At $135 million, .WEB is the highest valued first round new Top Level Domain registry sold at auction. It sets a new high bar on the value of TLDs. Nu Dot Co and its investors, prevailed in an ICANN auction and are now the proud owners of the .WEB Registry. Industry tea leaves point to Verisign as the backer but that has yet to be confirmed.
In the past two years, other TLD registries have sold for millions of dollars. Now that the big one (.WEB) is done, it is interesting to look at the relative value of these acquisitions and consider how these investments make sense for the buyers. The top 5 new TLD acquisition prices are listed below and a discussion follows.
In March 2015, I wrote an article; Did Google Overpay for .APP? The conclusion was, “no they did not overpay”. This was based on Google’s leading mobile app market position and .APP would allow them to own a new channel, introduce a new paradigm on app discoverability, and leverage Google’s Android market position in the application distribution market.
Then there was .SHOP, purchased for $41.5 million by GMO Registry. This one, I find to be a head scratcher in terms of the valuation. It is a good TLD, no question. It has clear meaning as an ecommerce destination but $41.5 million for a niche or single purpose TLD seems rich to me. .SHOP operators and investors will need to take a long view, dedicate significant marketing spend to develop a value proposition to deliver a new, better, and different offering to ecommerce merchants, and gain market traction. Did GMO overpay? Probably.
How about .BLOG, purchased for a reported $19 million by Automattic Inc., parent of WordPress? Wordpress is a leading website building and blogging software company. By various reports 25 – 27% of all websites use WordPress and millions of bloggers use their tools. WordPress is a big deal. There are parallels with .APP and .BLOG. Both were purchased by industry leaders in their respective lines of business. Each can use the TLD as a differentiator to leverage and extend their market position to drive growth. They can offer services that are unique in the market, increasing the value of their entire business. Secondly, as a defensive position, they ensure competitors are not armed with a powerful digital asset to disrupt their respective positions. .BLOG gets a thumbs up and in my view a good buy for Automattic. Not only will they sell millions of .BLOG domains, they will dramatically increase the worldwide awareness of new TLDs. That’s a win for the industry as well.
Where .APP and .BLOG have explicit meanings and added power due to the market positions of the acquirers, .SHOP is seeking to carve a new extension as an ecommerce destination alternative. This all makes sense but $41.5 million is a big number to dig out of, from a return on investment perspective.
.WEB is a different animal. This acquisition valuation is proof. .WEB is what we call a “super generic” and arguably the best new TLD alternative to .COM. It is a word that is commonly used with intuitive meaning. WEB could make a serious dent to .COM over the long run. With an initial investment of $135 million you have to assume the owners will follow their acquisition capital with serious marketing spend. Domain speculation in the .WEB space will be furious at launch. Premium domain sales for .WEB are likely to be orders of magnitude larger than in any other TLD introduced and as the .WEB space matures, those premium values will rise. Of course, this assumes Nu Dot Co drives forward with the now familiar premium domain strategy.
$135 million is a shocking number. It can be a winner assuming funds to support a major marketing and communication plan as the best alternative to .COM, or if Verisign, a cozy super-generic companion to .COM. .CO positioned as a viable alternative and currently have under 2 million registrations versus .COM at 126 million. Recall, Neustar acquired .CO for $109 million on $21 million in revenue with approximately 1.5 million domains under management.
Let’s assume Verisign is indeed the .WEB backer. Today, Verisign generates over $1 billion in revenue and a +60% operating profit. Nice business. The challenge for Verisign is not EBITDA or cash flow, it is growth. In their recent quarterly financial release, Verisign grew by 9% in the quarter compared to the same quarter in 2015. Not bad but not enough to excite and drive up shareholder value, where a single digit CAGR and cash generation is already baked into their market cap. The company is trading at ±9 times revenue and ±15 times EBITDA. If they did indeed acquire .WEB, the company now owns a new growth engine and they are uniquely positioned to drive it. Some suggest they would bury it to protect .COM. That is not in the best interest of shareholders. .COM is still king, will be for some time and .WEB can immediately contribute healthy operating profits out of the gate. If well executed, .WEB can add significant shareholder value.
If the tea leaves are misleading and everybody is wrong about Verisign, then we will have to write another blog on those implications. If it is Neustar, for example, then the market dynamics are entirely different. We are also likely to see a gun fight on how this all materialized with the secret backer of Nu Dot Co.
Let’s now assume it is not Verisign, the economics of a TLD registry are very good at scale from 1 million to 100 million Domains Under Management (DUM).
This chart models Domain Under Management (DUM), an assumed registry price of $8, the annual revenue, (ignoring one-time premium domain revenues) and assumed EBITDA improving from 10% to 50% as economies of scale kick in for a well run registry. Then apply business valuations at 5 times revenue (conservative low bar) or 20 times EBITDA, whichever you prefer.
The trick of course is getting to scale, how much additional investment will be required to get to scale and will the market demand exist for .WEB. For the investors at Nu Dot Co, you now own a valuable asset that will take time and skilled execution to monetize. We will need a few years to determine if $135 million was too much, just right or a home run investment. The potential to create a highly valuable business that generates tremendous profit and cash is there if they drive to scale.
If it is Verisign, it is a brilliant move, not unlike .BLOG and .APP, it extends Verisign’s .COM position and is the growth engine they need.
The new TLD market continues be increasingly dynamic and interesting with each passing day.