Mark Jeftovic for CircleID writes:
“I didn’t see the Fortune article Are domain names recession proof until the weekend, and being the author of the now infamous Domain aftermarket overdue for an asset repricing last year I feel somewhat obligated to comment on it.
There can be no doubt now that the recession is here. I went on record nearly a year ago that it was coming, so I nearly gagged when I saw Jim Cramer say something along the lines of “I told you all this was coming”? over the Christmas holidays. So now it’s ok to say “recession”? in polite company although the politicians and the pundits still try to soften it up by making sure they modify it with words like “maybe”?, “slight”?, “mild”? and “possible”?. Make no mistake, it’s underway and I think we’re far closer to the beginning of it than the end.
So, how will domain names fare in a recession? The Fortune article was upbeat:
“Global markets are in a state of panic. Credit markets are all but closed. And recession fears are everywhere. But at the conference I attended in Hollywood this week, called DomainFest, you’d have little clue that the financial world was melting down.
The domain world - the people that buy and sell names and make money from pay-per-click ads on their websites - is booming. Downturn? Bring it on…”?
While the rest of the article is little more than a layman’s intro to the domainer business model, the question is timely. Now that the recession is here and, to paraphrase the old detergent commercial “we’re soaking in it”?, are domain names as an asset class a “safe haven”?? Will they in general terms produce “above average”? returns compared with other places to put one’s money such as stocks, bonds, commodities or inflation protected t-bills?
I commented on that article a couple of days ago and said:
It was obvious to most professionals in the space the auction was not a success, far from it (wrote more about it on my blog)
So to answer your question, domains are not recession proof, and we can already see it.
This is a really good read for the domain investor, and to Mark, you were right. No doubt prices are going down for various reasons, such as PPC earnings for domain owners are down (less trust in domains as traffic earners), ,lack of history, lack of liquidity, and overall weak economy.
On the good side, now and in the near future cash is king. As Mark says:
Warren Buffet loves recessions because they enable him to pick up undervalued assets on the cheap. He’s parlayed $100,000 into a personal fortune worth over $30 Billion doing just that. What attracts Buffet to investments are what he calls “durable competitive advantages”?, or what his mentor Benjamin Graham termed “moats”?. In tech land we often equate this with “barriers to entry”? but they are not exactly the same thing. The phrase I personally identify with it is “the ability to defend”?. How defensible are domain names?
What is your take on the issue? Did you think Domainfest auction was a success? Do you agree with Paul Sloan and the Fortune.com article? Looking forward to reading your thoughts on this.
Sahar
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Recession
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Benjamin Graham
One thing to remember about Warren Buffett - he doesn’t just charge in on a horse and scoop up anything and everything that looks cheap (that was Benjamin Graham’s cigar butt theory - buy a stock with one last good puff left in it).
Buffett first determines what his rate of return will/should be and then compares all of the available stocks with his required rate of return. (oh yeah - they have to have a predictable earning stream too) If they meet his standard, he considers buying. If they don’t meet his required rate of return, he won’t buy - no matter how great the economic moat is.
An example of Buffett’s theory would be deciding that your required rate of return was 18%. Then looking at two domain names that are for sale. One may be $3,000 and will earn (if you can predict the earnings) $600 this year (20% rate of return). The other is $18,000 and will earn $1,800 (10% return). Buffett will chose the smaller domain even though the first domain will have 3x earnings of the second domain. He would rather make his higher rate of return and compound his investment than make the lower rate with higher actual dollar return.
When trying to follow Buffett’s lead (which is always wise) it is best to understand how the Oracle makes his money work so well for him. He is very diligent (Proverbs 21:5) and very patient and only purchases when everything lines up correctly.
Great article and great first comment from Steve.
The question is if supply and demand will outweigh traditional multiple returns. People still need web sites for their businesses, and will need to buy domains. This bodes will for ‘mid-market’ domains, i.e. $500-$5,000. On the upper end, I think the long range outlook for domain prices is excellent. But the offers might be few and far between for a few years.
I’m thankful to be sitting on plenty of cash to swoop in when (if) the time is right.
When it comes to the current market/recession, domain names do behave more than a little like real estate. For example, the Florida real estate market has crashed in flames. I grew up in Palm Beach County, my mother has been a real estate broker there for over 30 years and I have a license myself (never did get to use that license - the day after I got my Florida real estate license in 1997 my brother phoned me about this little thing called domain names - no joke).
In 2003, people in Florida were buying all of the real estate they could get their hands on and flipping it quickly for a handsome profit. It was like a feeding frenzy and it made me nervous. I couldn’t believe what people were buying. Everytime I flew down to Florida on WestPalmBeach.com business, I would cringe at the sight of how far west they were building near the Everglades.
Now it’s 2008, the smoke has cleared and people are saying, “Please. You could give me that house for free, I’m not living out there in the jungle. Too many alligators and iguanas.” But guess what? There is one area in South Florida where the real estate values have not gone down: Palm Beach. That’s because Palm Beach was desirable before the recession. And it will be desirable during and after the recession.
The same goes for premium domain names. The “Palm Beaches” of the domain name world will always be in demand. Michael and I are getting offered more money now for our Rate.com and Sample.com than we were last year. Much more.
As with real estate, a recession will tighten cash flow and mostly affect undeveloped mid-range to lower quality domain names. On the other hand, the cream of the crop will continue to grow in value.
One thing I agree with you on Mark is, the Domain Fest auction was nothing to write home about at all. I suppose Sahar inferred to the same somewhere on his blog, alluding to the fact that the right professional buyers simply were’nt there! The fact is, a lot of these domain conferences are quite cliched in many ways and only benefit a few lucky domainers that actually sell. I once did a quick estimate of how many domain names have been historically sold to date, by checking the archives on Namebio.com and only 20,000 plus names in total at best! thats a joke in my opinion compared to 140 million domains registered out there of which by my accounts at least 50% are dying just to be sold.
So what should domain auctions do, to avert a potential “domain credit crunch”? ? well, take a very close look at FUSU.com’s business model. Ok, I agree it’s fairly obvious these guys lack VC capital or credible partners, apart from being based in Slovakia of all places. However a domain stock exchange like fusu.com is the sort of thing that needs to happen in order to buy and sell 140 million domains regularly to a universal consumer market like cars, real estate and stocks. Another important thing is, these domain conferences really need to start inviting fortune 5000 companies, small to big ad agencies and run extensive campaigns in everday print media like “USA TODAY”? in order to apeal to a broader market. It makes no sense attracting just DOMAINERS!! ..after all, why would i want to be the buyer and seller of my own house? I would like to see law firms competing to buy supremecourt.com or liquor companies competing to buy whisky.com or travel agencies competing to buy floridatravelagent.com etc.. pure and simple! think about it folks! I have been to sotheby’s and christies many atimes in the past and if 75% of the art works on sale don’t sell at auction, these guy’s would have gone under many years ago. Art which is a very illiquid market appealing to an elite, middleclass and indeed corporate buyers does a lot better at auction sales than domains, because the auction houses make sure their catalogues reach a universal consumer market like you and I and not just art dealers! For some people art is an investment and for some it’s a collectible passion that makes a perfect investment.
Oh one last thing! by the way Mark, yes domains may experience a setback of sorts, but only in the short term, because after the next great depression which looks like it’s already starting, most people will not go back to leverage boring bricks and mortar the way they did before once they realise and fully understand the value of “DIGITAL ASSETS”? in a 21st that will be completely driven through TECHNOLOGY!
This downturn will be the perfect excuse for fortune 500 companies to dump the old way of doing things in an evolving GNR world(Genomics, Nanotechnology and Robotics), layoff all the un-necessary employees, outsource massively to india and china, use technology and mostly the internet more efficiently to save costs for the rest of the 21st century. If you don’t believe what I’m saying go back and check comments from Rupert Murdoch! He bought myspace because most people under 30 simply don’t read news in print anymore and don’t care!
Therefore, in the second wave of internet 2.0 about to ensue, I anticipate most people will inevitably look for a future to make a living via a more robust “WIMAX”? internet, and all starting with a domain name”¦hopefully YOURS!!