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April 12th, 2007 by 
Jay Westerdal
On Tuesday, I presented at the Harvard Business School Club. Domaining is now about smart financing as well as a lot of other things. Domains can be bought, sold, leased, and leveraged against. Domains are virtual Real Estate and the offline world is starting to invest in them. One of the questions I asked the audience was which of the following scenarios they would rather have.
Scenario A
Buy 10,000 unregistered domains that have fair type-in traffic. Then renew those 10,000 domains every year for $7 a year (Cost: $70,000). The domains earn $120,000 a year in revenue.
Scenario B
Buy a secondary domain with a heavy down payment for 10 times revenue. The name costs $70,000 to purchase. The domain earns $7,000 a year in revenue.
In Scenario A, the owner nets $50,000 a year on his annual investment. A 58% return on investment per year. In Scenario B, the domain earns $7,000 a year and the renewal cost is $7.
This is a hard questions to answer and has a trick to it. The trick is, are you using your own money or are you leveraging borrowed money. Without that knowledge, how do you begin to answer the question. Scenario B is very attractive if the buyer can leverage borrowed money. However, Scenario A is good for short term self financed ventures. Scenario A will cover his investment seed money in less then two years, while Scenario B will take 8-9 years to recoup their money.
Don’t forget that the cost of domains will go up every year. So Scenario A has a limited lifespan, however it returns on its investment rather fast.
What is the best Scenario? I never answered the question because I am not sure there is a right answer. The smart person would not choose one or the other, they would choose both. But IF you were forced to choose, now that would be tough.
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Posted in Domain Investing |
April 12th, 2007 at 8:41 pm
The answer is Scenario A .. The margins may be higher in Scenario B but you’re not allowing for the “risk” associated with having all your IP concentrated in one property. If the 10,000 names in Scenario A all get type-in traffic as the question implies then there are foundational elements of value in each and every one of the 10,000 names. There is also presumably a breakup value to each of those 10,000 as well. (more upside) If a covetous entity files a UDRP against the single name in Scenario B and you loose the dispute, you’re out of business. Had you chosen Scenario A and lost a single name, you could leverage the cashflow from the remaining 9,999 names to litigate against the party that caused you to inequitable become unseated from your name.
April 13th, 2007 at 7:50 am
A smart business person would look at the hybrid scenario C.
Purchase 6000 domains @ $7 bringing in $12 each, and one domain for $28,000 and you have a positive cash flow of several thousand in the first year, and a better cash flow in the second year even if the high priced one isn’t developed to bring in more than click revenue. Other advantages include 4000 fewer domains to manage than scenario A, A still strong scenario B for development, and positive cash flow in year two from the (A) parked domains to develop the premium domain (B) purchased in year one. This doesn’t count the potential sales offers from the A category that may yield large profits.
April 13th, 2007 at 9:04 am
Are we talking about choosing the scenario now or pre-2005 ? Would scenario A even be feasible today without a major investment in research and/or running a tasting operation? Can 10,000 domains be purchased in a short enough time frame that recoup their reg fees? If this could be done with tasting wouldn’t scenario A also require a large inital outlay of cash to perform the tasting, not to mention an investment into the technological infrastructure required to perform the testing on the names? Scenario B requires little in that regard and probably requires less in the way of time.
April 13th, 2007 at 9:37 am
Using the scenario as presented I don’t believe it is such a toss up.
If you could hand reg 10,000 domains that would bring in $120,000 in revenue then A is the way to go.
B is not even close.
Here’s why:
ROI and margins are not what is really important- dollars (income)are.
INCOME:
Year 1 = $50,000
Year 2 = $50,000 = $100,000 total
Year 3 = $50,000 - $150,000 total
etc…
At some point you can buy one or more very nice secondary domains
from this income. Then watch your domain income geometrically increase while your domain reg fees dramatically decrease in relation.
Plus, you still have 10,000 domains some of which you could sell off.
You could keep this scenario going. Continue to buy secondary domains from earnings that bring in good income while steadily selling off the hand reg portfolio.
Now you created a flip-flop.
Lots of income, little reg fees.
Or, keep your hand reg domains since they are profitable and do what
Franky encourages.
Establish your own Registrar and let someone else “run the cred”.
This should further lower your reg fees while maintaining better control of your domain portfolio.
Scenario B yields $7,000 year in income.
What are you going to buy with that?
Lots of hand reg domains?
Patrick
April 13th, 2007 at 9:40 am
I prefer running a Monte Carlo analysis.
Edited by Admin: Added Wikipedia link to Monte Carlo.
April 13th, 2007 at 2:14 pm
The experienced and creative business operator should select Option B, assuming the revenue in the hypothetical is from a parking page. Paying 10 times gross is absurd if the plan is to keep the business status quo by monetizing the name with a generic page through PPC or affiliate revenue.
However, if the parking page generates $7,000 without advertising the name, then users are typing it for a reason. The name is not a typo. It is probably generic for a class of goods or services that consumers are seeking. Accordingly, the operator should build a site loaded with content targeted at those consumers. By bringing valuable content, traffic should increase exponentially, and the operator can build a real business, which could be sold for many millions of dollars.
Option A is nice for a passive investment and quick return, but it assumes the PPC market will remain stable, and it ignores that the development of a legitimate Internet business brings appreciable value to Internet users, and therefore the potential for a serious return on investment.
April 13th, 2007 at 4:23 pm
Hi Admin,
While you’re at it, can you correct my misspelling of Monte Carlo?
Thanks,
Tim Cohn
Edited by Admin: Sure, no problem.
April 13th, 2007 at 8:14 pm
Buy 10,000 unregistered domains that have fair type-in traffic? Where would one find these?
I like the scenario, but I don’t think it’s that easy to buy unregistered domains with type-in traffic. A more realistic scenario would be to gradually accumulate 5,000 domains with type-in traffic, primarily as expiring domains. Supplement this buy buying others for somewhat more than reg fee, possibly even borrowing to splurge on one or two with lots of traffic.
April 24th, 2007 at 7:06 pm
scenario A) The domains earn $120,000 a year in revenue
Maybe you can arbitrage and sell at 10x revenue for a cool $1.2 million
Where can I find B) ? Most auctions of domains don’t disclose revenue do they?