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This is the second in the series of articles on the GFC and domaining. The first may be read at:
Revenue to Profit
The GFC has had a dramatic impact on the whole domain industry. For example let’s take a look at the poor domainer that ended up “holding the can” about 12 months ago. After running around for 9 months trying to convince investors on the value of domain names and how they are a sure winner he just finished raising his $1 million.
 He spent the money buying a portfolio on a 4 year revenue multiple which provided him a nice future earnings potential less re-registrations of $200K per year. Life is good! The investors are happy the domainer is happy and the life of the long drink continues.....the problem is that its beginning to taste a lot like Koolaid.
The GFC hits and Google and Yahoo begin their drive towards getting cash from everywhere and paying out a lot less. In some cases portfolios dropped by as much as 66% of the previous earning potential. Now what does the domainer do? There is only so long that a domainer can delay their quarterly earnings report.
Strangely, investors aren’t interested in excuses about why the earnings per click has dropped or why the business projections are now a memory. All they want the results to be what they were told they were going to be.
After two quarters of abysmal results the smart investors trigger what is called a ratchet. A ratchet works like this. The investor says, “I believe your business plan on the condition that if you don’t meet what you say you will meet that I begin to increase my equity share each quarter”.
The domainer that has gone seeking the “big money” is now caught between glossing over how great domains are to get the money and getting a little nervous if they’ve glossed it up a little too much. The smart investor also insists on the domainer placing a very sizeable (normally all) chunk of their portfolio into the deal. It’s sort of like, you put your domains in and I’ll put the cash and we’ll be 50/50....OK?
As I’ve said, the GFC hit and the investors trigger the ratchet and the domainer over the next 12 months loses his Pina Coladas, domains and essentially everything else as his position is diluted down to almost zero. The investor in the meantime is managing their risk via the ratchet.
Other than drink more of the almighty credit card money what does the domainer do? The only real option is to cut and run by renegotiating the agreement with the investor. This normally means splitting up the domains in on a revenue line basis. The domainer gets a few and the investor gets the rest.
Now both parties are facing problems. The domainer has to take his few domains that are left and make them more profitable so that they can pay off their credit card drinking bill. In many cases unless the domain owner can somehow placate the investors there will be a set of irreconcilable differences and a lot of bad feelings. This is when the domainer learns about the virtues of the word endeavour.
Since they have a lot of time on their hands domainers normally go down the “build out domain and make a pile of cash” route. Sadly, often due to lack of business skills only about 1% of domains that are built out actually perform better than their parking revenue. Remember that building out a domain is not a technology issue but is most definitely a business model problem.
The investor knows absolutely nothing about domains and although they have these “assets” they don’t really know what to do with them. Their goal is to either get their cash back from selling them off (which is often preferred) or to stick it out and get their money via revenues. All they can think about is what an incredible mess they’ve just inherited and how can they get out of it!
A smart domainer may be able to negotiate their way back into the investor’s good graces for some management fee but my guess is that the investor just wants to get out. After all, why get into bed again with the guy that created the mess in the first place?
In the meantime many investors are getting margin calls on their share portfolios because the crash is all but wiped out much of their own personal net worth. Maybe it’s time to join the domainer and put some drinks on the platinum credit card.....?
Investors care about one thing and one thing only. Return on investment. When it comes to domains what they need to be reassured about is that everything that can be done is being done to maximise the return or in the case of an explosion like that depicted above that the asset is being managed effectively to ultimately provide an exit.
If you are an investor in this position then I’d love to hear from you as with some of my background I may be able to assist to jointly develop a solution to your domain management problem. I would love to share with you some of my own experiences in these circumstances and how possible solutions have been developed in what initially appears to be one big huge mess.
Likewise if you are a domain owner with investors breathing down your neck then having a third party verify what is being done to manage the domain portfolio is often a good way to take the pressure off. Give me a call as I may be able to help out.
Change of industry dynamics is often very traumatic when investors are involved and often the good intentions that the relationship started with dissolve into a huge emotional and financial turmoil. |
Many registrars take advantage of these rules to exploit their customers and generate huge fees for little to no effort. Knowing this in advance I worked out a deal with the client's existing registrar to stagger renewals and change of ownership of the domains over the following 12 months. I was assured by the more than helpful account representative that this would not be a problem and that the change of ownership would be done at no cost when the domains were renewed. All was good!
My wife Roselyn normally notices that I've managed to get myself into this situation before I do. I end up being grumpy and generally not very nice to live with as I slog away at my forever growing "things to do" list.
So what's happened now at Downwind.com.au? Since the "Avatar Awards" I've now rolled out something that I've been working on for quite some time.....an aviation shopping mall.
According to the Google quarterly report over the past few years they have been consistently reducing their Traffic Acquisition Costs (TAC) by paying out publishers and domain owners less of the advertising pie. At the moment the average payout is 26.4% and it appears to have stablised over the last three quarters. Remember that this is the average payout across ALL publishers and that as many domain owners are aware they have experienced a very sharp decline in revenue over the last 18 months.
The first question that needs to be answered is, "Why is the TAC levelling off?" From my experience the decline is being arrested by second tier advertising players that have managed to scale to the point that if Google reduces the payout any further then the second tier players will begin to eat into the Google market share.