Investors would have two ways to cope with rising prices.
American Enterprise Institute submitted a comment (pdf) to ICANN about .com pricing during the comment period. Much of it echos Verisign’s own comments on the matter, and that shouldn’t be surprising.
The letter questions the role of domain name investors in the market for domain name pricing and suggests more investigation into the role of investors.
Perhaps the author, Roslyn Layton, could have asked Verisign for data related to this. After all, Verisign kind of invented the idea of domain investing at the top level by introducing premium pricing for high-quality .TV domain names.
But it got me thinking: what does happen to domain investing in an era of increasing wholesale prices?
It’s a difficult question. The last time this happened, most domain investors focused on parking revenue rather than sales. They would look at the cost to renew vs. how much money the domains generated and make their decision that way. It was a simple calculation. And Verisign and investors were able to take advantage of domain tasting to test domains for five days before committing to a full-year registration.
The equation is trickier when it comes to renewal prices vs. selling domains.
Layton posits that investors might reduce their domain holdings in the face of higher prices. This would make more domains available to people at “regular prices” on the primary market.
Let’s consider a domain investor who we will call “Large Portfolio Owner” (LPO). LPO owns one million domains that it sells on the aftermarket.
LPO sells 1% of its domains on the aftermarket each year for an average price of $2,500 each. This generates $25 million in revenue. In addition to the sunk cost of acquiring these domains, LPO has to pay $7.85 million to Verisign and $0.18 million to ICANN to renew the portfolio. We’ll round down to $8 million.
Now, let’s say Verisign increases prices 7% per year for four years starting this year. I’m going to assume that Verisign rounds down to the nearest penny each year, so the price would increase to $10.26 in 2023.
The cost for LPO to maintain its portfolio is now about $10.4 million, assuming it replenishes its portfolio each year. So LPO is making $2.4 million less each year.
LPO has two choices if it wishes to maintain its same profit level. One is to release marginal domains that it calculates have a low chance of selling. As Layton suggests, this would make more domains available at standard prices. However, they would be the ones least likely to appeal to consumers.
The alternative is to raise prices. LPO would need to charge an additional $240 per domain name to maintain its revenue. It’s unclear what impact this would have on the sell-through rate.
In all likelihood, LPO would use a combination of the two methods to maintain its profit levels.
You could certainly argue one impact would be greater than the other, depending on what your own economic interests are. Or if you want to scapegoat domain investors.
Nat Cohen says
Excellent points. As you say, when investing was focussed more on traffic revenue, a domain investor might drop a domain that was making $9 a year in parking revenue rather than keep it if the renewal fees rose from $8 per year to $10 per year. Yet most of these domains were not ones that “regular people” would have any interest in.
Let’s assume a 100 domain name portfolio. If you look simply at the 1%-2% sell through rate, then even assuming a 2% sell through rate and $10 renewal fees, the domain investor is going to have to price his/her domains at a minimum of $500 to break even. That would result in $1000 in sales to offset the $1000 in renewal fees.
At $8 renewal fees, the domain investor could price his/her domains at $400 and be able to break even ($800 in sales to offset $800 in renewal fees).
Are the higher renewal fees going to mean more domains are dropped and become available for “regular people” to register? No.
You never know which domains are going to sell. You aren’t going to drop a domain that could sell for hundreds of dollars because the renewal fee goes up by $2 per year.
But you are going to pass your higher costs onto your customers. When .com renewal prices go up by 31%, then the sales prices have to go up by 31% as well for the domain investor to break even.
As is usual with Verisign talking points, they are misleading, inaccurate, and don’t withstand scrutiny.
.Com renewal price increases are going to passed on in the form of higher resale prices. The regular people aren’t going to be helped, they are going to bear the burden of paying for the higher costs imposed on domain investors, for those costs are going to be passed along.
Imagine instead that .com renewal prices were $2 per year. Then at a 2% sell through rate, domain investors could set prices as low as $100 to break even.
It is Verisign’s excessive renewal fees that drive aftermarket prices higher – and are making them 5x higher than they need to be if .com wholesale prices were set at competitive market levels.
Mark Thorpe says
Seems to me that Verisign wants to be the main domain name supplier, numero uno. Which means squeezing out domain Investors, resellers and registrars.
Verisign wants to make money off of .COM domains any way possible!
Even if that means making more money off of end-users, domain businesses and domainers.
The only people going to drop domains are the amateurs holding garbage.
Will be an increase in drops for sure, particularly large portfolio holders with lowish margins. The marginal names will need to go.
Carl Kahn says
Many domain entrepreneurs will struggle and some may lose their livelihoods as prices continue to go up year after year. Domain service providers will be negatively impacted financially as well, as everything in the industry is connected. And fledgling domainers from poorer countries who currently derive scarce income from selling domains will find it harder to make money and will drop off the scene completely. Over time, the impact of price hikes will have a chilling effect on many decent, hard-working people and hit many corners of the industry.
Comment removed for fake email address
IP Holders Will Take A Hit The Most, IMO…
IP Today Has To Buy 5 Million Names Around Their Existing Trademarked Names…..
Each Price Increase On .COM May Perhaps Adds Millions To Expenses…
For Corporations Holding IP’s… This May Mean HUGE Billings …
IMO Renewals Should be Fixed At 0.00Cents/Yr After Initial Purchase Of A .COM For 10 Years..
Risk Fluctuation Of Price Drama Is Lowered For IP Holding Corporations Globally.
None will all follow the same channel.