Modelling new TLDs « Маrk Kусhmа

Modelling new TLDs

February 9, 2012 @ 11:55 am

I was triggered to come back to new Top-Level-Domain name (TLDs) hotly debated last year.

In the past, a classical TLD financial model was briefed to something like this:

.Info has seven million domains at $7 under management which is about USD 50 million a year, with operation costs below USD 5 million. .Biz registry is highly profitable as well, even .Travel makes USD 1 million a year.

Right, any TLD was a good venture in the past. Financials were as impressive as described above. Even .Tel made some bucks, though I am not sure whether they will ever recover all the costs involved in the past. The same applies to .Xxx and others.

The good thing with new TLDs is that cost-to-launch went down, by the factor of x5 – x10 (expected to be around USD 2-5 million ). This was in our model when we considered investing in new zones. We wanted to go with .Art (not .Arts as ICANN may skew it), .Hotel (as few other guys), .Pet, and few .More.

The real show-stopper for us was the potential and highly probable market cannibalisation once 1000 new zones are added to the root zone. Marketing costs will soar and sales will plummet. We played with the numbers a lot trying to sense and to model the “a semi big bang in TLDs” – what a difficult task, but the conclusion was that returns would be at least x50 – x100 lower than in the classical TLD model.

Now with costs down by the factor 5 and sales down 50 times – it just killed the IRR completely. Our numbers showed that such businesses would likely to be in the red for at least four-to-five years. IRR would drop than to single digits while the risks remained high. Saying nothing about other uncertainties, political, economical, and legal risks.

Hence, financially, and this is what my clients and shareholder want, we see better opportunities in investing in more promising start-ups, also in online realm. The same industry, the same placement, just better prospects for the allocated capital.

I still believe that new TLD is a big game. Many guys who made big bucks in .com are personally attached to the matter and will fuel the show.

Once new TLDs are out, I expect the average domain prices in the secondary as well as the primary markets to go down. At least for the first few years and surely in minus two digits percentage.

Intermezzo: there were days when aluminium was more expensive than gold until Hall–Héroult process was invented and the market was flooded with mega quantities. Aluminium is still selling good, both producers and buyers make money. The only losers were those refusing to make timely exit in the middle of the 19th century.

Same may happen to domain names, the registries and registrars will all be saved, but the business model of domain investors will be disrupted.

I haven’t heard many people talking about these issues, and yet they should.

Well, let’s spare some gun powder for the coming years and see how things develop.

Short link: http://➸.ws/~KsvA$q

Marko February 14th, 2012 @ 8:48 pm

A good question came from Tim on .com et al. Here goes my rationale on future pricing.

The following factors will play crucial role in the years to come:

1. Inflow of new TLDs. Though most of them will be cheap ones, they will create extra supply. Something similar happened in the electronic industry in earlier 90s. Chinese players got in and where are Philips and Siemens today? I’ve seen in from the inside. Once the cheap alternative hits your market – it will never be the same again. Indeed, no one took that into account. I haven’t seen a single study on it and I was hunting high and low. It is a good question to ask when the price drop will happen, but ICANN was asking for this result since they got themselves into .new game.

2. Big brands, many of them at least, will opt in for their own TLDs. Either in the first round, or later in three-five years. So will banks, and other big companies. Google is building everything around google.com now. I haven’t seen a single product from them been branded on other .com. They may and probably will shift to .google sooner or later. So will other companies. This will deprive domainers from quite of cohort of big fishes to sell to. For an typical incorporated entity it is not a big deal to spend 500k on .brand – this makes sense: they get a name which will be easy to protect and grand to market.

3. With .art, .hotel, .berlin, there will be less of ***art.com, ***hotel.com and ***berlin.de. At the beginning about 5% less. Then 10% less.

Bottom line. With big buyers out, with more generic substitutes splash into the market. I don’t see how .com names will gain any significant value in the next decade. The global growth is outside the US and the rest of the world is more .flexible and more .unwired. The drop will not be drastic, but the decline will be steady.