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New TLDs aren’t dead, but some business models won’t work

New TLDs are here to stay. That doesn’t mean they’ll make money the way they’re being operated right now.

“New top level domain names are dead! New top level domain names are dead!”

That’s been the common chorus from commenters on domain name blogs over the past couple weeks since news broke that Frank Schilling was jacking up the prices on many of his top level domains.

At the time, I asked if it was a death spiral. Upon further reflection, I think Frank’s move was a capitulation. I think he miscalculated the effects of this change, but he also faced the facts about many new top level domain name business models.

The reality is that most strings will be niche players happy to have 5,000 strings for many years.

I think this has been evident for the last year (or even two?). This is why I was so surprised at the money some new TLD operators were throwing at domain names in new TLD auctions.

How can you justify paying $5 million for a domain when the market has already told you that similar domains have about 5,000-10,000 potential registrations that make sense?

Some new TLD operators looked at it as funny money. If they were paid millions for losing other auctions, why not apply the winnings to another auction?

This doesn’t make business sense. Each individual TLD should be looked at as a business investment. What business says “Let’s waste $10 million on a business line that will never return that cash because another business just returned $10 million in easy profit?”

Another odd response has been “we spent so much because we’re in it for the long haul”.

That’s great, but what exactly is the long hual? If you expect a payback period of twenty years, why would you make the investment?

I’ve also seen lots of examples of new TLD companies thinking they were different. Only they had figured out the right string. The right business model.

They were wrong.

New TLD operators are going to have to face the reality of the market. Some are still keeping ridiculous premiums on their domain names because they think the domains will be worth that much someday. When is that day? Are they comfortable not selling domains until that day? In many cases, registries should give away domains they’ve priced at a premium to someone who will develop them.

I think the premiums are like lottery tickets to some registries. Every once in a while they have the matching numbers and someone pays $50k or $100k for a name. That makes up for a lot of $10 registrations. So maybe it’s the best model in this environment.

Still, whenever I see a “matching” .com sell for a fraction of the annual renewal price of a new TLD, I scratch my head.

Now, does all of this mean new TLDs are dead? No. But there’s a reality that registries need to accept.

Most of the strings out there have a total addressable market of about 5,000-10,000 names. They need to adjust the cost structure accordingly.

I’ll give an example. Earlier this week I saw a van with on it.

That’s a good domain. It’s an intuitive domain. It works perfectly for .house.

But how many other domains work well with .house? And, in how many cases is a reasonably good .com not a better alternative for the .house domain?

.House currently has 15,000 registrations with 40% at GoDaddy. That’s pretty healthy.

Every once in a while you’ll see a domain take off when it’s adopted by a particular industry. But that’s a rarity.

It’s a simple supply and demand issue. The domain industry can try to stimulate demand by recommending forwarding domains and new uses for domains. The effect will be marginal and it costs a lot of money to do this.

I also want to address another issue.

I don’t personally cheer when businesses fail or hit hard times. I’ve had my share of failed businesses, both as an operator and an investor. It sucks.

The majority of internet businesses fail. It’s really hard on the people that put their sweat and money into the venture.

I think some of the visceral reaction in the domain business has been because of new TLD operators “putting down” .com in their marketing. If you’re heavily invested in .com domain names then you might look at this marketing as an attack on your assets and your business. So when you see the people that you viewed as dissing your own business fail or struggle at their own, it could be a good feeling.

Still, some people take it too far. I’m shocked when someone cheers that a company had to lay off a lot of employees because of a strategy failure. Like those employees were evil people? Most were just trying to support their families.

As for the future, I predict a growing number of domains under new TLDs being put to use. There’s no way but up. The question is how quickly this number grows. Right now, it doesn’t seem to be very fast. As a result, you’ll see a lot of smaller registries gobbled up by the companies that can spread costs across many strings.

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Author: Andrew Allemann

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