BuyDomains and the economics of sizable domain portfolios

Ought to very sizable domain name portfolios be valued per domain or on sales and profitability metrics?

The sale of BuyDomains.com this stretch, counting a portfolio of close to a million domains for something less than $80 per domain, has raised eyebrows.

On Tuesday, I wrote a bit regarding 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 sizable portfolio holder that counts on individual domain sales as its main revenue source. First, it sells only a modest 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 sizable portfolio holders.

The BuyDomains Model

One thing to keep in mind is that sizable portfolio holders like BuyDomains, which typically sell one domain at a time, only sell a modest percentage of their inventory each year.

I don’t know what percentage of its portfolio BuyDomains was selling each year. Ahead of NameMedia sold it, Afternic typically noted regarding $1 million in weekly sales, and I know some weeks I checked it was for regarding 500 domains. But that included third-party sales, not just BuyDomains’ inventory. Historically, I’ve heard of rates of 1%-3% noted from sizable portfolio holders that do not do proactive sales.

BuyDomains owned regarding 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 regarding 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 since 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 regarding $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 firm has to continually replenish its stock of domain names.

Some of this fresh 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 firm 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 sizable 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 regarding 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 sizable 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.