Part 3 - How A Decline in the Chinese Economy Will Impact Domains

This is the third part in a series that examines domains and the Chinese economy. The first two parts can be viewd by clicking on the following links: Part 1      Part 2

The biggest concern with a Chinese economic downturn is the impact that it will have on the rest of the world. As companies reduce spending and hunker down during the economic storm domain valuations will be the recipient of a perfect storm of less demand and massively greater supply courtesy of the new gTLDs.

Escrow.com

If you are considering an offer right now on a domain, then my advice would be to take it, as I believe we will be heading into some rough water over the next couple of years. I’ve never regretted having cash in the bank and if I’m right, then there’s going to be some real bargains available in the not too distant future.

The biggest concern for me is the value of domain traffic in a financial crisis. Users will still have value but I’m concerned whether the value will be fully realised by domain investors in a downturn.

The Global Financial Crisis (GFC) taught us that although domain traffic is valuable (businesses need customers) the position of domain investors in the domain ecosystem is currently quite weak. As the dominant advertising partner, Google is likely to try and take a greater share of the reduced volume of advertising dollars in a difficult market.

This strategy worked in the past because there was excess margin between what Google pays out and second tier advertising exchanges. We are seeing that this is not necessarily the case in every market vertical. Domain investors that leave all of their domains with a single company or try and move them manually between monetisation companies will achieve sub-optimal results.

The challenge for domain investors is to diversify revenue sources so that they are not all coming from a single company. A recent article on the “hidden value of optimisation” clearly showed how optimising across multiple revenue sources effectively hedges against turbulent economic times. In the case of the article it illustrated the cross-rate differential between the Euro and $US as an example.

I’m constantly looking at macro-economic factors that may impact ParkLogic clients and then devise ways to help mitigate any downside risk while increasing the benefits from any potential upside opportunities. It’s what keeps the team awake at night as we dive into not just domain data but data that may impact the value that underpins our client’s assets.

To finalise this series, here is a list of actions that you may wish to consider implementing:

  • Finalise all active domain transactions.
  • Review the prices of all of your domains with an eye to reducing them.
  • Ensure all of your domains have buy it now prices on them.
  • Get all of your domains into each of the active market places.
  • Actively reach out to end users of your domains to market them.
  • Setup a webpage with all of your domains listed and their prices. All “for sale” links on parked pages should point to this webpage. If a potential buyer clicks on one of the domains then it may route through to one of the market places to handle the negotiation etc. This will mean that all of the traffic from potential buyers will be routed through to your domain list and not used to potentially sell someone else’s domain.
  • Outsource all of your domain management (especially for traffic) to a company that actively reduces revenue risk.
  • Do not buy any domains unless you can see a clearly defined exit.
  • Close any developmental projects that have a time horizon greater than 2 months.

I hope that you found the series on domaining and China interesting and thought provoking. I'm looking forward to DomainFest in Hong Kong to test out some of my hypothesis.

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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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Part 2 – How China’s Looming Debt Crisis Will Impact Domains

This is the second article in the series on China. Click here for part 1.

Off the back of all of the China debt crisis, what’s going on in the domain industry? For the past year many western domain investors have been scratching their heads as they tried to work out why the Chinese were buying up all of the 4 letter/number domains.

Escrow.com

Other than a few reasons which were largely due to mysticism and numerology there was no sustainable underpinning of the value of many of these domains. In short, it was spectulation run mad that rapidly pushed up the prices.

Despite the underlying values being questionable there has been a rush by many western domain speculators to register short character domains. The total goal was to then sell these domains to Chinese investors for inflated prices. While some people have made money, many are in the process of losing their shirt as the giant global ponzi scheme comes crashing down.

I recently spoke with a Chinese investor that has over $50m to invest in domains and she indicated that they are putting just about everything on hold to see what’s happening with the market. The domain industry has just experienced a bubble fuelled by cheap money that was looking for another asset class to invest into. The rule of thumb for bubbles is to get in and get out really fast so if you're holding any of these domains then it may be a long time (if ever) before you see a return.

As an example, a number of months ago I sold a whole lot of 4 letter dotcom domains to a Chinese buyer. I recently checked the market and you couldn’t get half the price for those domains now.

I have been upfront in saying that while the cheap money is available then in my opinion sell. It’s not often that you get opportunities like the one that has just past.

What’s really interesting is that many of the Chinese registrars are the companies that are moving massive numbers of the new gTLDs. As an example, registrar west.cn has sold 27.3% of the .xyz domains (1.13m). Congratulations should be made to Daniel Negari and his team as they really tapped into the Chinese market as a place to sell the .xyz brand in a big way.

Likewise, .CLUB has managed to sell over 60% of its domains to Chinese investors. It’s clear why Collin, Jeff and the team have been clocking up the frequent milers to China and back! Like a number of the other new gTLD registries they seized upon the boom time in China as a way to move their stock. It was a fantastic move!

The question that needs to be addressed is what will happen to the new gTLD market in a Chinese bust? Clearly renewals will evaporate from domain speculators and new registrations will return to much more modest levels. But is this really a bad thing?

What the Chinese boom has done for a number of the new gTLD registries like .CLUB and .XYZ is provide a massive injection of capital at a time when they most needed it. A Chinese bust will not be catastrophic for these companies as they've also been focusing their efforts in other parts of the world and in particular end users.

In the next article in the series I will go through what I think is a good domain strategy in the event of a Chinese economic collapse.

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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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Guest — JP
I wouldnt worry too much about China's debt. Check out this debt vs GDP heatmap. US is on fire, always has been, always will be un... Read More
15 April 2016
mgilmour
That's a really good chart but only shows government debt to GDP as a ratio. China has the majority of its debt is held by state o... Read More
15 April 2016
Guest — Joseph Peterson
Yep. That's about the long and short of it. After the first categories to experience upward price motion in the 2015 Chinese sur... Read More
16 April 2016
7189 Hits
3 Comments

Part 1 – How China’s Looming Debt Crisis Will Impact Domains

I’ve been concerned about China’s debt levels for quite some time and the impact that a Chinese economic meltdown may have on the domain industry. After returning from a week’s vacation I decided that it was time to start digging into the data and piecing together a number of anecdotal data points.

Escrow.com

It didn’t take long to discover that just about every major investment media source is concerned about China’s debt problems. Back in October 2015, The Economist had a little chart with the title, “Still Bingeing”, that outlined China’s total debt as a % of GDP. The chart can be viewed below

China bingeing on debt

On the 22nd Feb, Bloomberg News had a headline announcing that China’s debt will peak at 283% of GDP in 2019. To put this into perspective, the USA debt to GDP ratio is 104%.

Having a debt ratio of China’s magnitude is scary to say the least and many commentators suggest that this is only sustainable as long as China is able to maintain a GDP growth of greater than 6%. The problem is that the Chinese economy has not been growing as fast as the increase in debt levels.

For example, the country’s banks extended a record $US385 billion of new loans in January. Bloomberg news stated, “The increase in debt could pressure the country’s credit rating, Standard & Poor’s said on Tuesday, less than a week after the cost to insure Chinese bonds against default rose to a four-year high.”

The first problem is the Chinese economy is slowing down and is being propped up by massive injections of capital in the form of debt. So called state-owned “zombie” companies are being constantly bailed out rather than put down. These companies can repay the interest on loans but not the principal which just exacerbates the problems.

The second problem is the Chinese fuelled real-estate bubble collapses. Beijing and Shenzhen are up by more than 700% since 2000 and this has driven Chinese investors to look at high end top coastal cities in English-speaking countries. For example, Sydney, Melbourne, Auckland, Singapore, San Francisco, LA, Vancouver, New York, London….

The Chinese real-estate market has been falling for over a year and investors looked to the stock market, driving it up by over 160% in mid-2015. Dumb money entered the market and within 2.5 months the Shanghai Composite Index fell 42%.

The Shanghai Composite Index

The Chinese government has been trying to prop up the market ever since by buying hundreds of billions of dollars in stocks. This is an artificial way to keep the stock values from collapsing but ultimately the companies will be devalued to their true worth.

Some commentators are suggesting the index should fall by as much as 80% and sit around 1,000. Just watch the fall-out in the international real-estate markets when this happens!

What’s really interesting is the “non-performing loans” have jumped by over 50% between Dec 2014 and Dec 2015. “Non-performing loans” are loans where the borrower is defaulting. It will be interesting to see if the Chinese banking sector is healthy enough to handle waves of defaults. As 2008 proved the USA banks weren’t up to the challenge.

In the next article in this series I will apply this background of information on China to the domain industry.

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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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Guest — Leonard Britt
The US certainly has its own debt problems as well. How might a US dollar devaluation affect the domain market?
12 April 2016
mgilmour
A devaluation in the $US won't be a problem for domain owners in the $US as there isn't a currency change. European domainers, who... Read More
16 April 2016
Guest — Joseph Peterson
Worrisome, to say the least.
16 April 2016
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What's Going On With PPC? - Part 2

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.

Escrow.com

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.

RPM chart

RPM Chart

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 12th Aug the Chinese authorities devalued the RMB from 16.1 to 15.6 to the $US.

Shanghai Index

US to RMB exchange rate

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.

Google TAC

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.

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