Reflection on the Ides of March

There is an interesting situation playing out on the world stage that has a great deal of impact on the Internet and domain names.

We have new problems going on in Iran. This is on top of everything else happening in the Middle-East/Afghanistan/Iraq/Spending/Defecits.  It is probable that the US dollar is going to get permanently weaker as the Iranians and other supporting actors begin to unseat the USD as the defacto settlement currency for oil. This is a serious thing. For years, Countries of the world have had to hold huge amounts of USD reserves in order to pay for things that could only bought and paid for in US Dollars. Whether you chose to know it or not, that single factor (more than any other) has served to keep interest rates down and prices at the Walmart cheap. It's not necessarily going to be like that in future. To be fair, America has abused her privilege by spending a lot of money on bread and circuses -- but, I live in a US centric world (and frame of mind). I recognize that America has helped to elevate a great many people world-wide. So from my chair, this shift has a decidedly negative and uncomfortable whiff to it.

Along-side that gloomy state-of-affairs is a positive epoch-like sea-change, where the Internet is replacing "all traditional media" to some degree.  We know it is happening.  It's just hard to quantify how far things will go and to who's ultimate benefit the changes will inure.

Embodied within that "Internet" sea-change are domain names.  For those who do not already know this, domain names are the foundation of the World Wide Web. Every website, every email address needs a domain name to function. Every page that Google indexes has a domain-name address.  If it were possible to own every domain name that exists, you would control the Internet.  All of it.  You might laugh that off as implausible,  but as it is, most of the good, meaningful domain names on the Internet are owned by the person reading this and a handful of other large groups such as Marchex, Name Media, iReit, Fabulous, etc etc etc.  The world's top 20 domain name holders in 2007 control a decided majority of all domain names that represent anything meaningful at all. The rest of names are largely useless phrases that do not make sense, in TLD extensions without gravity or resonance.

So against those realities, in March 2007, I noticed that the prices for domain names (sales public and private) are increasing and solidifying.  There are not wild swings like there used to be where a great three-letter .com sells for $300 privately while it sells for $5,000-10,000 via Snapnames auction.  Today,  the price for a generic 3 letter is $5,000-10,000 nearly everywhere. An awareness of the value of domain names has filtered through to the masses -- it was even on the discussion table at the ICANN meetings in Lisbon.  There are few secrets anymore. Yet public companies like Marchex (MCHX) and large portfolio sales are still tracking at an average of less than $2,000 a domain name. These portfolios don't contain random domains which can be taken from the available pool (or via tasting) at registration price today.  I am talking about portfolios of hard-won, generic .com words and phrases that were cobbled together before 99.9999% of people recognized any value in domain names at all.

The disconnect I have built to is that large groups of names are actually worth less together than their individual break-up value apart (and by a considerable margin).  In a perverse way, it would almost be better for a company like Marchex to unwind the foresight of that name-portfolio's founder [Yun Ye], by selling their names onesey twosey. I previously estimated a conservative breakup value of Marchex' domain names alone at north of a billion. Problem is, even the best name-sellers can only liquidate about 2% of a large portfolio like Marchex's in any given year (and that's pushing it), so in exchange for "cash now", a name-seller has to give up the upside. To be fair, a seller may be giving up the unknowns of the uncertain world illustrated in the opening paragraph as well.

In the final analysis, any large name seller needs to ask themselves, "What will I do with the money?" Come back full circle to that world where oil is going to get much more expensive. Not necessarily because there is going to be less of it in 30 years but rather because the paper money we use to pay for it is going to become worth alot less in the next 5-7 years.  Fedex 3-4 day service may become the norm.  We may need to get used to paying more for a Fedex, and we'll be picking up our packages a 10-20 minute bike-ride away. That may be the future with much more expensive oil.  Time will tell I guess.

If that reality comes to be: Would you rather own a media enterprise run with trucks, printing presses, ink and lots of people in offices, or would you rather own a pile of generic domain names getting millions of monthly visits in an organic and benign manner?

If there are to be difficult times ahead I feel comfortable owning domain names.  If the times are to be good then I feel even better holding them. Based on the prices of individual name sales this past March, it would appear I'm not alone -- Even if other purchasers motivations run slightly less cautious than my own.

Comments

[Snoopy]

"I previously estimated a conservative breakup value of Marchex' domain names alone at north of a billion. Problem is, even the best name-sellers can only liquidate 2% of a large portfolio like Marchex's each year (pushing it)"

Surely the breakup value is the amount they would expect to receive if they sold every single name off for whatever they could get in a fairly short space of time?

If a portfolio owner can only sell 2% of inventory in a year then I would think the prices achieved do not reflect market values?

***FS*** conceded.. lets call it the conservative break-up value. 2% per year is a gerneral rule of thumb that I have heard several times related to passive portfolio selling.

[RobB]

Very interesting post there, which brings to mind a few things.

I've been meaning to ask you the question about what you think of Marchex's market cap, given they have all those great names and they are a publicly traded company. Their market cap is about 651 million I think, and you say their domains alone could be worth a billion (not including the ongoing revenue those domains are making). So I guess Marchex is a 'buy'.

About the US economy and US dollar, there have been people over the past few years, like Jim Rogers, who have predicted the dollar will fall against world currencies for many reasons (huge government debt the big one). They recommend things like investing outside the US, in gold, commodities, foreign currencies, anything but the US dollar. So far it hasn't happened but they say it's a matter of when not if. It could be a painful recession for many until it cleans itself up and growth starts again. Just looking at domains, I wonder what would happen. You would think people would have less money and companies would be hurting, so less shopping, less sales, less advertising $$$, which hurts domains to some degree. Things would recover eventually, economies go up and down, but it would be a shock because most of the 'internet generation' has never been through a tough recession (I'm talking much worse than the 2000 .com crash) and probably think it could never happen. If you read up on the 30's and to a lesser degree the 70's it's hard to picture what the conditions were in America during those times, and picturing what it would be like if it happened today.

I think domainers could still get hurt in a recession because the people surfing the net and the companies doing the advertising will be hurting. What if it gets so bad the internet connection is one of the things the household has to let go? But on the flip side, you don't have to feed a domain, or fill it with gas, or heat it, so I think even though domainers would be affected, it would be too a lesser degree than most. And you'd could out at the other end still holding all those good names when things turn up again.

If you are pulling in big money in domains, you should probably be investing a portion of it in hard assets like gold, commodities, or companies that have some of their revenue from outside the US, or more stable foreign currencies. Maybe even in foreign domains (.de, .uk, .cn) so that a setback in any one country doesn't cause a huge setback to your earnings.

As for oil, there could be a decade or two of real pain if oil reserves start depleting and not meeting demand. Already many say it could turn at any time. Emerging countries like China are buying vast amounts of oil, metals, and commodities. Demand is increasing and supplies are becoming uncertain. There hasn't been a huge new oil deposit discovery for a long time. Some experts say the Middle East oilfields could start producing less at any time. Luckily new energy sources are being developped (solar, wind, geothermal) but these are many years away from widespread use.

I'd recommend reading Jim Rogers book 'Hot Commodities' for his take on where this is all going. "Investment Biker" and "Adventure Capitalist" are two other books of his, where he travelled around the world by motorcycle and souped up car to visit different countries and give his take on their economies, what's working and not working.

On a final note, in 2000 and 2001, when I bought my first few domains, I started getting interested in mlm and network marketing. I thought I could slowly build a downline in an mlm company over time, so that in 10 or 20 years I'd be set, having a large growing organization of people helping me earn monthly residual income through product sales. I didn't buy many domains from 2002 to 2004, but I was still focusing on network marketing. Little did I realize then that having a bunch of generic .com domains was like an mlm business, you 'recruit' the right domains and they help you earn monthly residual income. You don't have to talk to them, you don't have to convince them, they don't quit, you just set them up and they keep working for you even while you sleep. It is the network marketers dream. I still keep a hand in mlm (plus I learned that the keywords pay good PPC, there is a lot of money flowing around in mlm so it helped me buy some good mlm-related domains) but I wish it had clicked with me sooner that the answer to residual income was in the domains. Sorry for the rambling post!

***FS*** Great comment! Thanks for the book tip and you're right .. domains are like an mlm machine you don't need to keep motivated. Quite a downline you've built Rob :) I think .cc tld's of the country you are in will always be good.. but people won't turn off their internet or stop typing .com because times get hard. Ad rates may lower but they will be stable. The people who will get hurt most are the pie in the sky domainers selling speculative (no type in) names to the greater fool.. That will all blow away and the industry may get smaller for a while.

[Omar]

Frank,

Right now the market seems to be very rational as buyers are basing their prices on cash flows. In addition, most buyers are quite knowledgeable of the industry.

However, I think psychology plays a big role in markets. Just imagine what happens when there is a flood of positive publicity. We could experience "domain mania" in which prices get out of whack with reality. I really think it will happen – I just don’t know when :)

[julien]

hey frank, just saw a video interview of you that led me to here. this is a great post that has some well thought out ideas behind it. cheers.

[michael zielinski]

"I previously estimated a conservative breakup value of Marchex' domain names alone at north of a billion"

There are huge amounts of value for publicly traded companies with domain portfolios that is simply not being recognized by the stock market. Marchex is one example, but there are others.

In early 2003, publicly traded Communicate.com (CMNN.OB) had a market cap of less than 1 million. They have individual names in their portfolio that are worth more than that. The stock price has risen significantly since then, but what about Tucows (TCX) which now owns the NetIdentity portfolio? There's value here that's not being recognized by the stock market. Other companies?

Will this eventually give rise to corporate domain raiders? Buy out the entire company with borrowed funds and sell off the domain names to unlock the value?

***FS*** Excellent points.. There will be corporate domain raiders IMO.. and Tucows has a nice portfolio too. MCHX was just the most obvious to me TCOWS too

[Leon]

"large groups of names are actually worth less together than their individual break-up value"

But what if the group of names are related; geographically, by profession, theme, program, product etc, etc?

[Patrick McDermott]

"most of the good, meaningful domain names on the Internet are owned by the person reading this and a handful of other large groups..."

Did you really mean "by the person WRITING this"?

Patrick

***FS*** HA! .. no.. people like you Patrick.. Of course there are people around the world that own individual great names. But there are alot less folks like that than there used to be. Today the majority of the good stuff is held by the few.. I include guys like AOL/CNET in the top holders list.. they have nice portfolios of individual names..