Supernatural Agency: Online business tales

1. What a buyer is willing to pay
2. What a seller is willing to sell for

No, I’m not being glib. We’re in an early stage emerging market with thin capitalization, little liquidity and few participants. Some sellers need money or want a fast buck, others are sitting and waiting for those strong market characteristics to appear.

Buyers, on the other hand, are split between speculators (domainers) and those who require domains for business purposes. We’re also seeing the emergence of an investor class with the recent pools of capital moving into Oversee and Moniker, etc., who can buy portfolios and manage those portfolios.

IMHO, these two factors, the sellers and the buyers’ motivations, are the only measurable appraisal metrics. We don’t have reliable multiples of traffic, revenue, etc. because the use of domains is so fragmented. I may sell a domain for $10k because it does not fit in with my development priorities. The buyer may see this as a steal because she has very specific business plans for this domain. Who made the right decision? Both did and the value is $10k but only for a moment.

Another factor is visibility- there is very little. Now that domains are selling in open auctions visibility is improving and awareness is growing of value. The person who bought my domain for $10k may get offers immediately from others who never saw the original opportunity.

These situations mean that there is no such thing as an informed domain appraisal right now. We’re in a wildly inflationary market that is creating itself in front of our eyes. That’s a very cool place to be, don’t you think?

I don’t think Google is shaking in their pants today now that the dust is settling on the Microsoft/Yahoo announcement. Only Microsoft would think that gluing together two crappy search engines would create a slick competitor to the ‘leader’ as Steven Ballmer elliptically refers to the Goog.

Microsoft has been struggling in the past five years to break out of its two product monopoly (Windows and Office), struggling with no apparent vision other than to keep pumping out unneeded upgrades of bloated desktop software. Their search division is the only part of the company that loses money and that’s because no one uses it- I’m not even sure what it’s called these days…MSLive? I’d guess their market share is almost entirely based on it being the default search tool in IE and Windows.

As for Yahoo, their search started as little more than a massive user-created directory and the problem with directories is that they must be manually maintained to stay up to date and they don’t scale. They moved to an algorithm but the move came late. The algorithm model that Google uses is constantly being fine-tuned to accomodate changes in technology, to fight abuse and, most important, to refine the relevance of the results. You cannot buy the time needed to catch up to them.

Now, $44 billion later (assuming the hostile takeover is successful) we have Microsoft attempting to swallow something bigger than its head. I don’t see any real integration potential- it is likely one engine will be killed off and the remains branded as some awful MS Live thingy. That $44 bill is a big chunk of Microsoft’s war chest and using it up brings Microsoft and Google much closer to financial parity (not to leave out Apple with its $18.5 billion cash hoard and rapidly encroaching operating system market share) because I don’t believe the combined new business will add up to anything near the sum of the parts as far as the markets are concerned- we might even see the majority of that market cap disappear.

Google, on the other hand, is criticized for making 99.9% of its revenues from search advertising. You can look at this two ways: Either they are a one trick pony in which case they are a very good one trick pony, so exceedingly good that you’d have to be crazy to challenge them, or they are simply building another business on the sidelines that hasn’t broken out yet. That business is online applications and hosted data storage. I come down on the latter POV.

I’m one of the ten people in the world who use Google Apps. I use Docs all the time now for writing because it is a nice simple editor and I can share my work with my business partner regardless of where we are or what machines we have access to. I also use Gmail and their Calendar and iGoogle. While I have no idea how Google plans to monetize their applications (advertising won’t work- Gmail generates practically no ad revenue for example), I do think that what they are doing is becoming the default location for doing business on the web. This an end-run around Microsoft’s core business. As it is these days I only use Word as a desktop backup for my Google Docs- and any text editor could serve that function.

We’re in a paradigm shift here. With broadband and rising energy costs businesses are going to be run from decentralized locations- home, satellite offices, video conference suites, etc. Online applications are perfectly suited to this model. The MS-Yahoo pairing doesn’t address this fundamental change at all.

There is a feeling of desperation in this move- when will someone realize that Ballmer is not a strategic leader?

As you may know we’re not big on domain parking as a business model. It seems that most of those who acquire large numbers of names and use a parking approach end up building their own templates- after all why share revenue with a parking company when their primary service is placing contextual advertising for you? However that argument can wait for another day…

Parking domains has proven useful from a development POV. We park new domains as soon as we register them (we’re not buyers in the aftermarket as we seem to find plenty to choose from in new registrations) and use the traffic stats to help us determine which we should develop. While this seems obvious, the results are not always obvious.

These stats are just one piece of the process. We also want clear niche subject matter domains that are associated with a buying mindset. Our environmental domains get good traffic but are not big moneymakers (we’re in it for a variety of reasons including getting out ahead of what may be the biggest new business sector in our lifetimes- it’s strategic) because readers of environmental and energy subjects aren’t buying related items…yet.

On the opposite end, our kitchen sites are chock full of buying mindsets- the average new kitchen costs $28,000 when you factor in things people don’t consider like new pots and pans, small appliances, home electronics, etc. It’s a $44 billion annual business in the US alone and when people are spending that kind of moola they want information.

Interestingly the few adult domains we own get clicks when parked but don’t make money. I suspect they really need a lot of visual content to work (wink wink). We’re going to get rid of them at some point, not because we’re prudes, but because we are building a portfolio model and they don’t fit.

I’ve blogged here quite a bit about the selection process in buying domains. It’s completely different if your business model is mass acquisition vs. development vs. flipping vs. building a traditional business around a great domain- each has very different criteria. And all are viable and important to this early stage business called domaining.

Gotta love it.

Today’s announcement by Google and French global advertising mega-agency Publicis of a partnership to automate the creative aspects of online advertising is interesting to put it mildly. If I were in the traditional agency business (and I have been) I’d be very very nervous.

Google CEO Eric Schmidt offered up the possibility of this partnership creating something called ‘open source advertising’ which I assume means that they will look into developing automated ways of developing effective creative and brand positioning on the web. If this is possible (and I imagine that this partnership is more about finding that out than someone already figuring it out) then the typical agency creative team will be marginalized when it comes to Internet Marketing. Ordinarily one might think this was bad except that the typical agency creative team has already marginalized themselves by pretending that online marketing was some kind of novelty item that was beneath the interest of the brand mavens.

Imagine a scenario where a mom and pop business wants to get the most out of their limited marketing budgets. Because they can’t afford agency rates and their tendency to overspend, these businesses typically let ad sales reps in the local media choose their buys, create their ads and manage their campaigns, for ‘free’ of course. This was the business equivalent of letting the fox manage the chicken coop. Junky ads, lousy positioning, budgets spent with no measurable return and the consequent belief that ‘advertising’ doesn’t work.

Now imagine a dead simple Google process for that business, one that automates keyword selection, creates ads, targets geographically, demographically and by price, all automatically and a system that returns a specific report on ROI, daily. I think our Mom and Pop business owner would dig that (and that growth business owner and those corporate shareholders…).

These guys could own advertising as we know it and as it will become- I’m watching and wondering…an open source marketing network?