Facing The Absurd

I harvest domains predominantly for their PPC revenue. Recently I’ve noticed an interesting thing with the CCTLD portfolios I create by new registrations – suddenly sales are bringing in a “noticeable” part of the portfolio’s revenue. When it comes to the cctld portfolios, this sales element is about 15% of the revenue (the remaining 85% coming from PPC). With my .com portfolios this is probably only about 3%. Interesting, can’t really find a reason to why.

Otherwise when it comes to ccltds I’ve been much more active with them recently. Since I’ve sort of overharvested the .com universe and ROI has been worsening there, I’ve been looking for other TLDs where ROI is better. So last year I did a lot in .nl, .se., .de, .co.uk, .it, .be, .com.mx, .ca, .com.br, .pl etc. Recently I’ve gone so exotic as to play around with .jp or .co.nz. Now I have around 50k CCTLDs but I think I’ve depleted them quite a bit as well

Sorry for not posting much lately. First two weeks of November I was too busy. Second two weeks I was depressed (manio-depression sucks). Last week I am hyper though again so back in work mode. Just wanted to give a little update on things I am working on and how things are going.

- Elephant Traffic – since I last posted about ET has grown tremendously, we are currently monetizing about 550k uniques a day, which is a very decent chunk of traffic. Our advertiser base is growing on a daily basis and on some domains we are peforming 10x better than parking. If you have high volume domains doing over 1k uniques a day, contact us, we can beet your current monetization by a big margin. We’ve also expanded the team and planning version 2.0 hopefully next week.

- Elephant Orchestra lead generation – Still growing very nicely, we are now doing $200k in revenue a month, however we do have some issues with profitability, so we need to work hard on our margins, 30% is not enough. We need to get it up to 40% next year and double revenue, then it will be a pretty nice business. We’ve added a lot of bluechip clients in the last two months such as the Czech Rep’s biggest bank etc, expanded into new verticals such as utilities and travel etc.

- Otherwise we continue to be chased by venture capital, we just had a meeting with a fund with over $11 billion under management, they seem to be pretty interested. Otherwise word is on the street that we are planning an IPO in Poland, funny we had Nasdaq OMX contact us as a result and pitching their exchange to us as a better option

- When it comes to my own domain portfolio, I’ve been selling off a little. I sold about 20k domains in the last two weeks alone. I don’t usually sell much, but this is probably the best time of the year to do so since ppc is high. Plan is to use the cash to deleverage a little, maybe build a little warchest for some nice acquisitions.

- I”m thinking of buying one multimillion domain at the moment, so I’ve been putting together the cash, arranging a little investor syndicate and raising some debt for it. We’ll see how it goes. Plan is, believe it or not, develop!

- Otherwise Rick Latona has a new venture called WatchBrokers.com, so I put some money into that along with my friend Ammar. Looks very promising. Basically it’s a cash4gold concept, but for luxury watches. And I also think Rick can pull it off.

- I’m also bankrolling a new start up that is playing around with some semantics, we want to build out a new news aggregation service that will have some advanced features such as sentiment, emerging story spotting, some hyperlocal features etc. More news soon.

- Otherwise my friend Ondrej Bartos finally launched his venture fund Credo Ventures, so I put in a million euros into that. Plan is to finance promissing Czech and regional IT/biotech companies. Somehow makes me feel a little bit good as well as it’s nice to plow some money back and help start-ups.

- Otherwise my facebook game development venture Viral Maniacs that I bankrolled didn’t go so well, so we had to lay off the whole gaming division, we will just be focusing on apps now. One big one coming hopefully still this year, gut feeling that it might be a killer. All is not yet lost hopefully.

- What has been absolutely hot hot hot is our online insurance broker ePojisteni.cz. We are now the biggest in the Czech Rep, doing about 4,500 car insurance contracts a month. Our staff has grown to 50 people there and is actually starting to be a bottleneck since we need more skilled phone brokers. Early next year we’ll launch a new site with more products and also run a big media campaign for around $1 mil. That should boost our dominance further.

- Otherwise I had to scratch plans for the wood pellet factory in Eastern Slovakia. Corruption there is terrible and I refused to give bribes. Nothing was simply possible there with stuffing somebodies pockets, so in the end we didn’t get the contract for wood etc.

- My lipousuction chain Slim & Go is a little shit now, a) it’s a bad season now and b) competition has gone up like crazy and everybody is discounting like hell. We opened a new one in Brno though and will open in Ceske Budejovice in january.

- What’s been really fun lately is this movie we are making together with a friend. We have a pretty decent budget for a Czech film, hired the mexican cameraman who did Amorres Perros, so shots look really good. I’ll hopefully have a little teaser in a few weeks, so will post it here.

- Also have plans to open a new small club in Prague, little bit of a freak show. I’m talking midgets, women in latex, men in wehrmacht uniforms, cyberpunk music etc. Will be fun hopefully. Still early stage idea at this point only.

- Otherwise the European Poker Tour is coming to Prague next week, so will be probably playing the main event or at least the heads up event. Have had a pretty sick run in poker in the last two weeks, up more than $40k, mostly in heads up cash games.

- As for my travel plans, I’ll probably show up at Affiliate Summit in Vegas and DomainFest in LA, so if you’re coming, let me know.

P.S. Keep it real!

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.

DOMAINSPONSOR® EXPANDS DOMAINFEST® TO EUROPE
--Early October event in Prague will focus on networking, building European business interest in online real estate--

LOS ANGELES, Calif. and FRANKFURT, Germany. DomainSponsor®, the domain monetization business unit of Oversee.net® and organizer of the DOMAINfest® series of conferences, said today that it will expand the highly regarded franchise into Europe with a conference in Prague, Czech Republic.

The two-day event will be held Wednesday and Thursday, October 6 and 7, 2010 at the landmark Hotel Intercontinental located in the heart of one of Europe’s most beautiful cities. Building on the success of last month’s event in Santa Monica, California, the October meeting will continue DOMAINfest’s focus on increasing the value of Internet real estate and will offer a rich setting for extensive networking involving topics relevant not only to domain investors from Europe, but also from around the world.  

Subject-matter experts will be invited to facilitate the networking sessions on Wednesday, October 6th.  The first day will also include a Moniker® Premium Domain Name Auction powered by SnapNames LiveTM technology.  Day 2 will be focused on social activities in and around Prague designed to provide the kind of shared experiences that can contribute to the building of long-term relationships between DOMAINfest Europe attendees.  Conference details, including the agenda and speakers, will be released in June, 2010.  

“DOMAINfest Europe is an excellent opportunity for European publishers, online marketers, and domain-related service providers to meet and discuss ways to increase the value of domain names, which we like to refer to as Internet real estate, “ said Peter Celeste, Senior Vice President of Oversee.net and General Manger, Monetization Services. “The DomainSponsor team looks forward to becoming more engaged with the European domain investor community, and this forum is the perfect venue to exchange ideas and build relationships.  As with all DOMAINfest events, we will be offering affordable registration rates to encourage maximum participation from a wide range of talented professionals from both inside and outside our industry.”

In January, 2010, DomainSponsor hosted a highly successful DOMAINfest Global® conference in Santa Monica, California that attracted more than 600 professionals from a variety of internet-related industries.  The conference included a variety of sessions over a three day period, including a keynote fireside chat with Tony Hsieh, CEO of Zappos.com. This recent DOMAINfest conference also featured a first-ever PITCHfest contest, structured networking sessions, and moderated general sessions with experts from the world of investment, advertising, and marketing. Videos of each session, including the keynote fireside chat, can be viewed at http://www.domainfest.com.  

In November 2009, DomainSponsor announced the establishment of its European head office in Frankfurt, Germany with Joerg Schnermann as General Manager. 

Moniker® Auction
Moniker will host a live premium domain name auction on Wednesday, October 6 followed by an extended online-only auction from October 7 to October 14.  Specific start and end times for each auction event will be announced June 1, 2010.  The live auction offers real-time online viewing and bidding from anywhere in the world via a free software download.  Details on how to bid in-person or remotely in any Moniker live auction can be found at http://domainauctions.moniker.com
.
Registration and Sponsorship Opportunities
Registration for DOMAINfest Europe will be open June 1, 2010. The early bird registration rate will be US$395 until July 1st.  A discounted rate of US$495 will then be available until September 1st, at which point the price increases to US$595. Companies interested in sponsorship opportunities can contact sales@domainfest.com
.
About DOMAINfest®
Founded and hosted by DomainSponsor®, the domain monetization division of Oversee.net, the DOMAINfest® conference brings domain industry and Internet professionals together to learn, network, and do business. Attendees include online advertising experts, domain publishers, domain monetization experts, SEO and SEM specialists, website developers, online marketers, ad or affiliate network suppliers, search advertising providers, venture capitalists, bankers and trademark/legal advisors. Visit http://www.domainfest.com for more information.

About Oversee.net
Oversee.net® is the leader in Internet real estate, specializing in monetizing, registering, selling and developing domain names. The company provides an array of managed services to domain investors, corporations, and individuals across more than ten million web sites. Oversee owns one of the largest portfolios of domain names in the world. The company’s unique optimized technology connects consumers and advertisers with highly relevant advertisements. Headquartered in Los Angeles, the company’s core brands include DomainSponsor®, SnapNames®, Moniker® and LowFares.comTM. To learn more, please visit www.oversee.net.

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.

Some things are irrational or absurd, without explanation. One of these things seems to be a complete lack of revenue data about domains on the various aftermarket platforms. Even though a domain’s parking revenue would strongly influence the selling price of a domain, nobody is even bothered with communicating this information to potential buyers who may be interested in bidding and revenue is a key factor for them. For some unknown reason potential buyers are forced to estimate and their accuracy determines their success. Buyers focused on traffic/revenue names on the various dropcatching platforms can strongly support this argument.

Domains that generate a constant stream of parking revenue are the most liquid part of the domain universe because most smart domain investors buy on yield, not on potential development potential, end-user resale value etc since these values are just hypothetical and speculative whereas yield=cashflow. There is always somebody who wants to buy yield. The people who have had the biggest success in this business focused on yield.

Cashflow domains generally sell in bulk portfolios for a given revenue multiple. Say you buy a portfolio o 1000 domains making $10k/month for a 5 year revenue multiple, so you pay $600k for it. You are buying/selling the revenue of the entire portfolio, you are not really looking at the individual domains.

This is where the opportunity in the aftermarket lies – If you would unbundle the portfolio and sell it by individual names, you might get a total of 7 years revenue, for example, for the entire portfolio. The reason being that certain people might see more value in certain names for which they are willing to pay more (because for example they have a better way to monetize the traffic). So somebody may be willing to pay a higher multiple for your travel traffic names, somebody for finance traffic names etc. Somebody may see development potential in the name. Somebody might assess the risk of the domain differently etc.

Somebody smart can quickly carve out this niche in the aftermarket and start focusing on revenue names and include detailed parking stats with every domain for sale. Buyers will then simply be bidding based on what revenue multiple they are willing to pay for the name, ideally in an auction format.

In a previous post about Bido, I said that I think Bido will have to fundamentally change its model to start making money. This is the direction I think it should go, because this is where potentially the money is and it is an unoccupied niche. Instead of focusing on names with predominantly speculative value that usually catch the eye of 1 or 2 bidders (as hard as you try), why not focus on revenue names where you are likely to get interest from tens of different bidders if you can create a liquid marketplace.

I really enjoy reading the feature stories on DNJournal, they bring a lot of inspiration. What usually most of the profiled people share in common is a pretty comfortable middle to upper class upbringing (I’m no different) which to a large extent helped them to be successful in their future business careers.

Today I want to tell you part of the life story of a huge domainer (easily over $200k in revenue per month), because it is one of the most breathtaking and fascinating stories I have ever heard and really differs from all of us. This person comes from Eastern Europe just like me and I have got to know him pretty well in the last two years, although we have met in person only a few times. This guy is completely under the radar, so obviously I will keep his name private. Let’s just call him Igor for the purpose of this story.

Igor spent most of his teenager years still behind the iron curtain, growing up under the communist regime of the time. The times were tough then, shops were undersupplied, there was a lack of freedom, you couldn’t travel etc. Igor dropped out of school early, never finishing high school. His first major encounter with life was when his father committed suicide when he was a teenager, to be found by Igor’s brother. Igor would later attempt to committ suicide himself through a rohypnol overdose, which he fortunately survived (he woke up 48 hours later). With the revolution in 1989, Igor discovered he had an entrepreneural spirit and decided to go into business, opening a newsstand at a train station. Unfortunately he ended bancrupt with no money, he had to find a new way how to provide himself with a living quickly. During his time working at the newsstand he got acquainted with some of the homosexual prostitutes residing there, which would tell him about their “business” and the potential of making decent money from it. Because of the situation he was in, he opted for this option and moved to Germany, where he would prostitute himself for over a year (although being straight himself). He also had a stint in Switzerland, only to be banned from the country for 10 years. As his financial situation improved, he came back and went back into business, starting a book wholesale operation. This career was brought to a halt though as he got involved in a serious car accident for which he was sentenced to two years in prison. After being released from prison he again started a new business, this time in import-export, where he finally found some success. The internet was becoming integral to this business and Igor stumbled upon the relatively new Google Adsense programme, which he implemented on his export related websites. After making 50 cents in the first day, he saw potential in this and was looking at ways to scale this and was quickly drawn to domains, which he would acquire through drops. Even though he had a demon called alcohol haunting him (he would go through two bottles of vodka a night working), he would put immense amounts of work into his new passion of domains and would observe his portfolio and parking revenue grow every month, mainly through re-investing all his income back into domains. Today, his portfolio numbers tens of thousands of domains and is still growing every day.I really admire this guy because he is one of the smartest people in the business, has a huge drive to move forward and has an unbelievable sense of humour. This guy is the biggest charater in the biz and is 100% pure. I hope a movie is made out of his life one day.

My lead generation business happens to be the fastest growing department in the company, with 350% year over year growth. Over the course of a year, the lead generation business grew from 1 person to 9 employees and by the end of the year I would like to have at least 20 in lead gen. So far we are only active in the Czech Republic where we are getting the proof of concept right before we expand abroad in the next few months.

At this point we are very close to doing $100k in revenue (we should pass that level next month) a month from lead gen with a 35% gross margin. It still contributes very little profit in comparison to my domain portfolio, but it is a huge growth business that in 2 years time could be a substantial contributor to our EBITDA. Our revenue target for 2010 is $1.8 million, which should be very attainable.

In the past year we’ve done a lot of tweaking of the model, implementing new marketing channels etc and I am pretty sure we’re getting the model right now. I’d like to share our model with with you guys. Maybe it could bring some inspiration to you or you could in exchange share some of your ideas how we can further improve.

90% of our lead generation business is finance – personal loans, payday loans, mortgages, credit cards, car insurance, life insurance etc. We are trying to expand the model into other areas now such as telco and utilities, but that’s still going to take time.

We work with clients only directly. Our selling point is pretty much this – Let us handle your performance marketing, instead of clicks we will provide you with more targeted leads (where you can exactly measure the performance) and we can generate volume. And lastly, we put our money where our mouth is – we invest in all the media buying on our own account and hope we will make the money back on leads. Compare this to various SEO/SEM consultants that offer ambiguous advice.

Once we have secured the client we build a professional landing page (we now have a lot of experience with this) that will convert well. Then the integral part is the marketing mix. The marketing is really just a form of arbitrage where you want the money that you spend on advertising to make you more on leads. This involves a lot of testing, measuring conversions etc. Currently our marketing mix that we find to work looks like this:

• Killer domain – we own some of the best generics in the finance sector in the .cz namespace such as the equivalent of “loans.cz” – pujcky.cz (example of our lead gen site).
• PPC – we buy quite a lot of clicks via Seznam.cz (largest Czech portal) and Google and arbitrage that against the leads
• SEO – we work hard to get organic rankings and happen to be pretty good at that
• Affiliates – we created our own affiliate network which now has more than 360 affiliates and is on of the top5 affiliate networks in .cz
• Display advertisig – since we need to create volume, we are also a pretty big spender on display advertising. Downside is that leads from display convert worse for advertisers than say, from ppc. But you need it for the volume.
• Email – we still haven’t realized the full potential of email marketing, although we have collected an opt-in database of over 110,000 email addresses. Still a lot of potential there.
• Mobile marketing – since we usually have the mobile numbers of people, we are starting to experiment with this as well. So far we mainly use mobile marketing as a way to improve to quality of leads for our clients – for example by certifying that the customers mobile phone number is real. We could use mobile marketing more aggressively though.

So this is pretty much how our model works and I am sure we are getting it pretty right.

So how do we plan to grow our lead generation business this year? Mainly through 3 opportunities:

• Focus on more sectors – As I said, we want to diversify more into telco, utilities, travel etc.
• Take a jump up the value chain – We want to be able to offer clients not just a lead, but also the closing of the sale and hence take a bigger cut of the action. We are starting to build our own callcenter for this.
• Expand abroad – This is probably where the biggest potential is. Our marketing mix may be a little bit different though. I see a lot of potential in especially arbitraging my domain traffic to leads. I currently get about 700k uniques a day so that’s a decent supply of traffic.

One thing that has been puzzling me for some time is the lack of institutional money in any structured way in the domain business. More institutional money is clearly a prerequisite for higher domain valuations.

When you look at it today there is only a little bit. Marchex/Fabulous/Tucows are publicly traded. Oversee, Demand Media, Skenzo, Name Media have all taken aboard funding, very decent amounts. Then we also had iReit, which sort of flopped. Various domaining companies managed to take on some debt such as Reinvent. Domain Capital at least brings a little leverage effect into the business (they have $30 million loaned out). But that’s pretty much it.

But why don’t we have more hedge fund-esque operations that would take on investor’s money, maybe even tie in a little leverage to increase ROE and start buying up portfolios? The only exceptions I sort of know of are DomainIvest.LU (they have raised their first 10 million Euro fund, which is now invested I hear), mad.biz runs some kind of private partnerships, where they bring in limited partners. I do a little bit of that as well. Maybe InternetRealEstate does some of that as well.

So what are the main reasons behind this lack of structured institutional capital?

One factor is that the first round of institutional capital that poured in sort of got burnt. This was before Google/Yahoo started heavily cutting payouts via various quality related claims, before the downturn hit etc. To really illustrate this: If you bought a portfolio in 2007, today it would be probably making 60-80% less on PPC than it did at the time of purchase.

Second is transparency. Michael Gilmour sums it up pretty well in his article here, so no need to elaborate further.

Another issue may be size. When you really think about it, the domain industry is pretty small. My estimate is that Google/Yahoo combined probably pay out about $40 million a month to the domain channel now. That’s already not much, again taking the more macro perspective (compare it to say the size of the bond market). Worse, the market is highly fragmented. There is not probably a domain portfolio owner that would own 10% of this market. Probably Oversee, Reinvent etc may be close to the 10%, but more likely in the 5-7% range, when it comes to their owned and operated portfolios. The domain biz may simply be too small to get on the radar of the big various funds.

And lastly, there is the issue of risk. There is the monetization risk (that ppc will further decline or a big upstream ad provider leaving the space and not syndicating its feeds to the domain channel), maybe a degree of type-in traffic fading away (more long term) and then there is the legal risk. I hope eventually somebody smart will find a way how to securitize the cashflow from domains and create domain derivatives that could for example separate the the yield of a portfolio and its risk. The same way that for example in the bond market you have credit default swaps (through which you can basically separate the yield of a bond from the risk of non-repayment). Doing this would be a huge boost for the business and would really help institutional money to flow in in masses.

So will be see an influx of institutional money coming into domains in the next 3 years?

I really think so. PPC is certainly not going to fall as much as it did in the last 2 years – I actually think it may be relatively stable and new monetization techniques (refer to previous post) may actually even bring a little bit of upside. I also think there is going to be a new breed of domainers-turned-domain fund managers that will start bringing in the institutional money – because the industry is so complex it’s rather difficult for an outsider to do that. And lastly, with us getting out the recession I think investors will have a higher appetite in risk again and start exploring more alternative investments again.

The domain business is still about parking. That is still where the money is made and if you haven’t realized this yet, then you are getting something wrong. In many ways a large part of the aftermarket is held up by the parking business as parking earnings are reinvested etc.

In many ways, parking hasn’t really evolved over the last 5 years too much. It’s still quite similar. Parking companies are an entity that acquire an ad feed and are a mediator between domainers and the upstream ad providers such as Google and Yahoo. They ad a little twist with optimization etc but that’s it. Nothing fundamentally has changed over the last 5 years.

What is starting to happen and will continue is a margin squeeze for parking companies, it’s not really an envious spot to be in to be honest. A significant catalyst to that are services like Above.com (great service btw, really recommend it). Plain and simple, they send your traffic to wherever it pays best in an automated fashion. Hence parking is really becoming just a commodity because domainers are going to send their traffic simply where their traffic pays best. This should force parking companies to inovate more but also will force them to cut their margins. At least some good news to domainers!

This is really happening now and will grow even more so in the future (that is if evil Google doesn’t force the ban of redirects). DomainSponsor is now receiving more than 10% of it’s publisher traffic via Above. For namedrive I estimate it’s likely to be more like 20%. That’s a lot of revenue.

Parking companies should quickly realize that they have to start inovating more to be able to get more traffic from domainers. They should look into alternative forms of monetization like zero-click, lead generation, CPA. Or their margins will be squeezed further and eventually the middlemen could be cut out entirely.

As parking is more commoditized it looks obvious that the parking companies that built up/acquired their own portfolios have a decent hedge against this. Owning the traffic is vital. From this point of view the smart parking companies have been Oversee, HitFarm, Parked, NameMedia – they all have very sizeable portfolios of their own. Sedo has something as well of it’s own, not huge though. But for example Namedrive and Trafficz (not completely sure about Skenzo) have very limited portfolios and hence the margin squeeze could effect them much more than the others.

The second thing that will be vital in the future is owning the advertiser relationships if you don’t want to be squeezed. Parking companies should start going more direct to advertisers, it is a necessity for the future. Because in the end we are pretty much reliant on Google. Google can squeeze all of us.