Opportunity is invisible to most. THAT is why it’s an opportunity to begin with. You have to look for voids and holes in the fabric of society – for the customer – and if you fill that gap, voila! – Rick Schwartz, The Domain King
Like any industry or asset class, booms and busts come and go. I think we are nearing the end of another cycle and while there will be pain for many there will be opportunity for others. The purpose of this article is to let you know that a) there is likely a bust coming b) how it might happen and c) how you could profit from it.
Nothing goes up forever.
We are all familiar with the CHIP boom of 2015 and the subsequent bust that occurred the following spring. But what you may not be aware of is the similar boom and bust that occurred in 2008. It was during this period that floor prices for Quad Premium (No J, K, Q, U, W, X, Y or Z) four letter, domains rose from $180 to $380 in just a few months (Dec 2007 to March 2008). So the CHIP boom was not a one time thing for four letter domains.
The underlying cause for periodic booms and busts, especially in niche markets like domains, are always the same. The main factors are supply and demand. But there is a third and very important factor that permeates all market movements. Good, old fashioned human emotion. This third factor has been a major player in every market boom and bust since the tulip bulb mania of the 1600s.
In the world of stocks and equities they give it a fancy name; market sentiment. But we should know it for what it is, simply greed and fear. Social economics and company fundamentals form the oceanic foundation of the stock market, but news events, consumer sentiment, confidence and panic are what drives the near term market waves and trends.
Domains are no different
While prices for 4Ls and numerics have been sliding, many domainers have remarked about the ever rising prices for brandables. While not in a bubble, I think the brandable aftermarket is highly inflated. The kinds of domains that one could obtain for under $25 three or four years ago appear to now be selling at the GoDaddy expired auctions for 10 times the price. That’s about a 1,000% increase. Meanwhile, end user prices for the same domains have only risen about 50% in the same period.
If true, a domainer’s capital investment is now 1,000% greater while his/her annual income has only increased by 50%. This is not a sustainable business model.
Established domainers know how to work the angles and can survive in this situation as they have existing inventory, due to earlier purchases at lower prices, as well as good cash flow from ongoing sales for new acquisitions. It’s not a long term solution but veteran domainers are a scrappy bunch and they are doing OK. For now.
New domainers, on the other hand, are having a tough time. They have little working capital and there is no room for error. This makes it’s very difficult for newcomers to break into the industry and many are folding up their tent and moving on. This is beneficial for consolidation but not good for expansion and diversification of the industry as a whole.
As we know, market imbalances and inefficiencies are not sustainable and tend to revert to the mean over time. Sometimes these changes occur gradually and over an extended period. Other times the crowd gets carried away and there is a completely unexpected and violent shake up.
What about now?
Despite the recent tax cuts and the lowest unemployment in a decade, wage increases are not keeping pace with inflation. As a 2018 study reports, 48% of Americans are not earning enough money to afford their basic needs such as housing, food, child care, health care, transportation and phone.
The rich are getting richer and the middle class are getting a second job.
Ironically, we are in the longest running bull market in stock history. But even good things come to an end and equities are seriously overpriced. In addition both household and government debt are at record high levels.
Additionally, while the US stock market is hitting new levels, as a whole, other markets around the world are in decline. This kind of divergence could be a warning sign.
I don’t know exactly when the next US recession will come. But it is coming and we should be prepared.
Here’s how it went down last time
After the stock market crash of 2008 Google changed its algorithms so parking revenues dried up. Many domainers turned to site development to create cash-flow/value around Pay Per Click and lead generation. But it didn’t last long. The web development strategy was fraught with pitfalls (Adam Dicker was one) and it slowly fell out of favor.
Around this time several of the largest registrars and commercial portfolio owners, got together and created a unified sales market by working a deal with Afternic. This put domain names front and center with end users. The purchase process was fast, easy and secure. Sales increased and selling low to mid-priced domains to end users became increasingly popular as an income/profit source for domainers.
In the case of brandables, Margot Bushnaq founded BrandBucket in 2007 and took advantage of the growth in small business as the financial recovery proceeded. The tech startup boom became a fertile ground for additional domains sales and many other copycat platforms sprang up in its wake. It wasn’t long before every domainer was adding brandable domains, by the dozen, to their personal portfolio.
Slowly, over time, this created the current situation where domainers are now fighting over a limited supply of good quality brandables in the GoDaddy expired auctions and on other sales platforms. At present, domainer demand increasingly exceeds end-user demand and this kind of imbalance can only last for so long.
This is what happened in the CHIP bubble – but on steroids. Chinese investors saw a rising liquid market and jumped in – buying short domains left and right. This created a feeding frenzy and prices soared.
We were warned
Though few heard it, Italian domain broker, Giuseppe Graziano, called the CHIPs market top in January 2016 when he said: “while we are likely to see an increase in activity after Chinese New Year (8th of February), the current prices have likely reached a plateau and 2016 might be a good year to actually stay liquid.”
Sure enough the CHIP market peaked the week of February 20th and started a sharp decline that went on for several months.
Giuseppe also predicted in mid 2016 that “since there are no significant differences in end user demand between Chinese and Western Premium domains, in the long term, we forecast a steady normalization of the trading ranges with Western Premium [4 letter] combinations trading closer to the more expensive Chinese Premiums.” This has also come to pass as CHIP values have declined to meet stabilizing, and even rising, Western Premium four letter domain prices. Both now have floor prices of around $400 USD just as Giuseppe predicted. So despite the crash there was an opportunity to profit.
While the situation in the brandable domain market is nowhere near the mania of the CHIP bubble I feel it is due for some kind of a pricing correction. I think that the coming US economic recession will likely be the catalyst for that normalization process.
Is there a silver lining?
As in every market transformation there are winners and losers. In 2009, prices for high end domains declined by 20%. However, domains selling in the $2,500 range only declined by about 3%. According to DN Journal, “for the first time, many [domain owners] began to cherry pick through their inventories and allow domains to expire that they normally would have renewed… some of the best names from top investors went up for sale.” Many of these domains would never have been available for sale to other domainers if it wasn’t for the 2008 crash.
So sales may be soft in the future and those who have lost their job or can’t make their mortgage payment will raise funds by selling domain inventory. This should stop the current brandable domain hoarding, increase supply and lower aftermarket prices. If, at that time, you are financially stable and have cash. It could be a chance to make some killer acquisitions and sell those domains for big profit as the US economy recovers in subsequent years.
Market crashes, recessions and economic downturns are always unexpected and catch the masses off guard. But this time you’ve been warned.
Will you be ready?