AftermarketDomains

Industry Issues

Central Trading

Currently domain owners deal directly with aftermarket sales agencies. As the market continued to grow it has become increasingly difficult to manage domains and the related sales processes across resellers. In the coming year it is expected that the number of substantial lead generation and sales agency businesses for aftermarket domains will dramatically increase. This boom will primarily be fuelled by the increased importance of this market to registrars and professional domain owners in general.

Historically the existing domain aftermarket resellers have had difficulty in maintaining stock control. Some of these issues included: failure to remove stock that had been sold, not displaying the current domain price on their websites, and long delays to include new domain stock in their programs.

In addition to this, the burden on the domain owners has been high when a change of status has occurred on their domains. Each time an owner sells a domain they have to communicate with every domain reseller they work with, tell each unique system that the domain is no longer for sale, and then follow through on a largely manual process to be paid and arrange domain transfer.

In order for an aftermarket domain value system to be effective, domain management and sales processes must work in real time while being compatible across all aftermarket websites. A single system must be able to control domain stock, collect domain metadata, attribute category classifications, reduce liability from trademark abuse, offer pricing recommendations, facilitate real-time transfers, collect funds from financial clearing houses and offer a universal communication interface for domain owners to use across all business systems. These activities are all related to stock control.

There have also been a number of development interests that are of value to consider in the value and market forces context. Domain spinning companies have been trying to add aftermarket domains into their functionality, but they currently lack the stock control role capabilities and don't have an existing relationship with the domain owners. Domain portals have natural competition between each other and therefore try to hoard stock instead of sharing domains available for resale.

Registrars who have shown an interest in developing aftermarket sales systems eventually realize that they and their competitors would all end up spending significant capital on development without gaining market advantage. Even if one registrar could build an advanced aftermarket sales system, it is unlikely that they would be able to distribute it to through the other registrars.

On analysis two things become very clear:

The greatest value is created by two segments in the value model that provide the rare and valuable resources. The driving interest for these segments is "Growth":

Lead Generation – generating qualified buyers (traffic) that eventuates in domain sales.

Domain Ownership – owning the domain stock that is rare (not easily replaced).

The other processes are threshold technology making their driving interest "Cost and Efficiency"

Operating an Open Market and financial technology are important aspects of the channel, but once a level of competency is created adding value becomes difficult.

Reseller activities that are not directly involved in the generation of consumer interest (actual sales and marketing) can easily be replaced. Creating new customer sales creates the true value.

Domain Settlement

Historically the domain aftermarket industry has been extremely inefficient at settling transactions. Frequently transactions took days to several weeks for the financial exchange and domain transfers to occur. In most systems the method of settlement entailed setting up an account with the current registrar of the domain being sold for the new owner and then transferring the domain into the new account for the owner. For these transactions the new owners were then left with the onerous task of learning to use a new registrar system, transferring their new domain to their own registrar, and dealing with the frequent failures of transfer caused by registrars resisting the loss of domains from their systems. As many of these new owners were retail buyers, this might be the first time they have had any exposure to using any of these systems.

Instead of taking weeks for settlement and transfer of retail domains – it should only take a matter of seconds. In order for this to be accomplished a number of criteria need to be established.

1. A price has to be previously set or negotiated.
2. Holding control of the domain needs to be obtained by the buyer
3. Finance needs to be authorized and collected
4. New ownership details need to be gathered
5. Money needs to be transferred to the seller
6. Buyer needs to request the transfer of the domain
7. Seller needs to release the domain from their registrar

"In an effective domain sales system the transfer of money and domain control should happen immediately on execution of the transaction and without human intervention."

Growth vs. Threshold

Threshold Technology

Stock Control, Distribution, and Financial Clearing are all online functions that will eventually become threshold technology. Threshold technology is easy to replicate and replace. The technology is development by necessity and becomes focused on cost reduction, process efficiency, and limiting risks. Due to the low barriers of entry and lack of rarity, these services justify only a very small margin. Low risk equates to low margin for these businesses.

Many of the sales agent processes that are automated are also threshold technology. When sales processes are wholly automated they are easy to replace and have a limited value to domain owners compared to other services.

The nature of threshold technology is in direct contrast to growth. Growth businesses and threshold technology businesses should not exist in the same business entity. Specialist development is more productive.

Growth Business

Lead Generation and Sales Agencies should be growth businesses. Growth businesses tend to take more risks, spend more money and are more dynamic. These attributes tend to encourage risking capital for potential growth opportunities. Growth businesses need the ability to take risks with new venues of distribution and the freedom to potentially fail. The attitudes and management style inherent in high growth companies are in sharp contrast to conservative businesses that manage threshold technology. Hi risk equates to high growth and profit potential for these companies.

"Growth companies tend to take more risk, spend more money and are more dynamic."

Human Involvement

When humans are involved in a transaction it costs money. This labour needs to be paid for by someone who is benefiting from the service. When possible, all human interaction should be eliminated from processes that can be fully automated, without a loss of customer service value.

When human involvement does add value, growth organizations should welcome it and charge for it. Some of these services may include personalized research, domain planning, negotiation, and customer service.

Industry Development

The biggest advantage of the internet is the nature of its distributed flexibility and ease of communication. This same advantage has caused some confusion and difficulties in communicating information for aftermarket domains and portfolio valuations. The core of the information issue is a lack of industry standardization. The industry needs standardization, lobbying and business development. In most industries associations and consortiums either self regulate or work with government to standardize the language of the involved industry. These same bodies develop standards and definitions of market segmentation and reporting. From an investment perspective, reporting and standardization is important because it clarifies information offering a means to describe the position of companies and products within the industry and without. Without standards it is difficult to describe the true value of any potential investment.

Industry Standardization, Lobbying and Business Development

In the case of the domain industry - no formal standards, monitoring or reporting have been developed for professional domain ownership. Clear market segmentation of business activities and domain stock has not been defined. Valuation criteria have not been fully explored.

An industry association that will take responsibility for the professional development of standards, monitoring and reporting needs to be created. This organisation needs to develop full market segmentation criteria, monitoring and reporting software, domain categorization standards, recommended valuation criteria, performance criteria for technology, and evaluation of revenue streams.

In the past few years a number of major issues involving the professional domain owners have come to be recognized very late in the process and after most of the external decisions have already been made. Domain owners are not adequately represented on a continued basis with ICANN (the domain regulator), legal issues have arisen with federal agencies and the United Nations, and positive distribution of information about profession domain ownership is not developed and distributed.

Professional domain society core goals should be:

1. Strategic planning for industry promotion and development
2. Monitoring and lobbying of ICANN and Verisign
3. Maintaining communication with political and government agencies
4. Actively promoting the virtues of the professional domain community
5. Mainstreaming domain ownership within Internet Marketing
6. Public relations and news propagation
7. Standardization of industry language, segmentation, research
8. Monitoring and reporting industry information and statistics
9. Attracting, maintaining and informing membership companies
10. Raising capital to fund society activities
11. Design and maintenance of promotional equipment and materials
12. Development and monitoring of professional standards and ethics

Anecdotal Evidence

Professional domain portfolio owners believe in the economic value of their domain names. They either believe that the traffic revenue supports the continued maintenance of the domains or that the future retail sale of the domains will justify holding on to them. This continued belief is often fostered by anecdotal evidence. When an owner sells a domain like xyzfishingsupplies.com for $1,500 it causes an immediate inflation of the domain owner’s valuation of all the similar domains in their portfolio. The reality is that this single sale doesn’t mean anything other than that one buyer felt there was $1,500 of value in that one domain for them regardless of the reason. What domain owners need to understand is that if all of the domains of a similar quality, brandability, traffic revenue and rate of sale were considered as a group – that these domains would be likely to create a significant income loss due to the maintenance costs. The rate of sale for the class of domains that xyzfishingsupplies.com would belong to is 40 times less likely to sell than a domain with a search count and bid price for its domain phrase.

Case Sample

10,000 domains X $6.75 registration costs per year = $67,500 X 10 years = $675,000
$2 average traffic revenue per domain = $20,000 revenue per year X 10 years = $200,000
Rate of sale = 0.05% per year ($1,000 average sale) = $5,000 X 10 years = $50,000
Valuation = - ($425,000)