at $7.63.

It’s difficult for any business to try and communicate to all of the stakeholders the benefits of a strategy that may suddenly have an extended time horizon. This looks to be the case with the capital markets, Rightside and the new gTLDs…..but is there a glimmer of sunshine coming through the cloudy sky? Let’s begin to unpack this…

In the previous quarter’s report there were a couple of slides that really leapt out at me. The first one showed that back in Q2 2015, 83% of revenue was subscription based and that 74% of domain registrations were being renewed. It also helps that the average revenue per domain is continuing to trend upwards. These figures are underpinning a very healthy business that is continuing to grow quarter on quarter as the Rightside team executes the business plan.

According to the Q2 report the target revenue growth is 9-15% in 2015. I crunched some numbers and it looks like they’re currently (ie. Q3 2015) at about 13% above Q4 2014 so it looks like they are going to hit the top end of the growth target…..all good news for investors!

Despite the good news of hitting targets I thought that it would be a worth digging further into the numbers to see what was going on. If we are to look at the revenue graphs you’ll notice that both the Registrar and the Registry are very slowly trending upwards to the right.

The Aftermarket is actually pretty flat….which is surprising given the level of cash recently being injected by Chinese investors into the domain space. It will be interesting to see if there is an uptick in the Aftermarket space in the next quarters report.

Given the renewal rates, the registrar numbers weren’t too surprising. A large number of domains produces a lot of money in subscription revenues. What did catch my eye was the registry growth.

There seems to be a huge amount of money being pumped into the new gTLD space and yet the actual revenue numbers seem to be quite small. Yes, the business unit is just over a year old but even still, I would have thought that there would have been an initial kick up in actual revenue.

The second chart shows the quarter on quarter growth rates for the three business units. In this case the registrar is very flat and typically growing at around 2-3% per quarter….although this does aggregate up to 7.6% for Q3 2015 compared to Q4 in 2014. It’s only a smidge above the annual 6.5% growth rate for the entire domain registration space but shows that Rightside is slowly gaining market share rather than losing it.

The Aftermarket is more volatile with swings from 85% of the previous quarter to 116% since Q4 2014. The business unit is doing $7.8m on average for the three quarters in 2015 which means that it is 90.3% of Q4 2014 or exactly line ball if you compare the first three quarters of 2015 vs. the last three of 2014.

What is incredible is the change in growth rate for the registry business. There has been a sharp reduction in quarterly growth from a high of 250% to a current level of 26% per quarter. It is early days for this business unit and some volatility is expected. Consideration must also be given to these figures being off a low starting base.

This registry result would be a great result for an established business but it poses a number of questions about what is happening in the new gTLD space. More than half of the Rightside Q2 report was dedicated to explaining what new gTLD’s are to investors. This makes it very clear that Rightside is putting a LOT of eggs in the new gTLD basket.

For example, there’s even a slide that poses the typical investor hockey stick scenario. It essentially says, the whole world is the market for the new gTLDs….if only we get a small slice of this big pie we will win big time! I must admit that I really don’t like these types of slides as they come across as being quite silly (slides 13 and 15 of Q2 presentation – see below).

From the chart below the incumbents have not been able to secure the “new market opportunity” and it’s very unclear whether the new gTLDs are going to be able to either. As the market matures, I wouldn’t be surprised if the new gTLDs end up settling into a growth rate of around 6-8% per annum which means the aspiration of the “new market opportunity” will largely remain untapped.

The fuel for the new gTLDs to secure massive growth has to be found in the sales and marketing budget, in the case of Rightside its $2.6m for the last quarter. When we’re talking about changing human behaviour on a global basis I would have thought that this budget would have had to be much, much larger. The next couple of quarters will really provide a good solid picture of the new gTLD space and whether it’s going to take off or not…..it will be interesting to see.

The problem is that the markets want Internet companies to have mega-unrealistic growth rates that they can fall in love with. They want the next dropbox or snap chat that they can madly invest in and then dump after they’ve made a capital killing on the ride up.

Here’s the challenge for Rightside….it’s a good solid business with sustainable revenue into the future. No problem at all with that….BUT….it looks and feels like a mature long established company in the mining or industrial sector that is selling widgets to other businesses. Great business but really boring.

The impression is that Rightside has looked to the new gTLDs as the sizzle that would get the market excited about them….it’s early days yet but don't think this is going to pan out quickly enough for the company. Eventually, the investors will come in and hack the expense line to pieces (ie. fire lots of people) to get the profits up since their returns are unlikely to come from capital growth.

In my opinion, what Rightside needs to do is speculate by buying a few bleeding edge innovative companies. Off the back of their good solid revenues they need a nascent technology in the domain space that is uninhibited by growth constraints. A technology that doesn’t need to convert the masses or do corporate deals that take years to come through. This is the sizzle that will get the market excited enough about the share price so that investors will once again play the capital game.

I get the feeling that if the investors give Rightside enough time then the company could become one of the great flagship in the domain space. Only time will tell whether the management team will be sucked into the vortex of quarterly targets or are given the space to revolutionise the entire domain industry with a fresh sense of vision. This will be an exceptionally difficult task but given the team line-up there is a good chance they could pull something like this off.

Just to make it very clear, I’m actually still quite bullish about the new gTLD opportunity for domain investors. What I do believe is that it’s going to be a 5-7 year time horizon for any investment to yield reasonable returns. The Rightside numbers have reinforced this perspective and my personal position of “keeping my powder dry” and waiting for the most opportune moment to invest.

I should say that I do not own any shares in Rightside and would recommend that you seek professional advice prior to investing in any company.

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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.

I’ve been married for 28 years to Roselyn, she’s the most wonderful lady in the world. In fact, she plans to be at NamesCon this January to meet many of my domaining friends so be on the lookout for her! I’m blessed with three children, Tim and Sarah are in their early twenties and Elise just turned seventeen.

I was up really late last night finishing an analysis on the publically traded registrar/registry company, Rightside, for a future blog post. It seemed only moments later that I had to get up early to go and see Elise play in her netball final.

Sadly, Elise lost her final but in my eyes she won the whole game. Despite being really sick this past couple of weeks and just coming through her final exams she put her heart and soul into the game and did the best she possibly could. I was a really proud father….regardless of the score.

Sarah is coming to the end of her course in specialist make-up (for movies and television) while maintaining a pretty full-on part-time job selling streetwear clothing. She’s killing her sales targets and is now one of the key members of the sales team.

Tim has just secured a position teaching English to Italian students through drama. This means that he’ll being heading to Italy first thing next year for five months of traveling to different schools around that country….what an experience! In the meantime, he’s just about finished writing his first book.

So why am I sharing a brief snapshot into my family? It’s so easy to take our loved ones for granted and assume that they will always be there…..and meanwhile time goes by. Sure, we have our difficult times, who doesn’t, but the reason why family is important is because…..well…..we’re family!

Over the years, finding out what really makes each other happy is crucial to happy family life. For instance, Sarah loves hearing that she’s doing well and getting little presents. Elise loves a cuddle on the couch, Tim likes any good conversation that also involves food and Roselyn loves it most when we spend time together.

If you’re struggling with your own family life or with a family member then my suggestion is to think about what really presses their buttons in a positive manner. We’re coming up to Christmas and it’s all about giving so why not think about your different family members in a new way. Instead of a gift voucher from Amazon, you may take your daughter out for dinner, spend some time getting some advice from your son about an investment or arrange for a day spa treatment for both your partner and you.

What I’ve found is that my family is just so important and provides the motivation to many things in my own life. Whenever I invest in my family I always seem to reap an incredible return….the challenge is to continue to invest for one day you may get surprised.

For example, a couple of hours ago Tim came home and presented Roselyn with a bunch of flowers and a box of chocolates for us both to share. He did this to just say thank you for dropping him off and taking him to the airport to visit his girlfriend in Sydney. It was a huge surprise for us both and a few tears of happiness were shed.

It made both Rosleyn and I so proud of our son and that some of those ratty teenage years were well behind him. As they say, “Ask a teenager while they still know everything” and spoken by a young man in his twenties, “it’s amazing how much smarter my parents are the older I become.” The person that coined these phrases really understood the torment that teenagers can sometimes bring a family.

If you’re going through this time, don’t worry, someday in the future your children will return to you and all the effort of bringing them up will be worth it.

Have a great weekend!

Michael

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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.

I recently had a great time speaking at DomainFest in Fort Lauderdale. It was more of a chat than a formal session and it allowed for me to share some of my experiences in the business of domain names. I thought that I’d share some of what was covered in this article as it could benefit many readers.

The first lesson in business is really simple, revenue less expenses equals profit. In my experience, in their love for their domains an incredible number of domain investors forget this simple equation. They have a little story about how they acquired or registered each of their domains and like Gollum from “The Lord of The Rings” they constantly say, “my precious”.

Yes, your domains are precious but if you forget the fundamental business equation then you’re not running a business, you’re enjoying a hobby. That’s fine to do but don’t expect to get business outcomes if you aren’t running your portfolio as a business. If you are running a business then you may have to drop a few domains into “Mount Doom”.

As much as I love my domains I’ve discovered that my wife loves my bank account far more. As she so lovingly puts it, “It’s very hard to cook a domain and serve it to the kids for dinner”.

The second mistake that many domainers make is to focus on the revenue side of the business to the exclusion of all else. These domainers are always holding out for the ultimate sale which is going to pay off the mortgage and allow them to sip margaritas on a far off beach. Seriously, for many of your domains you have more chance of winning the lottery than getting your asking price. My advice, get realistic with your pricing.

I was speaking to a domainer this past week and they were at their wits end because they had only sold a couple of domains in the past few years. They absolutely believed that their domains were worth millions. Here’s the problem, when the market tells you that your prices are too high then you can either listen or continuously fund the renewals out of your own pocket. It's your choice.

The biggest problem with the market is that it’s what we all live and die by. Promises and wishes are great but unless you actually convert a deal then they are pointless. I’ll quote my wife as she reminds me time and time again, “The deals not done until the cash is in the bank!” I couldn’t agree with her more.

If you aren’t selling your domains then either examine the price or your business model. For example, most domain sales are aimed at the small to medium sized business….I don’t know any businesses of that size with a spare $20K to spend on a domain. I know plenty that have $2K or $500 per month though!

Let’s get back to our equation and the other little factor that we have to consider, that is, expenses. Expenses go much, much further than renewal fees. Please, oh please, don’t forget to count the cost of your time. If you value your time at zero dollars then don’t be surprised when other people do so as well and waste a whole lot of it.

The time spent renewing your domains, keeping track of any PPC revenue and ensuring nameservers are set correctly is a direct cost to your investment. By the way, around 10-15% of your domains have incorrect DNS settings – if you don’t believe me then go and check. While you’re at it, don’t forget the costs of your accountant, any legals, bookkeeping etc. You may soon discover that your profit takes a significant hit.

Speaking of profit…..never get confused of the difference between cash in your bank account and profit. Just have a chat with the tax man and I’m sure that they’ll educate you on the difference. I’ve seen many domainers spend their cash only to forget about the fact that they need to pay their taxes.

Some of the hidden value in a portfolio can also be access via how you treat your domains for taxation purposes. My recommendation is to get some really good advice on this for your jurisdiction. I hate to say it but your little local accountant is unlikely going to cut it….there are just so many variables when it comes to domains.

For example, are they assets, expenses, contract rights or and expiring contract like an insurance agreement? If they are an asset then how is it that they can potentially be taken away from you? All good questions for an accountant in your own country.

Now that you have the most basic business equation under control let’s take a look at the next step….more on this later.

This is the second part in a series in understanding what is going on with Pay Per Click (PPC) revenue.

We can see the overall impact of the CTR and EPC graphs (see the previous article) by examining the RPM trend chart. The shape of the chart really highlights the rush of advertisers and consumers pushing up the value of traffic in May and then a decline into the norhern hemisphere summer period.

The seasonal summer downturn can be clearly seen and the rise through September is encouraging. It’s clear that in both cases the rise back up to the previous May values are not being reached so something else must have occurred to disrupt the normal cycle.

It just so happens that in the first half of June, the worlds second largest economy, China, experienced the beginning of a huge downturn in their economy. The Shanghai Index fell from a high of 5,166 and by the end of September it was resting at 3,053. In addition, to help forestall a total crash of their economy, on the 12^th Aug the Chinese authorities devalued the RMB from 16.1 to 15.6 to the $US.

When we examine the RPM trend we can see that it started entering a slump earlier than normal for the seasonal summer period. It is now lagging behind the typical summer rebound in much the same manner as the Shanghai Index is still languishing in the 3000's.

Domain investors would have to be completely naïve to think that such a massive decline in China would not have some impact on advertising earnings.

The question that needs to be asked is, “Will the RPM rebound?”

Although it’s early days yet, the RPM is clearly rising. The bend downwards in the trendline at the end of October is more of a function of a level 4 polynomial trend function rather than sudden depressing numbers. Traditionally, the lead up to Christmas is always a good time for traffic monetisers as advertisers flood into the Google auction system and bid prices up. Eager consumers also enter the market in droves to snap up an online bargain.

What is clear is that there is some manipulation of both the EPC and CTR numbers being reported back by Google. According to Google, if the domain channel is on now on the high value feed (due to CAF) then domain investors are receiving 90% of the advertising revenue or 68% if they are on the lower quality Adsense like feed.....not sure where we actually are in this spectrum.

What is suprising is that Google’s quarterly earnings report their Traffic Acquisition Costs (TAC) are currently sitting at 21.3%. It seems logical to me that even at 68% of the advertising revenue someone else must be paid a fraction for their traffic if the total TAC is to reach 21.3%. Either that or the domain channel (and other channels) are actually aggressively smart priced downwards.

Due to the lack of transparency it’s more likely this is the case and that no one is actually getting paid anything like the stated high values. Given the inverted shapes of the CTR and EPC graphs this is entirely more likely.

It’s all very easy to get angry at Google and demand our “fair share” but let’s face it…..they are actually obligated by their shareholders to maximise shareholder value. So don’t be surprised by this type of activity. The bottom line is that Google has been constantly reducing their TAC so that they ca be more profitable. They have also been buying domain traffic at massively reduced rates….

There is very little that we can do about macro-economic impacts to the domain industry like the one from China. Sadly, we just need to ride these out. However, as an industry we need to be constantly looking for solutions that pay more for our valuable traffic.....more on this later.

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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.