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What better way to kick things off than to review the domain aftermarket, three years after my then infamous “Domain Aftermarket Overdue For An Asset Repricing” article which caused a bit of a stir at the time.
I said then that there was a big recession coming, in it everything would suffer severe price declines, and that domain names would not be exempt. I went on to say that the low-hanging fruit in the domain industry had been picked: type-in activity would go into secular decline over time, and that domainers would face increasing competition from other avenues such as DNS resolvers, ISPs and web browsers.
It didn’t go over well. The reactions to it can be summed up in the archetypical response from the “Domain King” Rick Schwartz himself who called it “the absolute worst article on the business he’d ever read”.
What I got wrong
I should acknowledge several factual errors in the article: that almost every number I cited for aftermarket sales wrong. At the time I wrote it, it was just for my own blog, I didn’t google the numbers to verify them, I just went from memory. It was featured here on CircleID—errors and all—and next thing I know it’s one of the 10 most read stories there all year.
What I Got Right
In 2005 the parking services were citing revenue numbers like $60 to $200 RPM, while today a recent survey of domainers showed most are earning less than $20 RPM and many less then $10 RPM. From personal experience I can say my domain parking revenues are down 50% to 65% their highs in 2006.
As for aftermarket values of domains themselves? Take a look at some of the sales from Moniker/Traffic Auction Results in October 2007, what may be the zenith of the domain aftermarket before the meltdown hit the industry:
Every single one of those examples is currently parked on pay-per-click landing pages and I would be very very surprised if:
(Until recently, aftermarket values were lackluster at best. I’ll get to the recent “hot streak” in domains sales in a bit, but let’s first review what that terrain looked like over the past few years.)
The auction results from DomainFest 2009 or DomainFest 2010 looked dismal in comparison. When you look at the “quality” of names listed, which ones sold and at what price, not to mention what got “passed”, the contrast is striking:
From DomainFest 2009:
From DomainFest 2010
Category Killer Domains: The only thing they may kill is your business.
Perhaps the most instructive lesson today can be gleaned from the recently revealed plight of the Great White Whale of domain names: SEX.COM
Without going into the whole story behind the name, suffice it to say that that single domain has been defining the terrain in terms of law, in terms of best practices and maybe now in terms of economics, since the day it was registered (and is described in the book by Kieren McCarthy.)
SEX.COM is under foreclosure and when I started writing this article it was widely anticipated to be auctioned. It was purchased in 2006 for a staggering 14 million and was financed by Domain Capital. The industry was abuzz about the impending sale and some are heralding it as good news for the domain industry. As one blogger put it:
“Sex.com should definitely exceed $5 million in the forthcoming auction. This is electrifying news for domainers big and small. It should increase your confidence in the industry and in the money that can be made at the very top. When you have a one word irreplaceable “got-to-have-it” domain, time and time again we have seen values increase.”
Really? You mean if somebody pays 14 million dollars for something and goes broke trying to operate it and then it sells for $5 million on liquidation, it proves that the asset has somehow become more valuable and it validates the asset class it’s in?
Sex.com is not a success story. It shows that owning the category-killer domain simply does not guarantee success. Depending on the price paid, it may in fact preclude it.
This is not an isolated case. Take the publicly traded Live Current, which was Communicate.com back when I mentioned them briefly in my original article. If ever there was a case study that demonstrates the irrelevance of category killer domain names to business success, this is it.
Live Current was a “portfolio company” that was trying to develop web properties around their portfolio of category killers, most notably perfume.com and cricket.com.
It hasn’t worked and the company has seen it’s share price tank from over $2/share when I wrote the 2007 article to around 10 cents today. In their last annual report filing to the SEC, their accounting firm included a “going concern” statement:
WE GENERATED A NET LOSS OF $4,062,823 AND $10,103,137 BEFORE TAXES FOR THE YEARS ENDED DECEMBER 31, 2009 AND DECEMBER 31, 2008, RESPECTIVELY. WE MAY BE UNABLE TO CONTINUE AS A GOING CONCERN.
They have resorted to selling off the very domains in their portfolio in order to raise cash to survive.
So while having a category killer domain can definitely help your business it certainly does not guarantee it. (Barnes and Noble didn’t bankrupt themselves to buy books.com, and I’m sure they’re happy that they own it. But it’s not like it enabled them to kill Amazon. Now they just use it as a redirect.)
Another good example to look at is Marchex, since they are publicly traded we can get a good look at them and we know important parts of the story: they were the ones who bought the Yun Ye “ultsearch” portfolio for $160 million dollars.
When I wrote my original article, they were trading shy of $20/share. Today they are around $5, having lost shareholders about 3/4 of their value from pre-meltdown highs (2007) . The investor who made out the best in that story was they guy on the sell side: Yun Ye - who built his portfolio exclusively through drop catching expired domains and had a cost basis effectively nearer the cost of registration (there is a theme emerging here for those who care to notice it).
Most Domain “Investing”...Isn’t.
This is the reality that domainers have to face: Most of the activity in the space that is considered “investing” isn’t. Very few people are coming at domains from any semblance of methodical investment approach, and domainer “value investors” are near unheard of.
In the domainer space, it’s all about speculation. Not that there’s anything wrong with that. But let’s call it for what it is.
Value investors buy assets when their analysis of the business, the assets, the debt, or the cashflows show a favorable difference between what it’s worth and what it’s selling for.
Speculators buy purely on the basis that they think the price action will move up from their purchase price, and that they can subsequently sell to another buyer at a higher price.
The aftermarket is still in this greater-fool cycle. Names are being bought on the sole basis of a probable sale later at a higher price.
Unless you are looking at a domain for it’s cashflows, and these days that basically means PPC, CPA or website development, a domain can barely be called an asset. It yields no cash.
Domain Names Are Not A Store of Value
The recent buyer of flying.com called his purchase a “no-brainer” because if he put the money in the bank it would yield a paltry 1.2% (which is true). But there is an important distinction between the two:
Putting the money in the bank only yields 1.2% but you get that crappy return in exchange for the guarantee on your principal. When you go back to the bank, you’ll get the money back. I would be surprised to see flying.com earn much more than 1.2% in PPC anyway, but getting his money back out of the domain on demand is iffy, at best. If he put the name back on the market tomorrow I’m not sure that he’d recoup. That is the difference between investing and speculating.
Now the buyer of this domain has previous success with his existing business in the space, UsedAirplanes.com, so he won’t park the domain. But personally, if it were up to me I would have just put the 1.1M into the existing business “as-is”. He’s already built his brand, I don’t know how spending this kind of money really adds anything he doesn’t already have. Maybe he could have used that capital to buy out a competitor or take a stake in a related business within his circle of competence.
If you develop a website or a business around a domain, then it’s the website or the business that is generating the cashflows, not the domain itself. This is where domainers constantly miss the point. If it were up to domainers, Google should have spent their seed capital on acquiring the search.com domain, Godaddy’s Bob Parsons was an idiot for never grabbing domains.com and if Pearl Jam had called themselves RockGroup.com maybe they would have gotten somewhere.
Having a good domain name doesn’t hurt. It’s certainly better than having a crappy one. In the good-old days of type-in you could even get a business off the ground almost entirely propelled by the right name (the original webhosting.com comes to mind) - but for the most part, the domain name itself is ancillary to the execution of an actual business model. (Especially if your cost basis on acquiring a domain name puts you out of business.)
Don’t believe me? Then why do expired domains of former ecommerce websites eventually trail off and trend toward zero earnings? If all the secret sauce were in the domains, the cashflows on expired domains of former income producing websites would sustain themselves indefinitely. On some of them the tail may be long, but they definitely have a half-life.
The smart money domainers are liquidating domains.
When I wrote my original article, members of the inner temple were very quick to step-in and declare their undying faith in buy-side domaining. But then something strange happened within that small inner circle of domainers who had amassed the best portfolios in the world at the lowest cost-bases… they started selling. Not that there’s anything wrong with that either, it’s exactly what I recommended doing back in 2007.
Publicly, the big domain heavyweights still profess their unwavering belief that domains are the single greatest investment. And for them, they were. The basic core of the legendary portfolios: Frank Schilling, Kevin Ham, Gary Chernoff, et al. were built on the early days of the expiring domain drop game. Their cost basis on tens of thousands of these premium names is under $100 and in a lot of cases under $20. It’s the grain of truth of the domaining world: they really are the single greatest investment on earth, when your cost basis is close to the price of registration.
The late comers to the game, the VC’s and hedge funds who want to get a piece of the domain pie and are throwing stupid money into domain funds and buying up names at aftermarket fantasy prices are setting themselves up for permanent loss of capital.
There are a few standouts in the domain world.
Look at BuyDomains. They’ve built their portfolio on the drop game and are selling to end-users at retail prices. Owing to the depth of their inventory they have a predictable and steady transaction flow. They did it right.
DarkBlueSea is/was a registrar and parking platform that owned their own portfolio of domain names, monetized them and other people’s domains on their fabulous.com platform, and had an aftermarket sales pipeline. They were publicly traded in Australia, had a lot of positive cashflow and paid out at least one special dividend to shareholders.
What I find notable about what happened to DBS was that their stock price declined during the Global Financial Crisis, and was then capped off by a horrendous decline after they reported softer earnings on a weaker US dollar (all of their revenues were in USD). The stock price tanked and then they were acquired by The Photon Group. The reason I note this is because this is exactly what I’m talking about. DBS was solid, profitable and as far as I know, debt-free—and suffering through a period of price-to-value mismatch. Photon swept in and snapped them up. Now that’s Investing.
Tucows is a publicly traded domain registrar that owns a domain portfolio whose value, even at my pessimistic, rock bottom valuations, exceeds the total market cap of the company. They have begun to unlock the value of that portfolio via their Yummynames channel and it’s significantly boosting the bottom line. The beauty of the entire setup is that Tucows feeds the Yummynames channel via the domain expiry pipeline of their wholesale registrar operations. A lot of registrars do this, but only Tucows is publicly traded—and massively undervalued. Management knows it and I believe they’re slowly taking themselves private through an ongoing series of share buybacks. In some ways this situation is similar to the Dark Blue Sea situation, except the only people swooping in to snap up Tucows these days are Tucows themselves… and maybe one or two others. (Disclosure: yes, I own them. More disclosure: nobody’s perfect, I missed an opportunity to back up the truck when they bottomed at .22)
Conclusion
The reason I wrote this article is because I can’t bear to see the word “investing” misused any longer when used in the same sentence as “domains”. I’m reading bloggers and private funds mangle the context of word and excuse the flimsiest speculative fancies as “investing”.
It is true that there is still money to be made from domain names. If you know what you are doing, it is possible to buy domains at a higher cost basis and either develop it into something productive, or sometimes you just know that you’re still getting a deal at xx,xxx or possibly even xxx,xxx depending on the name involved. That said, it cannot be considered “investing” in the strict Benjamin Graham sense of the term:
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
For domainers to be considered “investors” they must approach their activities in a business-like manner and employ a sound methodology. Don’t buy high and hope to sell higher.
I couldn’t help but simply shake my head in disbelief when I read a post called “Domain Education. Post #1: Top Domains are Solid Investments” at symbolics.com who paid an undisclosed amount for the name on the basis that it was the first domain ever registered.
”Domain names are the secure assets you have been looking for.
Rest assured there are many 6 and 7 figure sales that the public is unaware of.
What do these numbers show?
Domains are running strong and moving forward.
People are starting to invest in domains more, and keep money in savings less.
There are still opportunities out there for both the well funded and beginning investors.”
Simply pointing out recent sales at high valuations and calling that proof that domain names are a sound “investment” excludes so many fundamental components of investing and relies on such a long leap in logic that the assertion is almost nonsensical. Every time I see a sale of a domain at massive valuations (recently: poker.org at 1M, guns.com at 800K, etc.) I usually see a lot of remarks “Congrats to the buyer” or “what a great buy”.
What these really are are “great sales”. Congrats are in order to the sellers. Whether or not any of these transactions at such a high cost basis will amount to “great investments” for the new owners remains to be seen.
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I like the part about the “great buy”. It reminds me the time that I went to a local auction and bid up the price of an oriental rug to $850, which was the most expensive sale up to that point in the day. That wasn’t a ~crazy~ price (I would have paid more at a dealer) but I’ve seen rugs like that go for $300 when you didn’t have two bullheads have a bidding war.
I heard “great buy” from a lot of people, but the truth was, it was a mediocre buy.
Advances in browsers will eventually eliminate type-in traffic, and that’s a good thing. My main browsers today are Google Chrome and Opera, and both of those do everything they can to keep you off worthless (to the viewer) parking pages. My guess is that antitrust concerns have kept IE and Firefox from doing something about this eyesore, but once all of the off-brand browsers are doing it, they’re going to be shamed into doing it too.
As a potential domain name buyer, my thoughts have been evolving. For a while I preferred SEO-oriented domains that have two or three keywords in them, and I’ve generally been able to get them on the primary market if I’ve been willing to be flexible. I went through a phase of registering names that did clever things with “.us” and other ccTLDs, but my next big project is based on a neologism—I give up a little SEO power, but from a PR and dealmaking perspective, the new branding concept looks more like a “serious” Angel funded company from Silicon Valley than like some “sleazy” SEO play out of Toronto that you’ve never heard of.
I’m surprised that with 714 views no-one has commented here. My chops are a bit rusty since my hiatus from blogging, but I thank-you for sending me the link to your post Mark and am delighted to revisit your predictions and the state of domain values today.
Let me begin by stating that domain “investment” is indeed alive, well, profitable and real. You can label somebody who invests in domain names a speculator; I have no problem with that label. Speculators are capitalists and I make no apologies for being a capitalist. But it would be silly to assume that those who buy domain names as their profession don’t apply some investment criteria to their cash outlay; and it’s arrogant to assume that domain names are not worthy as an investment class. As with any investment there is naked-speculation at the top (where big dollar sales sometimes defy logic) and at the bottom (where registrants register available names today only to try to pump and flip them for a few hundred dollars tomorrow). But I can assure you that there is a solid middle section of the domain industry where registrants make well thought out analysis about the potential upside, cash-flow and present-value of a domain name. If no speculators who buy domain names can be considered investors, then neither should short-sellers who buy “calls” to cover their short position, or “long” stock investors who buy a stock that fails to pay dividends. Investing and speculation are separated-twins at heart Mark. Brothers from a different Mother. The difference is merely the calculation of risk and reward. A conservative domain “investment“ takes into account that there is “some traffic and revenue” and models that into price-discovery. There are investment worthy assets in every class (even domain names), and no investment, even in Benjamin Graham’s day, was guaranteed.
Let’s look at what’s happened in the World for a minute. We had a credit and debt crisis. A BIG one. It’s still going on right now and is only invisible on the streets of your town because interest rates were lowered to 0% and the government injected trillions in printed-stimulus to save us from “martial law in America” (so reportedly said Hank Paulson to Senator James Inhofe during the debate on the now tiny-looking $800 billion dollar initial bailout). Since then trillions more in guarantees and promises have been made in a reaction that makes the knee-jerk fiscal response to September 11th look like pocket-change. I don’t think any of us can fully comprehend the not-so-distant consequences to our Country and future way of life that these financial machinations will ultimately cause. That’s another story though. To synopsize, we had a terrific crash and an immediate and dramatic government reaction worldwide. Stocks crashed (a bit) then came back because of the bailouts, and now the World is limping along like a fellow who’s been sucker punched, trying to look tough but waiting for the next blow.
Against that backdrop no-one in the domain space is doing too badly.
Traffic is real. It is still there. Tens of millions of households a month visit my network. Flat volume, not down. Google Chrome has helped type-in traffic and browsing, not hurt and has reinforced that people can “get there faster” by avoiding Google and typing the site-name. If nothing else Chrome has shown that as much as 1/3 of all Google.com’s search box traffic comes from people trying to enter domain names into the Google search-box. Google has not removed the address bar from Chrome; they have removed the search-box from Chrome and ultimately reinforced the utility of the domain name. Google is in the business of organizing the World’s information. It is a happy coincidence that the world’s information is hosted on websites which utilize domain names, that a domain name is the backbone for private unrestricted email communication and that the World is increasingly reluctant to “trust” Google, Facebook, Microsoft and others with their online destiny. When you own a domain name you operate outside of the cloud, outside of the framework of another company, which could eventually bind you in ways that you have not yet contemplated. It is a little bit like buying Gold bullion. You become your own central bank. Google.com is after all founded on a simple name. Without that name they would have no platform.
Perhaps that is why three years after your predictions there are more than 192 million domain names registered worldwide. Up from about 120 million at the time of your first post. The important thing to point out is that the good names do not change. Adding more skim milk to the mix does not create more cream, it only causes the cream to rise.
As more people buy domain names, more people will figure out that certain names are better in quality than others.
I can tell you that we get 4-5 times the number of WHOIS lookups and inquiries as we did 4 years ago. It is against this backdrop and my own personal lifecycle that I am selling the odd name. I have come to the unfortunate realization that I will not live forever. I recently celebrated a milestone birthday and it dawned on me that if I was willing to accept 20X PPC revenues for the sale of my business during 2007, perhaps I should consider 100X poorly implemented PPC for an individual name. So I do. That is part of a natural cycle and less about the state of an industry. Despite that, I am still acquiring many more names than we could hope to sell.
I will concede that domain sales come amid a horrible period in PPC but taking out the frothy top and bottom I spoke about earlier, the sales I see are for record amounts. Not by dramatic percentages but 20% above the level a couple of years ago. In fact if you look at the example names you highlighted from the Domainfest auction in 2009 and 2010 the most striking difference is not the price but the quality of names. Any investor will be quick to point out that the 2010 names are an order of magnitude worse in quality than the 2009 ones. Good names are selling for solid numbers. 100 times current pay per click advertising revenue in many cases.
PPC advertising is without a doubt off its highs. Anywhere from 25 – 60% depending on your traffic source, quality and revenue share. I believe this has less to do with the economy and domain names than it does with the two dominant advertising marketplaces Yahoo and Google. In short, Yahoo’s zeal to pursue a Microsoft deal and merger over the last few years caused them to take their eye off the business and it hurt their keyword marketplace. Google sensing a wounded competitor pared back the payouts of their own ad marketplace to publisher partners in favor of their own bottom line. Yahoo has recovered from its lows but they too have dialed down the payouts to publishers because there is little consequence in doing so. Commercial domain registrants and investors have offset these reduced ad-revenues by increasing name sales that has softened prices at the very top and bottom, but firmed the market and increased transactions in the middle. The ultimate consequence to these PPC marketplace changes will come in a year’s time or so as large PPC deals are not renewed. Domain names will continue to deliver traffic but I believe that less and less of that traffic will be delivered to Yahoo or Google’s marketplaces. Traffic is simply too valuable to sustain this indefinitely. There will be disintermediation as a consequence of low payouts.
Sex.com is a perfect example of the frothy top I mentioned at the beginning. The law of large numbers suggests it would be difficult for any operator to turn a $16mm name into a $32mm+ business, particularly in the world of adult where revenues are difficult to generate and competitors such as youporn.com offer content for free. It is not inconceivable however that a $40,000 name can be turned into a 200k business, or an $18,000 name into $100,000 business - and I can assure you those transactions are happening all around you today, everyday. Marchex is another interesting example. Their traffic is strong and revenues are sound but their overhead is high. That does not mean the names they own have lost their value. I challenge you to try and buy one and you’ll see what I mean. Marchex have probably sold some fairly high dollar names since acquiring that portfolio and if they could sell half their names in the remainder of their portfolio for similar prices, the breakup value of that remainder would be in the
billions
.
About the only thing this trip down memory lane reinforces is that your assessment is an odd contradiction. Domain names “are the Internet” and if anything whatsoever online should have any value at all, it is the real estate that underpins the physical space you occupy in the hearts and minds of people. I’m frankly astonished how a self professed bear like you who wisely believes in the value of precious metals as a hedge against the unthinkable, can view the stock of Internet Company a legitimate investment, but the foundational location that the Internet Company occupies on the Web is “speculative”.
After the first dot-com melt-down, the only asset left to invest in was often the domain name of the company that failed!
While I agree that it’s wrong to parade a frothy top $ sale as a bellwether for an investment, I disagree that domain names are rotting in the ashes of woe as you predicted they would several years ago. You were too bearish. Domain names have provided consistent returns and breakup values since your last post. I trust my domain names a lot more than my Goldman-Sachs stock and I would feel the same starting over with $10,000 in my pocket today.
That thumping sound you hear is Benjamin Graham rolling in his grave.
From the viewpoint of a site developer, it’s a calculation of “I spend $X for a domain name; would I be better off spending $X on something else?” $40,000 dollars can buy you a lot of content (100,000+ pages based on the technology I use) or get you a thousand or so paid links from aged, quality sites. $40,000 could buy you a mighty amount of PPC traffic too.
There’s no doubt that there’s value in a good name, but it’s certainly possible to succeed with neologisms or other names that are easy to get in the primary market: facebook.com, twitter.com, and even little players like sockdreams.com have managed to dominate markets. socks.com has a better domain name, but it’s a site for sore eyes and I can’t imagine it sells more than sockdreams does.
In my mind, much of the value of a domain name lies in the ability of people to hear it and remember it: amazon, facebook and twitter all have this quality, even though they don’t name anything that people “want.” I remember how Barnes And Noble struggled with this for years, because people just couldn’t figure out how you were supposed to spell it. Ultimately they bought quite a few domains and pointed them to their site to solve he problem.
The best undeveloped name in my portfolio has this quality; every month I hear from a speculator who wants to buy it for nothing and sell high, but I know it’s worth more than they want to pay.
Something I know is that there are a lot of people on the web and in business who don’t like the secondary market in domains and refuse to participate in it. That’s irrational, but it’s true—since it’s going to be possible to get 2nd rate domains on the primary market for a long time, it may be a long time or forever for those people to get in on the market.
Like a lot of things in advertising today, a big problem is that we don’t really know what different forms of advertising are really worth. The same goes for domains, and just like uncertainty suppresses the price of used cars, that uncertainty is currently suppressing the price of domains and online advertising.
Docs.com and Today.com were recently acquired by Microsoft. While some might think that domains don’t matter, take a look at what the big dogs are doing….their actions speak loudly.
Good article Mark and you raise some valid points, but you seriously need to step into my world for a moment. My brother Michael and I own and operate the Castello Cities Internet Network (CCIN.com). For the last 15 years we’ve developed and monetized names like Daycare.com, PalmSprings.com, Whisky.com, Acapulco.com, etc. And after all these years I can tell one thing with 100% certainty.
The name matters.
Of course, you can build a successful on-line business with any name. Google and eBay are proof of this. But I can also tell you from personal experience that we were able to develop mutliple businesses and attract high paying advertisers without a dollar of funding because of the multi-marketing power of these domain names. PalmSprings.com was the first we monetized and the local advertisers we approached would readily admit, “Well, you do own the name” (we still get the same reaction today). I never had to explain direct navigation or anything else to them. All we have to do is build lots of relevant content and we have synergy in a bottle. And that’s another thing - when discussing domain investors you must differentiate between those who park and those who develop. We live in two different worlds.
The value of a great name will always be relevant regardless of the medium.