Facing The Absurd

9 oct 2012 ptv sorts new key

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…

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

DomainFest is starting next week and I am eager to welcome you guys in Prague! For those of you who are still in town on Friday, we are having an open house at Elephant Orchestra, giving tours of our offices. It’s sort of our coming out since we’ve built EO into one of the biggest domain companies with 45+ employees sort of in “stealth mode”. We’d love to see all of you from 12.00 to 14.00 at our offices, which are located at Mezibranska 4, right next to the National Museum, where one of the dinner parties take place. If you want to come, please shoot Mateusz an email at drela(at)elephant-orchestra.com.

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.

There’s been a lot of buzz around alternative forms of domain monetization, alternatives to domain parking. Here’s my take on it…

I think quite a few of the ideas circulating around at the moment are sort of dead end. One thing that is pretty overhyped overall I think is development (sorry to say). Domainers are not developers, developing is a defocus for them and they don’t know how to do it properly in most cases. What is the point of spending a week building a website about sharks or octopuses that ends up making $2 on ad-sense a month? Don’t get me wrong, I do believe in building out prime generic domains especially in an e-commerce/lead generation/cpa context, doing SEO, arbitraging the site via PPC etc. I just don’t believe in taking 1000 domains and producing mass content, it’s really only about tricking Google for a little while who will eventually kill it because it’s really about just littering his search index. The only fit for domain mass development is for domains that don’t get type-in traffic. Why would you want to own domains without type-in traffic anyway? Rule number 1 – always follow the traffic. If you stick to this mantra, you get the domain game. If you don’t, I guess you’re condemned to flipping domains on dnforum for $20.

Since developing is such a complex issue, let’s focus on ways of alternative monetization for type in traffic. These are the areas I think are the way to go forward and make sense, some of them overlap:

• Zero click – The whole idea of this is not sending a visitor to a parked page but directly to an advertiser for a fixed fee for every redirect, similar to PPC for advertisers
• CPA/Lead Generation – I am very strong believer in this model. I think that about 20% of traffic now going to parked pages can be monetized better via CPA/Lead gen. Could even be 30%. This year I plan to take this route and arbitrage significantly more domain traffic to CPA. I want to build a small department in my company entirely focused on this. Problem with CPA is that it is very time consuming, involves a lot of testing and is difficult to scale. I think I have a solution for this though, I will elaborate more in coming weeks.
• CPM Ads – I think this could be a very decent ad on to parking. Why not put banners or more aggressive display formats on parked pages for advertisers more focused on selling their brand. There is huge money in display advertising and this area has really been ignored by the domain industry. Say you have a domain making $10 rpm. Why not put a banner on top of the parked page making another $5 rpm on top?
• Email/list building – Another area still completely ignored by the domain industry. Say you have a domain like PersonalLoans.com (still paying my debts to Frank). Why not put on it a email submission box entitling subscribers to get hot loan deals once in a while. This could be an interesting avenue for creating another continuous source of revenue from your domains. Email marketing is seriously a huge business.

Just my few cents…