Where is the value of a domain going ?

[Sameh]

From Whizzbang's Blog

I recently did some analysis of the domain name industry and found some interesting statistics that would support a number of theories about the industry and where it’s going.

Combined, Google and Yahoo have a market capitalization of $196 billion (although this changes on a daily basis) and their total revenue in 2006 from the ad-network channel was $7.88 billion.

The total revenue from domain parking last year was $800 million which means that parking represents 10.2% of the total ad-network channel or 4.7% of Google and Yahoo's total revenue. These are big numbers but it also means that the domain channel is going to be able to fly beneathe the radar any longer.

Here's the issue, if you're sitting on the board of Google or Yahoo wondering how you're going to support a market capitalisation that's in the stratosphere (Google) or how to join a rival (Yahoo) the easiest thing that you can do is begin to squeeze the margins of domainers. Domainers are part of a highly fragmented market that really doesn't have any power over the advertising aggregators, it's a soft easy option. I think that we're beginning to see this sort of action in the decline of EPC pricing.

Here's where it gets really interesting. The projected online advertising spend is going to grow by 15.1% for 2007 while the domain channel is growing by 37.5%. The domain channel is rapidly cannibalising the content channel advertising revenue and it has a huge and growing appetite. Verisign has indicated that 23% of all registered domains are parked and this is likely to increase which suggests that the domain channel may surpass 37.5% growth rates in the near future.

The growth rate and size of the domain parking industry will bring us to the attention of senior executives within Google and Yahoo therefore I would expect change in the future. It is only a matter of time.

My recommendation is that if your a domainer that has constantly reinvested back into domains then sell some of your portfolio, make sure that your financially secure and continue to enjoy the ride. Where people get burnt is when they believe that the growth rate will go on forever, trust me, it never goes on forever. So sell some domains for less then outstanding values so that you can enjoy the ride rather than being terrified by it.

 

[-NC-]

My newbie take on this:

This: $800 million / the domain channel may surpass 37.5% growth rates
Seems to conflict with this: no power

I'm guessing most of that 800 Mil is from the big players?

If the advertisement feed providers get together and decide to drop prices, then that would seem to me to invite a nice lawsuit. What's it called? price fixing? anti-trust? Your average domainer obviously doesn't have the cash to fight, but the big players might? Or perhaps lawyers might see this as a nice opportunity to sue those giant wallets?

"make sure that your financially secure" (sic)
Always good advice!

 

[accent]

Note that this applies only to domains with significant generic paying traffic. IMHO that is the province of the long time domainers and perhaps a few wealthy newcomers. I only have a few domains that even pay for their renewal, my strategy is end-users, not PPC.

But several factors seem destined to squeeze PPC parking, browsers defaulting to their own search pages, more savy users choosing search engines rather than blindly typing keywords for a couple.

And yes, the internet will not grow rapidly forever, but I suspect we have a while to go on this run.

 

[Ronald Regging]

Ive stated this many times before, but it's something that I truly believe so I'll probably continue to state it...

With ad costs rising and publisher/domainer payouts dropping, people need to start re-evaluating the price of domains not based on the revenue, but on the potential savings to an advertiser. I just know that there will be some big time domainers who will be too stubborn to make this switch when the time comes, and will end up undervaluing a great deal of their portfolio based on outdated methods. We may not be there yet, but it's coming. Mark my words.

We all stand to benefit from this shift in valuation as well and it's something that we as domainers should be wholeheartedly promoting and adopting, as well as trying to make the public aware of the values based on cost savings. If you get 1,000 clicks that pay $.50 each... Yet those same 1,000 clicks cost an advertiser $2.00 each... Would you rather value your domain based on a $500 monthly revenue or a $2,000 monthly savings to an advertiser?

Obviously this requires end user level sales, but theres no doubt that premium domains will eventually find their way into the hands of end users. But when I see premium domains with real commercial usage being sold at auction based on PPC revenue, it makes me see a lot of opportunity for the near future. Unfortunately I'm poor, so I won't be partaking of that action

 

[Spade]

I think a few of you have hit the nail on the head. In the blog article, he is assuming domain value is based on the revenue it generates. While this may be the case with some, it is not the case for domains as a whole.

A few posts above have touched on the subject. There is another issue beyond advertising, and that issue is web-presence. In the world of today, and the foreseable future, a vast majority of businesses are going to find it neccessary to have an online presence (if they dont already!) Although there is a nearly infinite amount of domains to use as you see fit, the issue here is getting the best possible name for your business.

How can you when nearly every decent names is being used or held? Welcome to the secondary domain market.

Although my portfolio is currently making enough to pay renewals and put a few coin in my pocket, I am intent on converting almost solely to a buydomains.com type business model.

I believe Herb is correct in his understanding of direct type in traffic to end-users. Companies are going to start evaluating the money they are spending on advertisement, and eventually will come to the conclusion that in the long run, it is much cheaper to buy the domain generating traffic then it is to pay google / yahoo for traffic.

Why buy the milk when you can buy the cow philosophy, right herb? =)


Justin

 

[Ronald Regging]

Why buy the milk when you can buy the cow philosophy, right herb? =)


Justin

Exactly It's like renting vs. owning. Why rely on a third party and their unknown variables when you can eliminate the middle man entirely and make more profit?

Also I agree with you completely about web-presence. Having a premium domain within your operating industry instantly gives your company a certain level of credibility and authority. It also saves tremendous costs when you consider branding. I know we discussed this before concerning the DropCatch.com thread. Maybe that would be an archaic example given the breadth of this conversation, but the same principles apply.

Some guy named Joe could own a jewelry business that most people have never heard of. And lets say that through whatever twist of fate, he acquires Jewelry.com and uses it for his business. Obviously his company isn't widely known, but suddenly it's using the best domain for selling jewelry. I would feel more secure buying jewelry online from Jewelry.com, rather than JoesJewelry.com, or any number of other random jewelry shops using random jewelry related domains. Maybe I have nothing to go on to feel this way, and perhaps I would, in fact, be safer using a lesser known site, but the name alone generates that sense of authority and brand. It's hard to put a figure on customers with that state of mind Companies spend many many years and many millions of dollars to generate that same sense...

Obviously the market for domains is still maturing, so we can't really say what they'll be worth someday. But with the way the overall picture is moving, I think it's easy to see that a lot of premium domains are undervalued, or shortly will be when market forces change the way people evaluate domains.
I also think that as the top sales keep crawling upward in figures, so will the median sales price of lesser quality domains.