2009 could include more mergers, acquisitions, and outright closings.
Domain name companies including registrars, parking companies, and portfolio holders are considering their strategic options in 2009.
Domain Name Wire has learned that Dark Blue Sea (ASX: DBS) has been shopping its services businesses, including Fabulous parking and registration. Dark Blue Sea CEO Richard Moore wouldn’t comment directly on what the company is considering, but he did refer me to the company’s third quarter release:
In the context of the expected industry consolidation, the Company is currently exploring a range of strategic options with other domain industry service providers. Whilst it is a difficult time to consummate transactions given the industry-specific and general economic uncertainty as well as market volatility, discussions with other industry participants suggests the timing is appropriate.
Whether or not Dark Blue Sea sells any of its businesses or enters into other agreements, 2009 will be an interesting year for domain companies. Based on conversations with a number of domain company executives and sources over the past four weeks, here’s how I see the playing field.
Services businesses’ margins are small and getting smaller. Domain services, such as registration and parking, work on fairly slim margins. These are under increasing pressure. Companies are considering what, if anything, to do with their service lines. Under particular pressure are small domain parking companies.
There are fixed costs and variable costs at parking companies. The fixed costs include the cost of initial servers, technology/software, and enough people to service accounts and keep the lights on.
Small domain parking companies get less revenue from Google and Yahoo than their bigger counterparts (perhaps 10%-15%), but still have the same baseline costs. At some point, small parking companies become unprofitable.
With a fall in parking revenue, some of these parking companies may have slipped below thresholds required by Google and Yahoo and may not have their contracts renewed.
Fabulous generates $2M-$3M USD quarterly in gross revenue from parking customers’ domains and about $1M USD from parking its own domains. It hands over roughly 80% of the gross from customer domains to its parking clients.
You can expect to see smaller parking companies selling themselves to big players and at low earnings multiples, or simply shutting their doors.
Outsourcing is in. Look for Directi, parent company of Skenzo, to reap benefits of its lower cost operations in India. Skenzo already provides the back end for a number of parking operations (including those of domain registrars) and registrars. Perhaps existing parking companies will outsource some of their operations to Directi.
Who’s in a good position?
Sedo – although its domain parking revenue has taken a hit, the company remains strong. Its brokerage business is holding steady, even though it’s a small part of the company’s revenue. It can also tap into the resources of its parent company Adlink.
Oversee.net – buoyed by a $150M investment and no debt, Oversee may be opportunistic in 2009. The company has been burned by its two big acquisitions (SnapNames because it lost Network Solutions and Moniker because it bought at the top of the market). But lessons learned may lead to smart buys at the bottom of the market rather than the top. And although SnapNames isn’t performing as planned, more drops in the coming year may boost its revenue.
Directi – I have less knowledge of Directi’s positioning, but it does appear strong. It received an investment in its Skenzo unit and remains an outsourcer of choice.
Demand Media – Demand Media, parent of eNom, NameJet, and HotKeys, is a wildcard since it’s hard to understand its strategy. But I expect the company to be opportunistic in the downturn.
In general, companies that own more of the value chain should hold up better than one trick ponies.
Here are a couple ideas:
Existing Google partner buys Fabulous – existing Google (NASDAQ: GOOG) partners include NameDrive, Sedo, Oversee.net, and this little company called GoDaddy. Perhaps GoDaddy should form a serious domain parking unit to take advantage of its massive scale. GoDaddy already has a partnership with Dark Blue Sea to sell domains. Maybe GoDaddy could pick up a true domainer’s registrar and create a new brand around it.
Oversee goes international – it’s no secret that DomainSponsor is the dominant Google U.S. partner and Sedo the dominant Europoean/international Google partner. Although buying domain parking companies can be a tricky business (no long term customer contracts), it will be interesting to see if DomainSponsor makes a play here to bolster its international capabilities.
[Update: DBS CEO Richard Moore e-mailed me to suggest that the paragraph I took from the company’s third quarter report should be read in the context of the entire section. You may read the report here (pdf).]