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Domain Aftermarket Overdue for an "Asset Repricing"

Mark Jeftovic

For the last couple years the domain aftermarket has been hot again, we're seeing valuations not seen since bubble1.0, which saw valuations like 7 million dollars for business.com and 4 million for drugs.com. The TechWreck was induced by the NASDAQ crash of 2000 and the fun was over for awhile.

What differentiates this bubble in the domain aftermarket from Bubble 1.0 is domain parking and monetization. While it existed in 2000, it was a weirdism on the fringe. Yun Ye was quietly building his Ultsearch empire and cleaning up.

When he sold out to Marchex, for 60+ million cash, the masses "woke up" to parking and PPC. Now we have Internet REITs, domainer conferences and, the second last sign of an overheated market dropping in to place: VC funds are tripping over themselves to invest into PPC and the monetization game. (The last sign of an overheated aftermarket are the sales letters I get from places like domainprofiteer.com offering me courses in how to get rich buying and flipping expired domain names)

Now individual domains and portfolios sell for multiples of their revenues plus a premium for the name itself in the case of generics and other "type-in" names. These multiples have gone vertical over the last twelve to eighteen months. During the nadir of the tech wreck, actual web businesses were going for about 1 year's revenues and that was the departure point for domain sales.

The interesting thing is since then, the multiples on domain names have outstripped the multiples on developed websites. To me, this is the equivalent of the "inverted yield curve" that portends economic recessions.

The logic, apparently, is that "developed websites" require actual work to keep them current and maintain the userbase. As such they often sell along typical business valuations: 1 to 2 times revenues or 3 to 5 times earnings. Often less.

PPC domains, type-in, generics, et al are going for minimum 5-7 years revenues and that was before things were heating up. Among domainer circles 12 and 15 year multiples are becoming more common, more sellers are looking for 20 years.

I've heard domainers talk in terms 40 or 60 year multiples or more. Really.

Valuations of this magnitude are financially unsound. We should all be familiar with the Rule of 72 (if you are not then you shouldn't be "investing" in anything, stop daytrading or whatever you're doing right now and go read Benjamin Graham's Intelligent Investor or something).

This handy rule of thumb instructs us to divide the rate of interest on an asset into 72 and you're left with the number of years it takes to double (or recoup) your money. With valuation multiples, do the opposite, divide the multiple into 72 to find out what your actual rate of return is:

MultipleRate of ReturnSnide comment
7 years10.2%not bad
12 years6%GMAC territory, if you sell yours before GM goes bankrupt and buy a domain at this multiple you may actually be better off for it
15 years4.8%we're getting into 10 year T-bill territory here
20 years3.6%we're below the nominal inflation rate here
60 years1.2% here we'd be better off hoarding empty aluminum cans

As one "domain flipper" on a closed domainer board gloats,

"In the domain aftermarket returns of 30-50% a year are commonplace. It's almost a certainty that $65k [for domain_deleted] will turn into a $100k within six months from my experience. This is what I term "long term" as I tend to flip within days..."

Evidence of tulipmania in the modern age.

"All my short term flips have made me 50%-200%"

"I agree [that it is] madness of people paying 10-20 years on ppc domains, but if you buy at even 8 years and sell asap to someone higher up the food chain, you don't have to agree with their madness, do you? :)"

At the time I started writing this article, John Gotts had recently paid 3 million dollars for the wiki.com domain name because he thinks "wikis are going to be hot" and from that premise, a lot of people are going to type "wiki.com" into their browser location bar.

Then "after he makes his money back on the 3 million he paid for the name, the rest will be pure profit". No, that isn't a line from a Simpson's episode, it's a real strategy, and according to Gotts there were two VCs interested in funding it. Big surprise. (Recent speculation is that the deal hasn't fully consummated and that Gotts left himself a large escape hatch if it didn't work out. The whois record doesn't seem to reflect a completed transaction.)

Type-in traffic is always nice, but anybody building a long-term business strategy or "investing" large quantities of cold hard cash on the premise that it will continue forever (or even escalate) will, I think, be disappointed. The underlying premise is that internet users will grow less sophisticated over time and that there will be no further or meaningful user interface changes from here on in, that net neutrality will prevail and ISPs, access providers, network carriers, web browsers and even root or recursive nameserver operators are going to stay out of the realm of "errant or exploratory internet traffic" and leave it all to the domainers.

Type-in traffic is the realm of grandmothers and the not-so-tech-savy. As people get more knowledgeable about the internet, their type-in usage declines. They stop "typing into" the browser's location bar and start using the browser's search tab.

I think these facts will work against any assumptions about type-in traffic, especially those who hope it will increase into the future. In Gotts' case, anybody clueful enough to know what a wiki is, knows better than to stumble their way around the internet typing what they want into the location bar. He'd have been better off buying wiki.org, which at least comes up near the top of the organic search engine results for "wiki", while his wiki.com doesn't even list on the first page.

Further, all it takes is one major browser (IE, for instance) to make a shift in the out-of-box layout of the browser dashboard: say putting a search input field right where the current location input bar is and type-in revenues will begin to decline in earnest.

Whatever type-in domains are doing now, I don't think there won't be as much of it in 10 years. So paying 10 years revenue on a type-in domain or portfolio seems highly speculative to me. Paying 20 borders on insanity.

One of the reasons I take this view is because I disagree with the wider sentiment that domains have an innate underlying value like a piece of real estate.

The argument goes that if you pay, say $100,000 for a name, then it has an underlying value of that amount, and the revenues earned by parking the name is a return on investment over and above the initial outlay.

I disagree with this. I think the domain has an underlying innate value of zero. If you pay 100K for a name, you are out 100K until the name earns it back for you, at which point you've broken even (aside from the loss of purchasing power of the currency via inflation in the intervening time).

You haven't turned a profit on the name until it earns back your initial investment plus an amount greater than inflation, at which point you're finally in the black on your "investment". If you do sell the domain for some amount afterwards, either recouping your funds or turning a profit, it's because you got lucky and you've succeeded in speculating, not investing.

Repeat after me: What makes a domain name valuable? It's what you do with it. If there's one thing the whole "Web2.0" phenomenon has proven, it's that for the most part domain names don't matter. Pick a word, any word. Is the domain name taken? No. Great. Reg it, and get back to business, building the website and advancing the business plan.

While nobody really knows what "web 2.0" means, the naming styles that emerged from it were a direct result of unfunded, agile start-ups working within the gaps left by domain hoarding and an overheated aftermarket.

So what will trigger "asset repricing" in the domain aftermarket? Basically aftermarket domains will be another casualty of the current liquidity bubble bursting, which will happen any day now. The talking heads on CNBC are already "upbeat" after yesterday's 400+ point selloff on th DOW. Downplaying the extreme imbalances in the financial markets. But I have maintained for years that the entire 2003-2005 run-up in the equities markets is just one big-ass bear market rally and I stick by my assertion that we will see new lows on the NASDAQ a lot sooner than we will see new highs.

Yes, the DOW hit a series of new highs which technically violate a bear market rally scenario. The DOW has hit new highs due to credit expansion and excess liquidity, pure and simple, and will unwind soon if it hasn't started already.

Yes, I am one of those nutjob quacks who is convinced there is a global recession bearing toward us like a freight train. Many early indicators already show successive months of contraction. In it, housing values, equities and corporate bonds are all going to take a dump.

The domain aftermarket isn't gold bullion or a t-bill. It isn't by any stretch a safe haven. There is no reason to think for a second that aftermarket domain pricing will move inversely to the wider asset classes which are going to spend the next few years clattering.

We're in a secular bear market, they tend to last 12 to 20 years. It started in 2000. Do the math.

My advice to anybody sitting on some monster domains or portfolios is to either sell them fast or develop them into something useful that can produce an income stream that doesn't depend on blind type-in traffic or pre-existing link-pop from an expired domain's previous incarnation.

The domain parking services are going to have to get a whole lot more creative if they want to survive the TechWreck2.0. Marchex may be headed there with their much anticipated openlist initiative, other operations like communicate.com are developing their properties into verticals.

Lots of people are working on a better, smarter, parked platform. The problem in this space is that there is a fine line between dynamically generating "contextual content" and an automated scraper splog.

At the end of the day, I don't see a lot of long term upside for domains on their own, there has to be a viable website on them, there has to be something original, innovative and useful. There is real work involved.

The pink cloud days of easy PPC money from type-in traffic are numbered, get used to it.

By Mark Jeftovic, Co-Founder, easyDNS Technlogies Inc.. More blog posts from Mark Jeftovic can also be read here.

Related topics: DNS, Domain Names, Net Neutrality, Telecom, Whois

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Comments

Re: Domain Aftermarket Overdue for an "Asset Repricing" George Kirikos  –  Mar 01, 2007 9:25 AM PDT

The Marchex deal was for $164.2 million, $155.2 million in cash and $9 million in stock.

I agree that the end of the world is nigh. For those wanting to sell their soon to be worthless domains, feel free to send me your domain lists. :)

Re: Domain Aftermarket Overdue for an "Asset Repricing" Snoopy  –  Mar 01, 2007 11:28 PM PDT

Drugs.com was report as sold for $823456 not $4million.

Re: Domain Aftermarket Overdue for an "Asset Repricing" Frank Schilling  –  Mar 02, 2007 1:52 PM PDT

Some very well thought out points in here Mark..  As a guy who stares into his Bloomberg all day I especially liked:

"To me, this is the equivalent of the “inverted yield curve” that portends economic recessions. "

The question you can't touch on (unless you are closer to the business) is: "Multiple of What?!" .. What are these 60X+ sales a multiple of?  PPC revenue?  A friend of mine pointed out that most generic name PPC Domain Investors are like land owners on the Las Vegas Strip..  and they only make money on Fridays picking up the empty cans and bottles that people throw onto their property from passing cars." That's pretty accurate IMO.

Most of the sale multiples you hear quoted are a "Multiple of PPC traffic revenue". Keyword marketplaces (google/yahoo) pay incredibly little for raw traffic to begin with. Then the domain owners selling names today are usually affiliated with a traffic middleman (ie. Sedo, Domain Sponsor) taking 20+% , then there is a rev share applied afterward, say 60%. The domain owner only gets 48% of the revenue that comes in at the top.  I don't know of another product on Earth where the distributor gets more than the producer.  Anyway, if Google or Yahoo owned and optimized most generic domains in-house, the name traffic could make double the top number and the multiple would go from 60X to 6x. And double is still not what this traffic generating name is worth to a final business owner. To quote Rick Schwartz:  "What is a customer who types privatejet.com worth if they buy a 50million dollar aircraft".  Most owners of high quality generic domain names know this, they factor that reality into the break up value.  A 60X multiple of a terrible traffic deal could quickly be converted to a 4X multiple and the names still have a break up value.

Marchex is a great example.  They paid 164 million (155 plus stock) for the names in an 8.5X PPC transaction..  They presumably re-wrote a lousy traffic contract into a great one and converted that into a 3-4X multiple.  But here's the kicker.. IMO they absolutely positively own 25,000 mid-tier domain names (with type-in traffic) that are worth $20,000 each on a resale. That’s $500,000,000.00 And they still have 170,000 names many of which are worth 10's of thousands to Millions (ie. Beijing.com, Debts.com).

Type-in traffic has been the only constant since the dawn of the commercial Internet. As these PPC pages get better people use them more, not less.  They actually provide a fairly good service.  Consider that parked pages formerly consisted of stick-men holding shovels and under-construction signs — and we still typed these names in after 'that' user experience!

Taking over a developed website for the name only is like a developer in FL buying a mobile home park on the Atlantic so they can put up a 30 story tower.  I view it as progress (and not so dumb). In some cases PPC can do better than a poorly managed poorly run commercial site.

If you think prices for names are crazy now wait a few years. There may be cyclical opportunities if the economy craters, but I think there are still huge opportunities for you, I, anyone to jump into the market today at this late phase, and buy a high quality generic domain name with type-in traffic for a reasonable price (in the secondary market, from a weak holder), and to turn that investment around relatively quickly for significant triple digit returns.  JMO

Re: Domain Aftermarket Overdue for an "Asset Repricing" Frank Schilling  –  Mar 02, 2007 4:08 PM PDT

Sorry for the additional Post but these are just too delicious not to rebut:

"Further, all it takes is one major browser (IE, for instance) to make a shift in the out-of-box layout of the browser dashboard: say putting a search input field right where the current location input bar is and type-in revenues will begin to decline in earnest."

This just won't happen.  If you can type ESPN.com or MyHistory.com you can type in ParkedName.com It's not up to ISP's or browsers to police user intent and when they try users abandon ship. People typing in names know exactly what they are doing.  This is not some kind of OpenDNS Error Search Hijack that Browsers or ISPs can shape without ramification. Compuserve became irrelevant when they tried to keep their users off the web in 1993, AOL became more valuable when they opened up their content.  I'm sure Microsoft would love to deny the world the ability to explore the web. Even if they felt emboldened to pursue that tac, Opera or Firefox would gain share while the Antitrust case made its way to trial.

"Yes, I am one of those nutjob quacks who is convinced there is a global recession bearing toward us like a freight train. Many early indicators already show successive months of contraction. In it, housing values, equities and corporate bonds are all going to take a dump.

The domain aftermarket isn’t gold bullion or a t-bill. It isn’t by any stretch a safe haven. There is no reason to think for a second that aftermarket domain pricing will move inversely to the wider asset classes which are going to spend the next few years clattering.

We’re in a secular bear market, they tend to last 12 to 20 years. It started in 2000. Do the math."

I'm one of those kooks too.  I agree that there are troubling economic signals on the horizon.  Deficits, social-security, Medicare, Medicaid have been the news for decades and US lawmakers are doing nothing about them. 60 minutes is reporting this weekend that the US could be flat broke in 30 years if nothing is done. Still I am bullish about domain names.  And I can assure you, I don't have to cheerlead for my own economic well-being.  There are too-many small websites, mom and pops and corporations with domains (who's concerns are exactly equal to large portfolio owners) for regulators, browser manufacturers etc to 'give the shaft' in the form of a dramatic negative change in the mechanics of the way the name-system or browsing works.  In fact, I am surprised that somebody as concerned as you about the future wouldn't embrace names as the only thing with true intrinsic burn-down value on the net. Google at $430+?  That's tulip mania. Undeveloped generic domain names can't be beaten down any further, they only get the bare din-level of type-in traffic as it is.

When I hear people talk about web2.0 I roll my eyes. Repeat after me: Web 2.0 is the B2B of 2007.  It's a hollow talking point. Be a developer and be a renter. Be a generic name-holder and be an owner.

Lastly:

"My advice to anybody sitting on some monster domains or portfolios is to either sell them fast or develop them into something useful that can produce an income stream that doesn’t depend on blind type-in traffic"

I have removed your reference to link-pop which I agree, is completely worthless.  However I'm going to take the rest of your remark, frame it, and hang it next to the 30 year USD bond on my wall.  Both will be worthless in 30 years.  The bond through inflation and your remark because it is just so very wrong.  Again, the only constant on the Internet "is" the domain name. If 'anything' has 'any' value on the net, it is the domain name. Without a domain name there is no such thing as email.  There are no websites.  I can not imagine a scenario where people — businesses of the world would give up trillions of dollars in advertising and branding that made .com the defacto standard of websites and the cornerstone of direct-navigation. There is just no logical talk-around. That said, I can not imagine great domain names getting less visits than they presently get, because frankly they don't get that many on average. But maybe I'm just too close to this. ;)

Re: Domain Aftermarket Overdue for an "Asset Repricing" Ram Mohan  –  Mar 14, 2007 2:50 PM PDT

I'm not so sure that all domain names have low or poor intrinsic value - after all, many names have real appeal and "stick" in people's heads.

I used to believe that type-in traffic came only from internet newbies, who would stop such behavior as soon as they became more savvy.  However, I find among many of my savvy friends, perhaps once a month or more, they will just type in a name, and IE will auto-fill-in .COM (grrr!) and you get to a PPC page.  (Plus, most of the world is yet to get on the Internet).

Many current PPC pages are insipid and offer low value.  But I suspect that over time, the DomainSponsors of the world will have no option but to improve the content and relevance of their output in order to stay competitive.

End-users don't really care whether the site they get to is a PPC site or a "real" site, as long as it provides "real" value and doesn't waste their time.  And there lie the investment opportunities.

-Ram

Re: Domain Aftermarket Overdue for an "Asset Repricing" Frank Schilling  –  Mar 14, 2007 3:55 PM PDT

However, I find among many of my savvy friends, perhaps once a month or more, they will just type in a name,

Y'know its funny Ram, I had a friend say: "How do commercial domain registrants make any money?  I only ever type a name once a month?" ..  and THAT was your day.  Making money with domain names through type-in traffic is not about breaking down the door and getting ten or twenty thousand visits a day to a name.  It is about making money between the raindrops. You visited "this name" today, your friend visited "that name" yesterday and the girl at Starbucks who just made you a soy vanilla latte will have her day on yet another name next week at 2pm. It's the few visits across a great many names that collectively reach millions of people.  Like a solar sail 1000 miles across attracting ions and pulling a spacecraft at the speed of light.

Re: Domain Aftermarket Overdue for an "Asset Repricing" Robert Haastrup-Timmi  –  Apr 26, 2007 12:22 PM PDT

“My advice to anybody sitting on some monster domains or portfolios is to either sell them fast or develop them into something useful that can produce an income stream that doesn’t depend on blind type-in traffic”

Mark!...that's a bit like saying don't hold on to your disney shares back in 1955 or sell your the Andy Warhol your your dad passed on to you back in 1972 or something. The point, is all assets appreciate in value over time taking into consideration boom and bust cycles. Like it or not Mark, the fact is Domain's are assets and if you think companies like DomainCapital.com are loaning money against domains as collateral for fun or because they have not done their home work, then perhaps you're the one who's missing the boat! Read my article, on why domains are the best investment for your future:
http://www.blackworld.com/blog/domainfutures.htm

Re: Domain Aftermarket Overdue for an "Asset Repricing" Snoopy  –  Apr 26, 2007 7:13 PM PDT

Robert Haastrup-Timmi said:

Mark!...that's a bit like saying don't hold on to your disney shares back in 1955 or sell your the Andy Warhol your your dad passed on to you back in 1972 or something. The point, is all assets appreciate in value over time taking into consideration boom and bust cycles. Like it or not Mark, the fact is Domain's are assets and if you think companies like DomainCapital.com are loaning money against domains as collateral for fun or because they have not done their home work, then perhaps you're the one who's missing the boat! Read my article, on why domains are the best investment for your future:
http://www.blackworld.com/blog/domainfutures.htm

Over the top, we have gone from one extreme to the other. Your blog article has almost as many errors in it as Mark's.

Re: Domain Aftermarket Overdue for an "Asset Repricing" Mark Jeftovic  –  Apr 26, 2007 8:20 PM PDT

Robert Haastrup-Timmi said:

Mark!...that's a bit like saying don't hold on to your disney shares back in 1955

Actually it's more like saying "Sell VA Linux" back in January 2001.

The point, is all assets appreciate in value over time taking into consideration boom and bust cycles.

Does that include Tulip bulbs? All assets do not go slowly, inexorably up. What you are seeing is the purchasing power of your money erode via inflation. The US dollar has lost 97% of it's value since the introduction of the Federal Reserve in 1913.

Like it or not Mark, the fact is Domain's are assets

I don't recall saying they weren't, or being particularly bummed out about the notion that they are. The fact is there is no legal consensus on if a domain name is even property. (Maybe you should read this: http://www.circleid.com/posts/is_a_domain_name_property/ ) It's immaterial to what I've been saying.

and if you think companies like DomainCapital.com are loaning money against domains as collateral for fun or because they have not done their home work, then perhaps you're the one who's missing the boat!

I never said that either. I said people buying insanely overvalued domains are probably going to come up short.

(In fact I also have an associated company which makes loans against domain names as well, and factors receivables generated by websites. I just don't lend ridiculous amounts of money against extremely overheated valuations.)

Read my article, on why domains are the best investment for your future:

Thanks, I read it, will blog a more detailed follow up, the trendirama.com guys asked me to follow up over there (that's where your article is posted originally, right?)

I'll post the link.

Re: Domain Aftermarket Overdue for an "Asset Repricing" Mark Jeftovic  –  Apr 26, 2007 8:30 PM PDT

Snoopy said:

Over the top, we have gone from one extreme to the other. Your blog article has almost as many errors in it as Mark's.

Yes I know Snoopy, I botched the numbers big time, you know I copped to that in my followup article.

Go easy on me, I've got a one-year old in the house, I haven't slept since Feb/06.

(I even messed up the date in my last comment, I meant to say Jan 2000, not 2001)

But I still stick by my premise.

-mark

Re: Domain Aftermarket Overdue for an "Asset Repricing" Robert Haastrup-Timmi  –  Apr 26, 2007 8:53 PM PDT

Thanks, I read it, will blog a more detailed follow up, the trendirama.com guys asked me to follow up over there (that’s where your article is posted originally, right?)

I’ll post the link.

Yes Mark, trendirama.com is where my article was originally posted.

Re: Domain Aftermarket Overdue for an "Asset Repricing" Robert Haastrup-Timmi  –  Apr 26, 2007 9:21 PM PDT

Does that include Tulip bulbs? All assets do not go slowly, inexorably up. What you are seeing is the purchasing power of your money erode via inflation. The US dollar has lost 97% of it’s value since the introduction of the Federal Reserve in 1913.

Mark, I understand the tulip bubble correlation you seem to be implying here, but I would argue that only a few domains actually achieve astronomical sale prices e.g diamond.com $7M… and even then, the underlying development potential and conversions from type-in traffic may justify the price tag.

The point is however, most domains in the aftermarket only sell for an average of $2500.00 which seems reasonable if the buyer wants to start a serious online business. Another point is, valuing domains based on natural type-in traffic is actually quite silly and devalues the market potential of the domain in my opinion. I make an excellent daily/monthly return on a lot of my domains that have no natural type-in traffic whatsoever, simply by optimising them through search engines and most of them are parked! Therefore I could prove to you that NorwegianCruiseLiner.com for instance, a long domain name is actually worth $10,000 to $36,000 a multiple of 3 to 10 yrs, just parked and not developed, but earns money through seo.

Re: Domain Aftermarket Overdue for an "Asset Repricing" Mark Jeftovic  –  Apr 26, 2007 9:52 PM PDT

Robert Haastrup-Timmi said:

I make an excellent daily/monthly return on a lot of my domains that have no natural type-in traffic whatsoever, simply by optimising them through search engines and most of them are parked! Therefore I could prove to you that NorwegianCruiseLiner.com for instance, a long domain name is actually worth $10,000 to $36,000 a multiple of 3 to 10 yrs, just parked and not developed, but earns money through seo.

If by optimization and seo you mean ppc arbitrage or search engine spamming, I wouldn't value a domain much more than 10 months net income. You're at the mercy of the SE algorithms, not to mention it may violate the policies of your parking service.

It's not my idea of a long term viable business model. Others are welcome to it, but I certainly wouldn't pay 10 years revenues on it.

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