Industry professionals occasionally debate about whether buying based on a pay per click revenue multiple is smart, and on what revenue multiple is appropriate to make a purchase. Naysayers (like myself) will argue that there is much more to a domain name than PPC, so simply using a revenue multiple is short sighted. Many who use revenue multiples argue that it’s one of the easiest and best ways to value a domain name, and it is especially important when buying a group of names or a portfolio.
While I don’t believe names should be bought or sold simply on a PPC revenue multiple, I do believe domain names should be bought based on some sort of revenue multiple. In any major business, marketing spend is typically allocated based on the return that is expected from the investment. Most of the time, the company will use a model to project a return based on expected response, lifetime value, depreciation, attrition…etc, etc. They will input the variables they know from past experience and make an educated guess on variables they don’t know. This gives an annual rate of return and can help place a value on an investment.
Using similar calculations based on my past experience, I come up with a value for a domain name before buying or selling it. I like to use 3-5 years as the amount of time to earn back the initial domain investment, but it varies depending on the domain name and my plans for it. With geographic domain names, I can determine approximately how much revenue I will be able to generate based on advertising sales, and I can justify a purchase price based on that. Had I used PPC multiples, I probably wouldn’t have been able to justify my purchase price.
When doing a calculation such as this, keep in mind the cost to develop and maintain the website, the cost of data and data entry, and the time it will take you to make the sales or the cost of paying someone to make the sales. Just because a domain name can make $100,000 per year as a website doesn’t mean the name is worth $300-500k based on my thinking. Since the cost of building and maintaining a website can be high, and the time considerations can be great, it is important to keep these figures in mind. While this isn’t perfect, it can help determine the value of a domain name to make an offer or a sale.
In a press release dated July 24, 2007, CADNA announced the launch of “its national campaign against Internet fraud.” The press release also publicized that “CADNA’s membership includes such leading brands as AIG, Dell, Eli Lilly, Hilton, HSBC, Marriott, Richemont, Verizon, Wyndham, and Yahoo!.”
More recently, when CADNA announced it’s support of the proposed Snowe legislation (S. 2661) called the Anti-Phishing Consumer Protection Act in a February 26, 2008 press release, they stated that its membership includes “American International Group, Inc.; Bacardi & Company Limited; Compagnie FinanciÃ¨re Richemont SA; Dell Inc.; Eli Lilly and Company; Hilton Hotels Corporation; HSBC Holdings plc; Marriott International, Inc.; Verizon Communications Inc.; and Wyndham Worldwide Corporation.”
Strangely enough, Yahoo! is no longer listed as a member of CADNA. Interesting. Did Yahoo! decide they were no longer interested in fighting Internet fraud? I am sure that’s not the case. Why then is Yahoo! no longer a member of CADNA (or at least a publicized member)?
In the financial trading world, there is a term called good news/bad action, which means that good news causes a bad action for the price or market. An example of good news/bad action would be the orange crop report scene in the movie “Trading Places,” starring Eddie Murphy and Dan Ackroyd. With the crop report expected to be bad due to the weather, the price of orange commodity futures rise tremendously. Once the report is released, and the crop damage is less than expected, the good news causes the price of futures to rocket down.
The domain world can also offer a similar phenomenon. Yesterday in Britain’s Guardian, a positive domain article was published, called “Trade in Web Names Worth Millions.” The article cited the story of domain investor Neil Stanley, former banker at Goldman Sachs, and now owner of the domain names bridalfashion.co.uk, onlinecareers.co.uk, schoolguide.co.uk, sendingflowers.co.uk and impotency.co.uk. The crux of the article was the amount of money Stanley and other domain investors earn from parked domain names, and the relatively little work that is needed to profit in this manner.
From my viewpoint, the article’s purpose was to tell people the good news about how easy it is to make money by owning domain names, and it would seem to be good press for domain investors. The idea is that savvy “dotcom entrepreneurs” earn plenty of money because of the clicks of others, and if the dotcom entrepreneurs want to cash out, domain names are like liquid gold and can be sold for hundreds of thousands or millions of dollars.
The bad action from this and other similar articles that make domain investing seem easy, is that domain investors will become even more of a target. People want our domain names and will do what it takes to get them. Scammers will continue to pop-up, attempting to steal or sell stolen domain names. Laws will continue to be proposed in an attempt to take our domain names. Now is the time need to support the Internet Commerce Association more than ever.
Our industry isn’t a get rich quick scheme. The people making good money with pay per click advertising on great generic domain names either spent a considerable amount of money acquiring them, spent countless hours in front of their computer screens researching domain names, or went out on a limb and invested in domain names when few even knew what domain names were. While a domain name may make a mint in PPC advertising, buying these domain names wasn’t and still isn’t a simple task. I love the domain industry, but there isn’t any truth to the stereotype that this is an easy business.
The really good news is that if you do your research, you will be rewarded.
One of my father’s business associates of 20+ years has a company I will call “J. Smith”. Most of their products are sold via private label, but they do use their brand for some direct to consumer sales, although they are always sold in retail stores as they are a wholesaler. Today, I navigated to his website, “Smith.com” and got an error page. I did a Google search and found that his company website is actually “JSmith.com.” I did a Whois search, and lo and behold, “Smith.com” was previously registered but now remains unregistered.
I called my father’s friend on the phone to talk about a couple of things and to catch up. During our conversation, I told him he should really buy his last name .com, either for his business or so nobody could do anything with it. Since he doesn’t use the domain name for anything other than email and a placeholder, he was reluctant and didn’t seem interested. I told him if he didn’t want it for his business, he should buy it for his son who might want it down the road. He said he would tell his son, but who knows if he will.
As savvy as I have become, I’ve found that there are many people who don’t realize the importance of a domain name – especially their own last name! Anyway, I am wondering if I should register the name for him. What do you guys think?
Congratulations to Clark Landry and his team at Hecta Media on their recent portfolio acquisition. According to a news release on Forbes this morning, publicly traded Hecta Media (AIM Exchange) purchased a portfolio consisting of approximately 60,000 domain names for $1,450,000. They also retain the option to purchase two additional portfolios for $1,900,000. According to the release, the company expects revenues of $750,000 annually, which is important because the renewal fees will be over $400,000 per year (assuming they are all .com names). Based on my back of the napkin calculations, this is just over a 4 year revenue multiple.
I had the chance to meet with Clark Landry, CEO of Hecta Media, several months ago in New York, and he is a dynamic person, with an entrepreneurial spirit. When we were initially speaking, I had thought most large portfolios for sale with good names were significantly more expensive than what Hecta was able to pay for it. My advice to Clark would be to get pare down the portfolio of non-producing, poor names to save on the renewal fees. Sometimes you have but a bucket of rocks to find some gems.