Inaugural Guest Post (#1) - The Sage

I recently promised that I would start a weekly (or bi-weekly depending on demand) guest post.  These posts are from some of the smartest folks in and out of the domain space that I have ever had the pleasure of knowing.  Some are financiers some have a cursory attachment to the space.  Others are deeply involved.  They are all wildly successful and highly respected.  Some are worth hundreds of millions of dollars, one is a billionaire ..all are very private and I am grateful to have them share what they know.  Here then,  is our inaugural post:

Perspectives on the Domain Industry

By The Sage

The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun. Ecclesiastes 1:9


I see so many similarities between domain names and real estate.  Initially I saw domain names as virtual real estate with the great potential to develop digital property and build big businesses around them.  Currently the hot selling domain names are generic domains.  Some companies seem to brand as generic domains like hotels.com.  Others chose to buy the generic domain and forward it to their site (books.com to bn.com - Barnes and Noble). Still other companies have taken the concept one step further and have started to lease virtual real estate at Secondlife.com.  You can buy an acre of virtual real estate there for $1600.  Inside this virtual world, it has become a community, a market place and virtual people are selling the virtual real estate that they have purchased and one has known to have made over $1,000,000 doing this.

Business is about recognizing trends and patterns, applying already existing ideas to new industries and so to try and understand domain names, looking at the real estate industry can give you some perspective.

Recently, one of the biggest buyouts of real estate, mostly commercial, for $39 Billion took place. Equity office (equityoffice.com) was bought out by Blackstone (www.blackstone.com).  Another company tried very hard to purchase the real estate portfolio, Vornado (www.vno.com) but failed.  The Chairman of Vornado, Steven Roth, was quoted to have said that every deal that he had passed up this decade he has regretted not buying and was justifying the high offers he put in to buy the biggest real estate portfolio.  He rationalized that what seemed to be too high of a price at the time, years later seems like such a bargain and so it would be with this acquisition.  I use that rationale a lot when I am purchasing domain names.  Every now and then, I look at all the domain names I didn’t win at auction or passed up on because I thought the price was too high and I would say that about 90% of them, I wished I had purchased and this is dating back the last seven years.  I am cognizant of the law of gravity that what goes up must come down and that markets cycle up and down with the trend ever sloping upwards.  Most of us will live only 70 or 80 years so sometimes long term means that we will never see the fruit of our planting and so we need have exit strategies or speed up or increase the slope of the growth.  I think generations when I am building my business.  As long as I can pay the property tax (domain renewals), the maintenance and development costs of the business and upon death, the estate taxes, the business in the hands of the next generation as real estate will only be worth more.  There are risks and those risks need to be revisited and reevaluated often and the business needs to adapt to the ever changing and fast market.  The only constant thing in business is change.  These changes are happening at a lot faster pace with the advent of technology and globalization, especially in the domain name industry.

The trend long term for real estate is always up.  There are certainly opportunity costs but given the proper infrastructure, management, plans, real estate can certainly have not only long term upside but also good cash flows for the short term.
I have never been one to sell domain names.  I am buyer, not a seller.  I invest in the long term and see a lot of unrealized potential in domain names that the capital markets or financial institutions wouldn't be able to acknowledge or lend money on.  Things that the big companies would consider over priced at this time.  I see Las Vegas being made on desert land and new suburbs arising outside of downtown.  Some will sell and speculate, selling the golden goose for a large profit and trying to find other golden geese.  I keep the golden goose and try to buy more, even if it is at a premium.  I am confident that in five years time, all of the “overpriced” purchases I have made will be considered bargains.  I don’t believe the market has peaked yet.  When these smaller cap companies go public or have more access to money in the capital markets, they will be able to get access to more capital and invest in more infrastructure.  With that infrastructure, they will be better able to leverage portfolio purchases that they can buy at much higher multiples than they are paying now and develop them in a couple of years to get a single digit multiple ROI.  It also follows the trend of nature where smaller fish get eaten by bigger fish.  The food chain in the domain industry is starting to become very apparent and companies will get bigger with consolidation of domain portfolios merging them with media companies and companies that can efficiently manage such assets and growth, combined with good people.  Demand Media, Name Media, Marchex, iReit are the bigger players but newer companies that are starting to understand the value of domain names will start to appear and enter the scene.  Netshops, Geosign, registrars no longer deleting their customer domain names but keeping them for themselves, and the list will grow.  The opportunity to consolidate the space will be over in the next two to three years and the portfolio holders that do not sell will be like the small buildings in between multiple skyscrapers.  Build up a good portfolio, develop them out partially and you will have a great valuation.  Or build a business to compete with the above companies and be named among them.

There is nowhere to go but up with a long term strategy.  If you don't have the infrastructure, the vision, and the plan to start developing the virtual real estate, it will have potential value but it will remain unrealized.  If you don't have the structure to develop, it may make sense to sell it for a big profit to someone who may.
In the analogy of real, real estate, the land may be valued differently from a person who just wants to live in the house, another who wants to build a new house on the land, a developer who wants to build townhouses on the entire block and a developer who wants to change the zoning and build skyscrapers on that block and the surrounding ones.

Not everyone can be that developer but the higher you are up in that chain, the more value you can extract from the land.  The biggest and best developers will have the necessary infrastructure in terms of capital, people, relationships with financial institutions, governments, and businesses to enable it to do things that the others can not.

Where are you on the domain food chain is a very important question?

Are you a domain aggregator, cater to domain holders, develop domains into businesses?

What kind of domain names are you purchasing?

Do you have a strategy when purchasing domain names as to what market, niche and do these domains have synergy with other domain names you are purchasing?

If you can ask yourself these questions each time you purchase a domain name, it will go a long way.

Frank definitely has a strategy and he has become one of the largest individual domain name portfolio holders.  You can see much of the insight, vision and strategy he has when you read his blog.  Seeing things from his perspective, you can only benefit as your perspective widens. I predict that the better domain name portfolios will start to sell once some of these smaller cap companies go public or when some larger private equity firms begin to understand the value of domain names.  However, they not only need to aligned with capital but with the right group of people.
I have never written a blog and this seems more like an article.  Give me some feedback as to length.  I can make it longer or shorter.  I feel like I am on the Gong show and expect to hear the Gong soon.  Gooonnng.

Comments

[Gabe]

Great read - thanks for your insight! Length was fine...I feel like a sponge just soaking it in. Your views really reaffirm my feelings that domains will follow the path of real estate. The similarities are striking:

1. You can sell for capital appreciation, or lease for positive cash flow.

2. Can develop to maximize revenues.

3. Both involve escrow, brokers, and now even financing (which I think will expand to more players soon as values are recognized mainstream).

I'm in the mortgage financing industry myself and there is no way (that I can imagine) in the real estate world that you can drop $200k to buy a lot, spend $5K to develop it, have less than $1000/mo. in overhead and have a positive cashflow of $5K - 10K a month. Whereas in the domain game, this is very possible by developing a generic domain with type-in traffic, adding relevant content, and monetizing via CPA and PPC ads.

Take a look at the Myspace generation - these kids spend more time on the internet now than they do on TV. When I was there age, I was either outside or glued to the TV. It seems that online advertising can only increase, pumping more a more $'s into the pockets of the owners of valuable internet properties.

In regards to your theory of being a buyer and and not selling - I have to agree. I remember reading a quote by John Jacob Astor - arguably Americas first Millionaire who bought up Manhattan back in the late 1700's - "Buy by the acre and lease, never sell". That always stuck to me - he was in it for the long haul. He wasn't in it for capital appreciation and short term satisfaction - he was a cashflow investor and knew that the value of his property would increase exponentially over time.

As for me, I'm just a small time player trying to get a few gold pieces to hold on to before the gold mine dries up. Hey Frank - you want to loan me $200K for 10 years at 10%? :)

[Colin Pape]

Great first post Sage!

I think your format, length and conversational style is perfect for the medium. Thanks for taking the time to share your insights with us.

You are right on the money with your analogies and strategy in my mind. We are still so early in the game and we have so much farther to go that anyone who isn't in for the long term will look back and wish they held onto their portfolios - even those who are now selling for thousands of times more than they paid for their names.

People like Frank with a view towards the future, and who've been able to generate enough income to cover their maintenance costs (and then some), will wind up being in positions of tremendous power and with vast wealth.

The internet is THE greatest development in the history of humanity, and one that is here for the long-term - though it will inevitably morph and grow in myriad ways - changing life for all of us in the process.

This has already happened for many. I remember life before the net (though barely), and it was so limited, drab and uninspiring compared to life post-net.

It's incredibly empowering to know that I can share my thoughts with the same person who inspired me to get into this industry (and who scooped my one-and-only renewal lapse :P)...and that my words will actually be read and analyzed in some form.

The internet makes it possible for each of us to reach our full potential as individuals in ways that were not possible before.

Almost everything I know I have learned through freely-provided content, accessed through Google. Everytime I've faced a server problem, a programming challenge or anything else life has thrown my way, the internet has always been there with the answer for me.

As someone whose longest stretch being offline in the past 8 years is about 14 hours, I can say with authority that someday everyone will live like this. It's the only logical path, especially in a world that is becoming increasingly competitive and fast-paced on the way to The Singularity.

The internet makes learning so enjoyable, easy, inexpensive and efficient that doing it any other way is like trying to smash your way through a brick wall.

I'm fortunate to have been able to access and digest more information before my 28th birthday than most people (pre-net, at least) do in their lifetimes.

I feel like I've traveled the world a thousand times over, yet I've left homebase relatively few times, and certainly am not the globe trekker I feel like I am sometimes.

I could pass for an expert on subjects that I would not even have known existed before the net came along.

I've experienced the lives of people whom I would have never had the opportunity to connect with 'in real life' and I've actually been able to help and influence these people.

I've been able to join together with others like myself to collaborate on large-scale projects that would have been impossible.

I've been able to contact people who've inspired and influenced me, and whom, pre-net, would have been totally inaccessible due to the number of filters they would have had in place (secretaries, personal assistants, unlisted phone numbers, etc.).

The bottom line is that the internet is a freaking amazing tool - and it's becoming better every day as updated software, faster connections and more users come online. The internet is the opportunity of 7 billion lifetimes.

I could go on for days.

That said, as barriers to entry continue to drop in the online world, branding and community will become increasingly important. Building communities of course is the key, but the right branding makes starting and developing communities that much easier.

The key to branding in most cases is naming. Therefore, those with a lock on the best domain names will be perfectly positioned to capitalize on the mega-growth that the net has seen and will continue to see in the future as the space continues to explode.

Which brings us back the the real estate analogy. Could anyone in their right mind argue that location does not determine the type of community that will arise? Prime real estate attracts certain types of individuals, which in turn attracts more of the same.

Something tells me that the type of person I'm likely to meet while walking along Seven Mile beach in the Caymans is different than the person I'd be sharing the main street with in Flin Flon, Manitoba. :)

***FS*** You never know.. there are great folks everywhere.. even in Flin Flon. Thanks for your very insightful comments.

[Scotty]

The Sage,

Excellent post. Informative and clear. Looking forward to more of your insight.

[Frank Schilling]

I remember reading a quote by John Jacob Astor - arguably Americas first Millionaire who bought up Manhattan back in the late 1700's - "Buy by the acre and lease, never sell". That always stuck to me - he was in it for the long haul. He wasn't in it for capital appreciation and short term satisfaction - he was a cashflow investor and knew that the value of his property would increase exponentially over time.

***FS*** I often admired JJ Astor for his ability to believe in the long term.. While Astor was surely not a perfect guy (he was also a slum lord), his ability to be fearless and look way into to the future was astounding. Definitely a man of great vision. I think about Astor alot when folks say things like "take some money off the table for your family" .. "diversify" .. into what? ebay stock? google stock? USD bonds? I diversify every 15th of the month when the Search Traffic check comes in. Long term, you are alot safer holding generic high quality domain names than cash. You might laugh but I believe that.

[Snoopy]

Very nice article Sage, I enjoyed reading it alot, I thought the length was appropriate.

"He rationalized that what seemed to be too high of a price at the time, years later seems like such a bargain and so it would be with this acquisition. I use that rationale a lot when I am purchasing domain names."

I think a lot of people would share that view especially when values have gone up greatly like in the domain industry. Even extreme examples, say overpaying 2 fold a few years ago, would look like a great deals today. Having said that the guy who pays double probably could have got a better deal if he'd looked around, he could have made twice the profit. I have bought quite a few names in the past that have appreciated a lot but looking back I feel in some instances I could have bought better at the time. There are also names that I greatly regret not buying, whilst the majority of what I have bought I am happy with.

Just the fact that something has appreciated doesn't make it a good buy in my view.

***FS*** Thanks for that additional point Snoop.. Just because something has doubled.. doesn't mean its going to double inefinitely. But even to me things still seem low today. Open a 1000SqFt (10sq meter) retail location in any big city on earth and it will cost you $100,000 USD in improvements before a single person (traffic) walks in the door. Buy a great domain name like homeforeclosures.com at what is really a public auction with some element of 'auction fever' and pay $90,000 and get 15-30 visitors a day in bare din-level traffic without development.. with every person who walks by looking for exactly that thing. The dichotomy is striking. I think homeforeclosures.com could realisticaly be a million dollar name by doing absolutely ZERO development (I wouldn't sell that name for less than a million dollars)... The fact that most of the people reading this far probably don't think that statement is completely ludicrous (against the backdrop of my realworld 1000sf storefront example) shows there is probably room to double an double and double again and still wouldn't be bubbly.

The vast majority of people on this planet with 'The Money' have absolutely no-idea how the Internet works or what has intrinsic value. The rich folks today (murdoch, redstone) are relying on people who themselves do not understand how the mechanics of traffic (and domain names) work. When they start to figure that out.. things are going to dramatically change.

[Tia Wood]

Thank you for taking the time to come speak with us. The length is fine! We're all sitting here soaking up the information. No information is too much!