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I have posted Frank Schilling response in full as it's a damn good read ..
Original article links are below ...
<<It's amazing how things haven't changed
Frank Schilling – Apr 30, 2010 1:38 PM PDT
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. >>
The Domain Aftermarket Redux: Are Domainers "Investors" Yet?
http://www.circleid.com/posts/the_domain_aftermarket_redux_are_domainers_investors_yet/#6463
Comments ..
http://www.circleid.com/posts/the_domain_aftermarket_redux_are_domainers_investors_yet/#6463
Original article links are below ...
<<It's amazing how things haven't changed
Frank Schilling – Apr 30, 2010 1:38 PM PDT
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. >>
The Domain Aftermarket Redux: Are Domainers "Investors" Yet?
http://www.circleid.com/posts/the_domain_aftermarket_redux_are_domainers_investors_yet/#6463
Comments ..
http://www.circleid.com/posts/the_domain_aftermarket_redux_are_domainers_investors_yet/#6463
