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

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.

Back in 2008 the world experienced the impact of the subprime mortgage crisis. Greed, combined with a dose of stupidity put the global economy into a tailspin. The question I have been asking myself is whether the online advertising industry is heading for its own subprime shakeout.

The global financial crisis was caused by blending toxic loans that would never be paid back with good loans that would. The thought of big commissions spurred Wall Street forward to meddle with the ratio of good performing to bad performing loans so they were weighted on the wrong side of the ledger.

Ratings agencies such as Moody’s and Standard and Poors would look at these loan blends and put a rating on them that represented the riskiness of the blended loan portfolio. The problem is the agencies were paid by the banks that were trying to sell them…..so guess what, all these toxic loan portfolios received the highest investment rating.

I know that I’ve over simplified the whole financial crisis but what happened next was incredibly predictable and now a part of history. People lost their jobs as a credit squeeze hit the financial markets and central bankers wondered how they were blindsided.

Let’s compare this to the online advertising industry.

Traffic can be bought at varying degrees of quality and blended together so that it’s just acceptable enough for advertisers to buy. In fact, the name of the game for many traffic sellers is to get an advertiser hooked on the “heroin” and then dilute the traffic quality with “talcum powder”. This way the sellers can maximise their returns.

In June I wrote an article on the new gTLD ICU and I believed that it would be successful not necessarily because of the extension but because two of the founders, Kevin Kopas and Lars Jensen. I thought it was time that I checked in on their efforts and to see if my belief in the both of them was warranted….

For a start, I don’t think anyone has clocked up as many frequent flyer miles as either Kevin or Lars....and that's saying something coming from an Australian like me. In their efforts to promote ICU I think they’ve attended just about every conference imaginable around the world.

If you ever bump into them (and you will) then just ask them what time zone they were in last week. I wouldn’t be surprised if you receive a confused expression, followed by silence and then a reply of which one do you mean? I sometimes wonder whether ICU will be successful simply because of their brute force effort.

Putting aside all of the anecdotes, what are the numbers telling us? I hopped into ntldstats (great site btw) and checked out whether the dynamic duo have managed to get things moving forward. The first thing I noticed is that ICU has cracked the top 50 most popular extensions in just under 3 months….not a mean feat in itself.

As can be seen from the chart there was clearly an initial surge in early registrations and then a constantly increasing number since June. In fact, you could say the graph is getting slightly steeper as time goes by. My guess is this is the result of more registrars taking on ICU and exposing it to a wider market.

In a number of past articles, I’ve spoken about the fact that traffic quality is entirely dependent upon the advertiser. If the traffic works for them then it’s high quality, otherwise it’s low. This has always seemed to make sense to me until I began digging a little further…..and now I think I could have been wrong...

Over the last couple of years ParkLogic has been experimenting with how to best define traffic quality. We’ve tried quite a number of third party services that are used by advertisers and what we’ve found is there seems to be a lot of smoke and mirrors bundled with some hefty fees.

The problem is that many advertisers rely upon these services to determine whether traffic they are purchasing is of a high quality or not. It’s the very sophisticated e-commerce website that attributes a traffic source id to a click and then tracks it right through to a purchase.

For those advertisers that wave the flag of Google Analytics then think again. If you think about it, Google is essentially in conflict with itself by wanting search traffic to provide awesome results so that the advertiser will purchase more traffic.

Back in 2014 I was sharing the platform with a couple of the new gTLD registry representatives at a TRAFFIC conference (one of the last). Both of them were telling everyone at the conference that they needed to buy what they were selling before it was too late. I had a decision....should I gag myself or not?

I listened as they both told the audience that the new gTLDs were the most awesome thing to ever occur on the Internet. To get into the gold rush all the conference attendees needed to do was secure their stake in the future of domaining!

After all the huff and puff I decided it was time for someone to bring some sanity to the debate and remove the self-imposed gag of politeness. So I waded in and attempted to pour a bucket of hard cold reality over the audience. A summary of what I said was, “There is no business model for investors in the new gTLDs.”

I then ticked off the business models. Do they have traffic? Nope. Can I buy one for $10 and sell it for $2,000? In a market of massive supply….unlikely. Can I buy a premium domain for $10,000 and sell it for $100,000? Nope. Can I build them out? I may as well build out the many .com domains I have.

Have some investors made money selling the new gTLDs? Yes. Just like some people win the lottery….but as a rule there is no sustainable business model for investors.

I then stated that I believed that as investors we were on at least a seven-year journey while the market decided which extension would succeed and which would fail. It would also provide some time to see which of the three major investment business models would become viable.

As I spoke a hush descended over the audience. I then said that some in them would ignore my advice and mortgage their houses to buy some of the new gTLDs. As their cash ran out I would likely pick up some of the domains for registration cost, post seven-years.