Should very large domain name portfolios be valued per domain or on sales and profitability metrics?
The sale of BuyDomains.com this week, including a portfolio of close to a million domains for something less than $80 per domain, has raised eyebrows.
On Tuesday, I wrote a bit about the BuyDomains’ business and how the valuation might make sense when viewed from a different perspective.
This post will go into a bit more depth, and compare BuyDomains to other domain portfolio business models.
There are a couple key levers at play for a large portfolio holder that counts on individual domain sales as its main revenue source. First, it sells only a small percentage of its portfolio each year. Second, it has to keep spending money to replenish its inventory.
Let’s take a look at these levers in more depth, and then compare BuyDomains’ model to some other large portfolio holders.
The BuyDomains Model
One thing to keep in mind is that large portfolio holders like BuyDomains, which typically sell one domain at a time, only sell a small percentage of their inventory each year.
I don’t know what percentage of its portfolio BuyDomains was selling each year. Before NameMedia sold it, Afternic typically reported about $1 million in weekly sales, and I know some weeks I checked it was for about 500 domains. But that included third-party sales, not just BuyDomains’ inventory. Historically, I’ve heard of rates of 1%-3% reported from large portfolio holders that do not do proactive sales.
BuyDomains owned about 950,000 domain names. At a 2% rate per year, that’s just 19,000 domains per year.
If you sell 2% of your portfolio each year, it would take about 35 years to sell just half your portfolio, and over 75 years to sell 80% of your portfolio, even at a constant 2% rate. That’s because your base keeps shrinking each year. Of course, you can assume it would be harder and harder to sell 2% of a portfolio each year as your stock of good domains dwindled, making it harder in later years.
It could sell slightly more if it dropped prices, but demand is fairly price inelastic in the market BuyDomains serves. It would be difficult to sell a lot more domains unless it significantly reduced its average selling price, which it effectively did by selling 100% of its portfolio to Endurance.
BuyDomains’ inventory has a holding cost in the form of annual renewals. At about $8 per year, that’s a whopping $7.6 million annually. Just to maintain inventory you don’t sell.
In order to maintain steady sales for a business like BuyDomains, the company has to continually replenish its stock of domain names.
Some of this new stock can be hand registered or bought at low prices from expired domain streams in bulk. But the good domains require competing in expired domain auctions. Those prices are higher, pushing replenishment costs up.
(In the short term, a company like BuyDomains can juice its earnings, mostly by cutting down on replenishment costs. The effect of not replenishing stock with worthwhile inventory won’t be felt until many years down the road.)
When you consider these costs, you start to look at valuation in terms of earnings multiples rather than value per domain.
Comparing BuyDomains to other very large portfolios owners
At the opposite end of the spectrum from BuyDomains is Frank Schilling, who holds on to his domains until he gets a top dollar offer.
This means: lower sales rates, more sale volatility, but lower replenishment costs.
How it impacts annual revenue is something I’ve struggled with. If BuyDomains negotiated like Frank Schilling, it would sell a lot fewer domains per year. But would it make as much money, and not have to worry so much about replenishing its inventory?
(You could take it to the extreme on a much smaller portfolio, like that of Rick Schwartz. In Rick’s case, he hits the lottery every once in a while. It’s very inconsistent compared to BuyDomains or even Frank Schilling.)
BuyDomains, as a large business with employees and outside investors, needs a certain level of consistency that is harder to a achieve with a higher priced, fewer sales strategy.
Between the BuyDomains model and Schilling is Marchex, which probably has a higher typical selling price than BuyDomains, but has a much lower sell-through rate as a result.
I’d probably put HugeDomains in the same bucket as BuyDomains — high volume, low prices — although I’ve seen some sales that make me question that.
Great post! With the commoditization of domains it is nice to see different models at work.
Huge Domains owns about the same number of domains. If you asked Andrew Reberry if he would cash out for 80 million I bet the answer would be yes.
Depends if you are valuing this as a business or as an asset. If you are talking about $80 per domain you are valuing it as an asset so replenish rate does not factor in. I don’t know if they park the domains or not, but that could significantly help offset renewal cost of the assets.
If they can sell 2% of the assets a year for an average price of $1,000 a domain and there is some parking revenue it looks like a good deal for the buyer as this thing will pay itself off 4-6 years (depending how much parking revenue they generate). If average domain sales price is above $1,000 then this is a steal.
$80 per domain is simply unbelievable. It’s impossible to see any good news for the industry out of this sale.
Great post Andrew
I think $80 per name was an incredibly buy.
Based on the %2,buydomains.com would sell $3 million per month, 36 mill per year.
That is half what they paid for the portfolio.
In another words taking in consideration the renewals in 2 1/2 years they are getting their money’s worth.
That’s why they Endurance Group got such a fantastic deal in my opinion.
Buydomains.com was doing things strangely because they had their domains go directly to a sales lander instead of a ppc lander with a sales link so they were trying to increase sales but lost the parking revenue which meant their renewal costs ate their sales profits instead of renewals being partially paid by parking.
They probably did this because there was pressure from investors to increase sales so the portfolio could be sold to somebody quickly based on sales metrics and investors could get back their money.
Sales landers increase sales but in buydomains.com case I think they lost more money than the increse in sales brought.
Buydomains.com probably chose the sales landers also because both hugedomains.com and domainmarket.com run the sales lander model but the difference is that nearly all hugedomains.com domains are clearly priced on the lander and many domainmarket.com domains are clearly priced on the lander whereas buydomains.com lander was basically just a contact form.
I bet hugedomains.com sales landers with clear price on the lander convert much better than buydomains.com sales landers with a price quote request form.
Michael Mann built buydomains.com and has built another quality portfolio with domainmarket.com and I think the buydomains.com sale at 80 dollars per domain shows that no amount of scripts or analytics can beat a well trained domain investor eye.
For the normal domain investor the best model is the ppc lander with a sales link model because just a sales lander model requires such a huge volume that it is almost impossible to do unless you are Mann or Rewberry.
I’m surprised that Endurance group bought buydomains.com because Endurance has seemed quite clueless when it comes to providing registration services to domain investors by driving away many of their domain investor customers from the registrars they have aqcuired by implementing systems which are suited for a customer with 1-10 domains and heavily push upsells but turn into a headache for domain investors.
I think Web.com has shown that too aggressive upselling is a losing strategy on the long run because it upsets registrars most valuable asset which is customers and I also think Endurance is too agressive in upselling in my opinion and if Endurance is going to aggressively upsell buydomains.com domains to their customers then it will probably cause more bad feelings towards normal domain investors.
When you own 1 million mediocre domain names, $80.00 per domain is much better than wasting $8.00 for renewal.
Lets face it. Who among you has made enough money off “parking” to pay for renewals for your top 3000 domains?
this is very interesting. $80 per domain. i like mansour’s comment above about owning 1 million mediocre domains!!! lol. true but. yet when it comes to pricing these mediocre domains for sale, they wouldn’t accept any less than $500 or so for the worst, and probably close to $1000 for the not so worst. so really then it’s just extortion on a huge scale isn’t it? (note: i’m a domain owner too and have no problem asking a price that is reasonable, but pleeeeease, some people take it to the extreme, even the bigger and/or well known players in the domain game.)
$80 per domain is quite interesting to me – I have a number of clients looking seriously at new TLDs but I’ve not found any useful data regarding their effect (positive or negative) on SEO yet.