Domain Names the Dark Blue Sea Way — Value Your
A look at how Dark Blue Sea values domain names.
Dark Blue Sea (ASX: DBS.AX) is one of the world’s largest holders of domain names, with over 550,000 domain names in its portfolio. It’s also a publicly traded firm, which helps us peer in to see how the firm works.
Only a modest percentage of DBS’ domain names are profitable, in that domain parking revenue covers the approximately $7 per domain it costs for annual registration. The firm holds on to many of these unprofitable domain names with the hope of selling them to end users. It views domain names as an insurance contract, as stated by its latest annual note:
The domain sales component is actually a chance of being sold at the offering price. This chance of being sold is similar to an insurance contract – there is a modest chance of getting a big payoff.
That may sound more like a lottery ticket than an insurance contract, but DBS uses data to help find the winners that are most likely to payout. It has tens of thousands of domain sales to use as comparables, and uses search data to find domains with likely type-in or end user value. It also has sales data from its own domain sales — data that it doesn’t share with anyone else. It views this secretly held data as a competitive advantage, while its competitors such as Name Media hand the data over to sources such as DNJournal. (Name Media has an incentive to do this since it wants more domain owners to list their domains with its sales channels such as Afternic.)
In addition, the collection of the data related to the domain pricing characteristics, contributes further potential domain names that are suitable candidates for secondary market sales. Putting all this data together has enabled us to create a Domain Name Universe – a comprehensive list of domain names that can be broadly ranked in descending order. Those domain names ranked above a certain level are suitable for Dark Blue Sea to own and generate a financial return. Sifting through lists of domain names from the Domain Name Universe, we often find many suitable fresh domain names that are not registered. This is one of the main ways we find fresh domain names to buy.
All of this number crunching gives DBS a competitive advantage over the every day domainer. DBS is able to hand register domain names that it believes have value. The firm sums up its advantage:
Looking through the Domain Name Universe, most of the better ranked domain names will be registered. Still, as the value of domain names is not widely understood, many thousands of potentially valuable domain names are not renewed by their respective registered owners every day. So there is a regular supply of fresh names to review. This is another one of the methods we use to source fresh domain names.
This process isn’t 100% accurate, as it appears the firm has started to let some of its domain names go in expired domain auctions (although reaping a high percentage of the sales). Or perhaps the firm has updated its data models and is letting go of domain names that aren’t likely to sell.
Ought to you hold onto your unprofitable domains? Here’s how DBS would look at it. You ought to add your annual parking revenue to an weighted sales price of the domain name:
A (simplified) example may be illustrative. A domain name, which earns $5 in advertising revenue, is listed for sale at $500. It costs $7, paid up front, in registration expenses. If there is a 1% chance of that domain name being sold in the next year, (on average) we will generate revenue of $10 ($5 + 1% x $500) less costs of $7 for a profit of $3 on that domain. This is a (gross) return of approximately 40% on the $7 outlay. More generally, for each domain name, we need to model all of these components both in the first year (if we don’t yet own the domain name) and into the future. This is where the data is helpful.
Whenever you register a domain name, you probably think there’s a good possibility that it will sell. But consider what percentage of your portfolio you actually sell each year. It’s likely modest — maybe 1% or 2%. I think this is a great way to look at domain values, and to make decisions to hold onto domains that aren’t covering the $7 renewal fee.
