I had the absolute pleasure of presenting a session on Domain Monetisation at Domaining Europe yesterday. A lot of people asked if I could upload the presention to my blog....so here it is!

Click to Download the Domain Monetisation Presentation

Domaining Europe has been outstanding so far and I'm really looking forward to heading back down to meet new people, do some business an make new friends!

I’ve taken a great deal of interest in the Chinese economy of late and I’ve written a number of articles that outline how everything is not so good in the dragon nation. Debt continues to skyrocket, GDP is levelling off and there appears to be stockpiles of commodities that are unused. So how is this all going to impact domain investors?

CNBC published an article, “Moody’s raises worries over China loans as Communist party paper calls debt load ‘original sin’”. Within the article, influential investors Kyle Bass and George Soros warn of a credit crisis in China, with Bass noting the presence of “ticking time bombs” in China’s banking system.

What really struck me about the article was the second video where an independent economist, Andy Xie, suggests that China’s real bad loan situation is closer to 20% and not the 1.5% being reported. He then went on to say that over half the loans relate to property and that all across the country buildings empty and that they are being traded like gambling chips. Everyone is hoping that someone else will pay more for the assets.

The Economist recently wrote an article titled, “The coming debt bust”, which outlined the fact that China’s overall debt is 280% of GDP. One scary statistic is that 16% of China’s top 1,000 firms owed more in interest than they earned before tax. Debt levels are expanding twice as fast as the economy. Market Watch recently indicated that it takes four units of credit for each unit of growth.

So will the Chinese authorities be able to manage the economy to a hard or soft landing? They have plenty of ammunition in their reserves (around $3 trillion) but more and more commentators believe that the current regime is playing catch-up to rapidly changing economic circumstances. What everyone appears to be saying is the debt piper is calling….

If there is a hard landing how will this impact domain investors? Since China is the world’s second largest economy we can draw a comparison between it and the US sub-prime fuelled crash of 2008.

For traffic portfolios, Google immediately took greater margin in a great cash grab to help support their earnings. The difference we are seeing now is that Google’s TAC (Traffic Acquisition Costs) has been pushed down to the point where they really can’t increase margins without losing market share to tier two advertising networks. This means that we are unlikely to see a collapse in earnings per click rates induced by Google.

The other factor impacting the advertising auction system is obviously the companies bidding for the traffic. In the event of a crash many companies will immediately hold onto their cash and reduce discretionary spending (which online advertising is often seen as). This will place downward pressure on EPC rates and depending upon competition for the market vertical keyword how far down the rates will fall.

Domain sales will almost certainly experience a sharp correction (especially in the ChiP domains) as debt laden Chinese buyers suddenly become sellers at any price. In many cases, off-market margin loans have underpinned domain valuations and these loans will be called as stocks collapse in value. Chinese investors will be forced to sell domain assets to meet their lenders capital requirements.

Assuming that the world doesn’t go into a global depression, what’s the good news? If you’re cashed up, then there’s going to be a heap of bargains. A good rule is most people make money on the buy not just the sell. In other words, in this type of market there will be domains available that can be snatched up for a song and later sold at an enormous profit.

Whatever happens, make sure you have some cash to ride out the crisis. Some commentators are suggesting that the GFC of 2008 was a tremor before the real financial earthquake.

I know that my wife and I are reviewing our personal financial circumstances to help ensure that we are in a position to weather a global storm. We periodically do this but right now I’m getting a sense of urgency about it. If I’m completely off the mark, then the worse that we’ve done is be financially prudent.

Remember, many people make a fortune in the bad times by being wise in the good times.

Over the last few years there has been a rush of capital into the domain industry from two major sources, Chinese investors and speculators. I have written quite a lot on the Chinese investors but have largely ignored the speculators.

Speculators have hoped to win the lottery by having a domain that a cashed up major company wants to desperately buy. They hear about the successes of “old-time” domainers and dream about find the pot-of-gold at the end of one of their domain rainbows. I don’t mean to rain on your parade but this is unlikely to happen and here’s why.

The clock is ticking until on Saturday I jump on yet another aircraft to travel to Europe and the other side of the world. I must admit that other than the 24-hour journey, I’m really looking forward to this trip as I’ll get a chance to catch-up with all of the European ParkLogic clients and friends.

So what takes me to Europe? As well as a whole heap of meetings I’m heading to Amsterdam to attend TNW (The Next Web). The best way to think of TNW is that it’s the TED conference for technology. I hope to come away exhilarated and really excited about some of the great ideas and business models being presented.

ParkLogic is sponsoring Domaining Europe and it’s the second conference I’ll be attending. I’ve always wanted to go to Domaining Europe and it was great that Dietmar, the convener, decided to move it from Valencia to The Hague….which is just down the road from Amsterdam. I have the privilege of speaking on monetisation and being on a panel…..I’ll make sure that the session is lively and interesting!

If you’re attending Domaining Europe or TNW then please don’t hesitate to reach out to me so that we can schedule some time together. My schedule usually fills up pretty quickly so please contact me ASAP. I would particularly like to meet with any domain investors that monetise their traffic.

In the meantime, I would like to wish everyone safe journeys.

I published an article about ChiP (Chinese Premium) domains yesterday and received a really interesting comment from a reader that I would like to unpack. For a start I would like to thank them for the effort they took in writing the comment as it’s clear they are really passionate about domains.

As the comment is public, here is what they wrote:

Your advice to sell is terrible advice. And then you offer to help CHIP owners liquidate. Four-letter .com prices are positioned to move up substantially in the coming years and you recommend getting out now. You obviously needed a better translator on your China trip. SELLING CHIPS NOW AT LIQUIDATION PRICES IS TERRIBLE ADVICE. PLEASE DON'T HEED.

Yes, my advice may be terrible for a subset of the domain community that is wanting to hold their domains in perpetuity but here’s the thing. The whole point of having an asset is either it produces dividends in the form of an income stream (eg. Monetisation) or you sell the asset for more than you paid for it (ie. capital gain).

If you always believe the price of the asset will increase and you have no need of additional cash, then logically you should hold the asset. The assumptions underpinning this strategy is that domains will be used forever and that there aren’t any market cycles that you can take advantage of.

It’s all about managing risk and everyone has a different risk profile. For example, a number of years ago I sold my traffic portfolio at the peak of the market for a crazy multiple, waited a couple of years and then bought back in at a fraction of the cost. I was managing my risk, taking some cash off the table and watching the market.

If you are running a business, then at some point in time you will sell the asset and crystalise the capital gain. If you plan on selling in the way distant future, then you essentially are saying you have an infinite appetite for risk.

One of the major aspects of risk management is diversification by taking the money off the table and then investing it elsewhere. Everyone is different. Some take the cash and invest it in the stock market while others invest it in personal relationships by having a family holiday. Wherever you choose to invest is your own business.

There is the other issue of cost of capital. What does it cost you to have cash working for you elsewhere versus leaving it in the current asset? If you want to invest in a business and don’t have the cash then it could be you end up borrowing funds…..what is the cost of this capital versus selling the domains now? These are all questions that can only be answered on an individual basis.

Which brings me to the current market cycle. All the data indicates that we have tipped over the peak of a Chinese driven market cycle. Domains I sold in December last year I can now pick up for around 70% of their sale price. Over the last twelve months the Shanghai Composite Index (see below) continues to decline which correlates with what is happening in the domain space.

This does not mean that selling ChiP domains is a bad deal now. Yes, you may have received a better deal last year but in six months’ time it’s likely the market will completely cool off and you find yourself playing the really long-term hold game. Is this something that everyone wants to do? Of course not. Some will hold and some will sell based upon their own circumstances.

Let’s flip this around. If the reader who commented believes that selling ChiP domains at “liquidation prices” (for the record, they aren’t liquidation prices) is terrible advice then they must be a massive buyer of the domains themselves. They have a belief that over the years the domains will massively increase in value and therefore they should logically purchase them. What does this do? It pushes the prices of the domains up as there is more demand and reducing supply.

Now if the commenter is saying everyone is mad for selling and they are not buying then they are either being economically irrational or they themselves don’t have the cash to take advantage of the cheap opportunity.

This brings me to my final point. The lack of liquidity in the domain market as investors buy-in to the perpetual hold model is frightening. This mode of thinking drives some domain investors to reject $1,000 deals for stock-turn domains in the belief that one day they will get $20,000 for them. In comes the massive supply of new gTLD options for buyers and suddenly the potential $20,000 deal is fifty plus years away…..that’s a long-term hold.

The purpose of indicating that my company, ParkLogic has buyers of ChiP domains was an effort to solve the liquidity problem for those people that wished to manage their risk. We’ve already moved a lot of ChiP domains and continue to do so as everyone has a different risk profile.

Never forget that cash provides flexibility to take advantage of other opportunities. As an example, the other day I came across a fantastic business that was looking for investment. I’m now a shareholder and it’s rapidly moving forward….

---------------------------------------------------------------------------

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.