Facing The Absurd

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Affiliate Summit ended tuesday in Vegas and we were obviously there with Elephant Traffic. Since a lot of our advertisers our affiliate marketers that arbitrage domain traffic to CPA, AS is a really good avenue for us to acquire new advertisers. Our cost to take part with 5 people including booth, flight, accomodation, parties with clients was about $40k. However we usually make this money back in 3 months time from new advertisers, so it’s definitely worth it. We also take part in the Ad:Tech and LeadsCon conferences, which bring us a similar return.

Our booth was sort of stylized to Prague since we were offering a draw for a vacation worth $5k there. This is how it looked (Jeremy Lopez, GM of ET in the photo):

Otherwise Vegas was pretty fun as usual, although didn’t do as much partying as when I was there last year. Surprisingly even managed to win some money and finally learned the basics of craps, courtesy of our head salesman Yancy. Looking forward to DomainFest in LA now…

Unbelievable, I did my first real estate deal today. I have generally always avoided this asset class as the ROI didn’t meet my criteria – buying a house at a 5% rental yield is and was a waste of money for me. That’s why I never bothered even to buy my own apartment to live in since renting made sense to me. But I finally found a way how to improve ROI significantly with blending in some development as well.

I bought an unused attic in an apartment building today, where me and my building partners will develop two pretty exclusive apartments with roof top terraces. I acquired two garages in the building as part of the deal as well. I paid around $260k to acquire the property. Redevelopment will take about 9 months and will cost around another $320k. So total cost around $580k. Then I plan roughly another 6-12 months for the apartments to sell for around $1.3 million. This kind of ROI suddenly makes sense to me, so I might do some more of this stuff in thefuture…

I happen to live and run my businesses from a country that most Americans can’t point out on a map or still call Czechoslovakia (which is totally understandable, I couldn’t name the 50 US States either). Although I am obviously a big Czech patriot, I would still like to ventilate my frustrations of operating a business from a country that has a population of 10 million. It makes competing on a global scale much more difficult and me and my team have to go the extra yard to be better.

The most frustrating thing is the size of the market – 10 million people with a GDP per capita of $24k at PPP. Compare that to the U.S. with 300 million people / $46k and you find out that the US is roughly a 60x bigger market than the Czech Rep when it comes to buying power. Because of all the language barriers and unique aspects of every European country, it is very difficult to scale a project/service once you reach a certain level. Being part of the EU has certainly helped, but the EU is certainly not a federation of states like the US. Just to illustrate this frustration with an example – take our lead generation department within Elephant Orchestra. Lead Generation is in many ways a local service – you have to be close to your customers (lead buyers) and you have to understand the local market for acquiring traffic. What is currently frustrating us here is that we are hitting  a major constraint in the amount of traffic we can profitably buy and convert. If we want to grow, we have to expand into other lead gen niches (like health, education) or expand abroad. But expanding abroad is very difficult since you have to build up your knowledge and a team from zero and that costs money. Whereas if we would have a US presence, it would be much more easy to scale our model and maintain margins.

Then there are several frustrations of running a global business from here, again to illustrate, I will use the example of Elephant Traffic. First of all, if we want to sell in the US, we have to understand the language. The HR pool of native speakers is really tied to the expat community. Or we have to “import” the people. Second is the travel barrier, if we want to meet our clients, we have to be constantly travelling, which increases costs.  Then there is the time difference, hence our sales people and account managers have to work the US time zone, which means coming to work at 3 p.m. and finishing at 12 p.m. Again that limits the HR pool, a lot of people don’t want to work those hours. Then there is the issue of knowledge exchange – there are virtually no people that would be in a similar business as us, so you can’t refine your ideas, network etc. Then there is the mindset. Czechs typically have a pretty provincial way of thinking (recommend reading the book Good Soldier Svejk to understand). It is difficult to transplant “global thinking” into them.

Obviously there are certainn advantages of operating from the CZ such as well educated cheaper labour, maybe a more favourable tax climate, it’s easier to become a market leader here etc. But really the dissadvantages are still much bigger. Hence I think it is inevitable for us to open a US presence next year. That will allow us to both exploit some of the favourable aspects of the CZ but also make it easier for us to compete with the global players. Take the best of both.

I really like destroying commonly held perceptions. So here’s another shot: The future of domaining doesn’t lie in domaining per se, but in finance. Finance is where the new domain fortunes will be made. Knowing the domain game won’t be enough to make you rich anymore.

Let’s look at the development of domaining from a slightly historical perspective. The first guys in the biz (such as Scott Day) saw the value of domains as brands, gateways to the internet, that should be valuable one day. That was their edge. Then guys like Frank Schilling and Kevin Ham came in that understood the value of type-in traffic and built their empires around that (banking on the assymetry of information – most people didn’t understand it). That was their edge. Then came the big tasters. Their edge (already understanding type-in traffic) was in technology, acquiring tasting data and seeing the opportunity that many did not see.  From this “historical” point of view we can basically break this down into three evolutionary steps, let’s call it generations – that made a killing in the domain business.

So what is the fourth generation, the next evolutionary step? I believe it is going to be about combining domaining and modern day finance. That’s where the fourth generation domain fortunes will be created.

And that’s exactly where I think my edge is (not that I would want to put myself in the vanguard of this next generation ). You see, when I came into the domain business a little over two years ago, I saw it through a different lens than most people in the business. I simply saw domains as any other asset that creates a cashflow stream (predominantly from PPC). So there was a huge arbitrage opportunity.

This lied and still lies on the ability to raise debt for cheaper than the yield that a domain generates. Say you would buy a great generic for 10 years revenue for $1 million. The cashflow stream is hence $100k per year. Now if you have the ability to raise that amount in debt say at 6% p.a., servicing the debt is going to cost you $60k per year. So you get to pocket the difference (+you have the added benefit of the capital appreciation of the domains). Then you just need to find a way to scale this to make a lot of money. Obviously raising the debt against domains is very difficult so you really have to get creative.

Bringing in aspects of financial engineering is where the new fortunes in domaining are going to be created. However with the introduction of leverage, some fortunes may be also lost (that is the downside). So if you want to make a lot of money in domaining, stop reasearching just domains and look into how private equity works.

Lookig forward to hear your thoughts in the discussion.

I was just looking through Bido at the recent sales page. Since Bido get’s so much PR and buzz, I was really surprised about the miniscule amount of volume in dollar terms. Looks like on a typical day maybe $1,000-$1,500 of sales go through. That’s $100-150 of margin for Bido a day. And a hell of a lot of effort is put into that from Sahar’s team with no doubt to even get that result. I don’t really want to show off or anything, but just to put that number in context, I make that kind of money in less than 10 minutes, 24 hours a day, just from parking.

What the example of Bido clearly shows us is how difficult it really is to create a new viable aftermarket platform and especially get the model right. I think Sahar&co will really have to fundamentally change Bido’s model and I sincerely wish them a lot of luck, because any efforts like this help increase liquidity, which is always positive for all of us.

Overall, if you look  at the various aftermarket platform models, I think only some work very well, some moderately and some don’t at all.

Somebody who I think got the aftermarket model working really well is Namemedia with BuyDomains etc. Why it is so nicely profitable is that to a large degree, Namemedia is what I call in the business of proprietary domain trading. They own the inventory (or most of it) that they sell, hence their margins are really thick. Whereas others just rely on their 10% cut, Namemedia takes almost 100%. That’s why they can market their names proactively. Dark Blue Sea has been trying to do something similar to that with it’s Domain Distribution Network, but they are clearly not even close to as good as NameMedia is on this.

Another aftermarket model that I think makes a lot of sense is the dropcatching-to-auction model of Namejet, Snapnames and Pool. If you create liquidity in the marketplace, you can snap up domains for $7 and sell them for $79 or even thousands of dollars. Obviously most of the inventory comes from preferred registrar partnerships so the margins are not that high (as they have to give a big chunk to the registrars), but these dropcatching services definitely take a bigger cut than 10% that for example Bido or Sedo rely on.

Rick Latona gets it right as well through his whole aftermarket package (newsletter, auctions, active brokering). He also engages in what I call a lot of proprietary trading, a lot of the inventory he sells is his.

To a lesser degree I don’t think the whole marketplace model of Sedo (on a standalone basis) is that awesome and profitable. On a typical month, Sedo sells something like $6 million in inventory, with a 10% margin of $600k roughly. However Sedo has a HUGE overhead to keep this operation running, spends significant amounts on marketing etc. There’s probably very little left of the $600k a month after all the costs. However why this model seems to work is the marketplace’s impact on Sedo’s parking business. Because of the marketplace, Sedo gets a lot of parking business, where it can make thicker margins. Pretty much all the small guys making $50 a month on parking park with Sedo now, but they probably have thousands or maybe even tens of thousands of them so it adds up. The impact of the marketplace on the parking side of the business is exactly why Namedrive went into this business with its NDX Market. Overall clearly, on a standalone basis, the marketplace model is nothing very profitable.

So bottom line is that if you want the marketplace model to work, you really need some kind of upsell to make it work – to parking, a registrar or something like that.