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I’ve been reading a lot about how Google has recently entered the domain parking game and any domain owner can now establish a direct account with them. This is an interesting change of direction for Google but one that was almost ordained to happen at sometime. I’ve spent the last week digesting this news and trying to fully understand it within the strategic context and implications that it has for the domain industry.
 Let me say from the start that Google has always been in the domain parking game. There are many large domain owners that have been using direct Google feeds for quite sometime. The only change has been Google’s change in policy around how low they were going to drop the bar in order to attract additional direct customers. Now that everyone can get an account it’s my opinion that Google will shortly discover that this isn’t necessarily a good strategy.
For the first few days of ParkLogic we used to have a sign-up link on our site where we would allow anyone to establish an account, upload domains for optimization and then reap the benefits of our technology and processes. What we quickly discovered was that by opening up the sign-up process to everyone you ended up getting a lot of undesirable accounts being setup.
After the initial inrush of accounts we spent the next few weeks shutting down the great majority. Since that time we made the decision to only allow accounts that pass stringent criteria – the result has been quality traffic from quality domain owners. I think that Google will discover that there is a lot of “bad domainers” spoiling the pool for everyone and that it costs a lot to weed out the good from the bad.
Over the last few days I’ve spoken with a number of senior people in some of the major parking companies to get their thoughts on the Google announcement. The consensus appeared to be that they weren’t particularly happy but Google has assured them that they would not cut into parking companies margins. It would seem to me that there is a clear case of channel conflict where Google is now competing against their parking company customers. Then again, hasn’t this always been the case for large domainers?
The question that I ended up asking myself was, “Why?” Why is Google making this policy change, why now and why get their major customers offside?
I think that the online advertising industry is closely mimicking the mobile phone industry of about ten years ago. The major telcos created wholesalers and sales channels (ie. parking companies). These companies stimulated the market and then the telcos crushed the intermediary in a search for additional margin and an effort to support sagging profit lines.
Over the last twelve months Google’s share price has taken a dive from a high of just over $700 and is now just a tad over $300 per share. That’s nearly a 60% drop in the share price – a scary fall for any company!
An even scarier prospect would be if Google reported reduced earnings for a quarter. In today’s current economic turmoil it’s likely that the market would punish Google enormously making even $300 per share look like a pipe-dream. I believe that the “Why now?” is largely a financial decision rather than strategic.
If you’re sitting at the top of Google pondering some of these possibilities the first thing that you would need to look at is any possible margin gains from consolidating the sales channels. A sizable portion of revenue sits within the domain space and a portion of this margin (approx. 25%) can be potentially realized by going direct to domain owners.
I foresee that there will be a couple of difficulties with this strategy:
1. There is no point establishing a direct channel if you give all the margin away to get the direct relationships. This means that it’s very unlikely that Google will ever give the parking companies revenue to the domainer – there just isn’t any reason for them to do this.
2. I think that Google has underestimated the value that parking companies bring to the table. Over the past five years parking companies have developed incredibly sophisticated systems to filter “bad traffic”, create valuable additional targeting tools and many have spent incredible amounts of time analyzing the impact of huge varieties of templates and graphics on user behaviour. All of this is incredibly valuable intellectual property that has been developed through the school of hard knocks.
Our experience has shown that with the correct optimization tools and processes in place we consistently beat the revenue numbers of larger domainers with direct Google feeds by routing the traffic through parking companies. Our conclusion has been that the parking companies are the unsung heroes of the domain industry and that they add value.
Let me come back to my mobile phone industry example that I discussed briefly earlier. I think that the difference between the mobile phone industry and the parking industry is intellectual property.
The wholesalers in the mobile phone industry were truly just a distribution channel that added very little value to the sales channel other than being a distribution point for product. The problem with this is that it could be very easily duplicated by the telco going directly to the consumer.
As I’ve already stated the parking companies do add value. They are not simply a distribution system where traffic and advertisers meet. This is the fundamental difference between the two industries and the classic margin game that is currently being played out. Add to this mix the fact that there is Yahoo, they may be down but they aren’t out.
So where is my thinking on the whole Google issue? I wouldn’t be surprised if it fizzles out and that we find ourselves in a very similar world to the one we were in six months ago. There will be one difference.
For the first time parking companies will be aware of the power that they actually wield against their upstream advertising partner. The margin claw-back game that Google has been exacting via Smart Pricing will be up and the shoe will potentially be on the other foot. This is a high stakes game and one that is likely to take the next six months to play out but it is alway a must pay attention game for the whole industry.
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And Happy Holidays, too!
ps What's it like having these holidays in the summer? Seems odd to many of us "northern hemisphere folks."