Facing The Absurd

I see a lot of domainers diversify into real estate when they start making money. They view it as something similar to domains. The truth is that they would have been much better off if they would have kept re-investing in domains or other businesses.

My perception is that real estate investments are a sinful waste of money, money that maybe yields 5% per year. For us domain investors that is a petty return. If I would have a choice, I would prefer to have money in the bank than in real estate. Because it’s liquid and available for opportunistic deal making and this liquidity outweighs the forgone yield for me.

The main arguement made by domainers is that real estate is a very secure investment. Every domainer has paranoias that his domains might be taken away but he knows that nobody is going to take his house away. Hence they sacrifice yield in favour of security.

The big secret is that you do not have to sacrifice yield in exchange for security. The answer is diversification. If you have a diversified portfolio of high yielding investments (like domains) or businesses (obviously running the risk that some of these may default/go bancrupt) you will still be better off in the long run than if you plow money into real estate.

I like to illustrate things with analogies, so here’s one from the bond market. In the long run, a well diversified portfolio of junk bonds will perform better than a portfolio of tripleA rated bonds. Some of the junk bonds will obviously default, but the higher yield of the others will more than compensate for this in comparison to the AAA’s.

Over the short time I’ve been in the domaining business, I’ve experimented with both reserve and no-reserve auctions. If I balance the pro’s and con’s I am strongly in favour of no-reserve auctions, especially for domains where it is likely multiple parties will be interested in the domain. The upside of a no-reserve auction here outbalances the risk for me (of the domain selling for less than I’d like). For example, just a few minutes ago we had two no-reserve auctions ending on Sedo. We ended selling 949.com for $13,560 and 313.com for $25,000. My original expectation was aroud $30k for both, so the upside (even less Sedo’s commission) worked out well for us. I think the fact that it was a no-reserve auction brought a lot of this upside. Few months ago, the no-reserve format worked out very well for us with the our auction of 64.com, which went all the way to $90k. So I continue to strongly support the no-reserve format because I also want to see more liquidity.

A lot of people involved in buying and selling names got burnt by buying domains in 2007-08 peak valuations that still to this day cannot be liquidated for the price they were bought for. The interesting thing to me is that most people have a preference to sit on the paper loss until it eventually turns around (they hope) and they will be able to sell without making a loss. I.e selling for under the buying price is taboo for them. I think this is an error that is actually producing more losses for them.

I’ll support my thinking with an example. Say you bought a domain for $100k in 2008. In today’s market the maximum you can get for it is $80k, so you decide to wait. In 2012 you will get to sell the domain for $120k and make 20% on your investment over a course of 4 years. That is a pretty bad ROI. Instead, if you were willing to take a loss and sell the domain in 2009 for $80k, you would initially incur a 20% loss but you could put that $80k you got to work. Say buying and selling more domains, investing in a portfolio etc. From 2009 to 2012 a skilled domain flipper could probably turn that $80k easily into $300k in three years time. So if you would have taked the liquidity route, you could have got a much better ROI on your $100k investment. Pause for thought.

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.