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It is an undisputed fact to anyone involved in the domain name aftermarket that a significant upswing in overall pricing trends of certain categories of domain, namely short 2 and 3 character .com as well as strong one-word .com, have been realized over the past year due to a strong influx of Chinese buyers into the market.

Writer and financial strategist Simon Black of SovereignMan.com today speculated in a blog post that a driving factor behind this influx is the Chinese Government’s increasingly tightened capital control policies amidst a flagging economic outlook and flailing stock market.  I say ‘speculate’ as I don’t know that there is any consensus as to the overall motivations of individual Chinese buyers.

However the supposition – that Chinese buyers are buying expensive domains as a way to get their savings offshore –  does not seem completely unfounded.   Mr Black explains:

Chinese citizens now have strict limitations on the amount of money they can withdraw while traveling abroad, plus restrictions on how much money they can transfer overseas.

But for any Chinese citizen with savings right now, it’s pretty obvious what’s happening. And they want to get their money out of the country.

But it raises a difficult question– how do you get money out of the country when the government has imposed strict capital controls?

With a little creativity, there’s always a way.

Bitcoin has been a popular alternative in China because people can easily cross borders with vast sums of money encrypted inside their mobile phones.

But there’s a new tactic that Chinese are using now: domains.

Yes, those domains. As in Internet “.com” domains.

I believe though that Mr. Black falls short on a few key points within this claim.  He continues:

But… Chinese aren’t looking to make money. They’re not buying domains as investments– they’re using domains to TRANSPORT money.

Think about it– if you have $50,000 that you really need to get out of China, you can buy an expensive domain today.

Naturally there are no restrictions (for now) on buying a .com domain. So the sale goes through without any problems.

But domains are international. Almost anyone in the world can buy or sell a .com domain.

So later, you travel overseas, open a foreign bank account, then sell your domain to someone else.

The proceeds of that sale get paid to your new bank account abroad. And, presto! You’ve just moved a lot of money overseas, completely circumventing capital controls.

Naturally there are some costs involved, including some brokerage fees for buying/selling the domain.

But for Chinese citizens whose alternative is to let their savings remain trapped within a failing system, they’ll gladly pay a few percent to move their money abroad.

You can read the full article here.

First, nearly anyone with an active involvement in the domain aftermarket can tell you that there is no such thing as “presto!” when it comes to buying and selling domains, unless you are able to make a killing on the buy side, meaning, that you purchase a domain at a price that is well undervalued.

Otherwise, domain names are not a very liquid asset.  That being said, premium domain names, and short, 2 and 3 character domains of which the Chinese are very active buyers, certainly have much more liquidity than the average domain.  However, more is a relative term, and we must bare in mind that these buyers are now buying at the top of the market.  The price of 2 and 3 (and even 4) character domains have never been so high.

If Mr. Black were more acquainted with the domain market, he would know that buyers today are paying in some cases nearly triple the value for some domains than they would have sold for a year or so ago.

Therefore, while flight from capital controls seams like a very plausible motivation for the upsurge in activity from China, it would demonstrably not be such a simple matter of using domain names to transport wealth as is being claimed, in as far as since the Chinese are the ones driving up the prices it remains to be seen how they would easily unlock an equal value of their investments by reselling to overseas buyers who are not subject to the same forces.

A second point to note is that typical brokerage fees in the domain industry are not on the order of “a few percentage points” but rather will range easily from 10% – 20%, thus also negating the idea that it will be easy to unlock anywhere near full value, as in addition to buying in at peak pricing (although, who really knows if this is the top of the top), it presents the added difficulty of having to sell a domain name yourself if you want to avoid having 10% – 20% skimmed off of your investment by brokerage fees.  Brokers add liquidity, thus doing without them can also decrease the liquidity of the asset.

This analysis is not meant to trash Simon Black, as I am in fact someone in agreement with much of what he writes on and I would encourage anyone to research his blog further for alternative viewpoints to financial planning and economic freedom.  However I feel that in this particular case Mr. Black, while presenting a reasonably sound hypothesis, is not familiar enough with certain nuances of the domain aftermarket to really say for sure whether flight from capital controls is a valid motivating factor for Chinese buyers of domain names.  It may well be one among many motivating factors, but I am inclined to say there must be others, and that it may not even be the strongest factor.

What do you think?

{ 1 comment }

While cleaning out an inbox the other day I somehow came across a link to a blog post from four years ago, titled, Domain-squatter parasites not interested in haggling, apparently.

As you might have guessed already, the author relates the story of how he woke up one day deciding he’d like to own a particular domain name, contacted the seller, but were unwilling to entertain their asking price, and proceeded to call them out as a “cybersquatter”.

Reading through the comments I found the reason for bookmarking the article. In it, a commenter going by the name ‘Donnacha of WordSkill’, gives what I thought was an articulate series of responses to the blog’s author and subsequent commenters who were all on the bandwagon attacking the domain aftermarket.

I’ve excerpted a portion of those replies below. You can follow the above link to the article if you’d like to read them in full along with all of the other comments to give it more context.

It’s rather long, but contains a lot of great points. You may not agree with everything the commenter says, but regardless, it is nice to see when someone is willing to go against the herd and try to present well-reasoned counter arguments into such discussions that are often brimming with invective.

Most half-decent domains were registered back in the mid to late Nineties, at the then normal price of around $100 per year, renewal prices only came down to their current levels a few years layer. Pretty much any decent domain registered in the past ten years would have been acquired through a drop-catching service for at least $69, probably much more if more than one person wanted it and an auction ensued.

When you come up with a great name for your business, it is natural to be disappointed when you discover that someone thought of it before you and registered the .COM.

It is, however, a sign of stupidity to then allow your disappointment to grow into anger and decide that the owner is a squatter, to allow your anger to distort reality.

.COM domains have always been first-come-first-served, so, by definition, a domain owner cannot be squatting a domain unless someone has a trademark that pre-dates the domain registration.

Many .COM domains are openly offered for lower prices on any of the hundreds of online marketplaces but if a domain has NOT been listed for sale and you want that one specific domain, you want someone else to give you their property which they have been renewing for years, a low-ball offer like $250 is ridiculous.

Think about it: most domain were originally registered, purchased or bought at auction for a lot of money because someone, much like yourself, had an idea for it. Like most ideas, it didn’t happen but the owner continued paying the annual renewals, aware that the name had value. The chances are that the owner has been paying annual renewals on at least a few dozen names, because most idea guys have dozens of ideas over the years.

Now, in mid-2011, you come along, all excited because the same idea has now occurred to you ten years later, and you say “Gee, thanks for keeping this lovely domain for me, here’s a couple of hundred bucks, bye!”.

If he doesn’t jump at the chance to let you cherry-pick the best of his domains for probably less than he originally paid, he’s suddenly a “domain-squatting parasite”?

…..

I never suggested the anger was about me or reflective of my importance, I clearly state that the anger is against domain owners who got there first – not one of you care about the actual people behind the domains, about how they might have come to own a particular domain years before it ever occurred to you, you merely know that you WANT their property and, if you are not given it, you throw a tantrum. It is pretty clear who is being self-entitled and self-important here.

…..

I am not denying that there are a lot of people registering domains with no intention of ever using them for a “proper” website (whatever YOU define as proper, bearing in mind that domains existed long before websites and that many would dispute your contention that advertising does not add any value to the economy) but, unfortunately, there is no simple online mechanism to discern a registrant’s intentions – if you decide that the failure to instantly create a website = guilt, you are going to be slandering a lot of innocent people too.

Here is a thought – if you got the real names of all the people bitching about domain “squatters”, I bet that every single one of them has at least one domain that they haven’t yet created a website for, and not one of them would just give it to some stranger who emailed them asking for it.

…..

No, I did NOT imply that the system is right, I actually think it is deeply flawed and was quite deliberately designed that way.

What I object to is the lazy tendency of people, who find that the domain they want is already registered, to denounce the owners as squatters. It is childish, unrealistic and, in most cases, hypocritical because pretty much all of those complaining own at least one domain which they have not yet gotten around to building a site for – in some other idiot’s eyes THEY are the squatter!

What I see is that most decent non-trademark .COM names were registered or bought, often for quite a lot of money, by the previous generation of idea guys who, like all of you now, believed that they would get around to launching their ideas.

Most people did not realise how valuable the domain itself would become and they could have lost that value at any time, but some owners continued to pay the renewals every year.

Most of those domains will never sell at a profit, some will. In a few cases, the owner will be handsomely rewarded for having been the first to identify a great name, for putting actual money down and for having made the bet that the Internet would continue to thrive.

That is just life. The owners are not at fault, the system is. It is lazy, wrong and hypocritical to attack the owners simply because it feels more natural to personalise attacks.

…..

You are wrong on the history. Domains originally cost nothing, you simply requested whatever domains you wanted, no justification was required. As you suggest, most Internet users at that time did not abuse that, but some undeniably did.

In 1995 a private commercial vehicle was formed to take over responsibility for domain registrations, the form of which was decided by politicians but with a major input by corporate lobbyists. The resulting business was then sold by the government, for pittance, to a military contractor, SAIC, and, a few months later, they started charging.

The system was designed to allow anyone to buy any available domain without the need to prove their entitlement to that name. This low barrier ensured maximum sales at minimum operating cost to the corporation, the responsibility and cost of trademark enforcement was simply shifted elsewhere. This low-friction model produced a massive windfall for the corporation and, in 2000 the monopoly was sold on to Verisign for $20bn.

The majority of domains do NOT have websites and the majority of the ongoing river of profits come from annual renewal of those domains. When the major registries started selling “dropping” domains, something that was never intended when the system was created, they could have stopped it but did not, for one simple reason: they like it that someone, anyone at all, continues to pay that yearly renewal. It is all about the bottom line.

I don’t like the system but I see it clearly for what it is, and that is the very opposite of delusional. The delusion is when people like you react to the frustration of not being given everything you want by projecting blame upon the people who happen to have been ahead of you in the queue, who happened to have had an idea before you.

When guys like yourself talk about “Internet scum lords” and the Internet’s “intended purpose”, what you really mean is that you would like one of two things:

1. That you would like the .COM of a domain you want for a REALLY AWESOME idea you just had to be available, because it would be SO frickin’ awesome and, God, the scumbag who currently owns it isn’t even doing anything with it, it should be given to me! (but, funnily enough, the idea is rarely sufficiently awesome to justify offering the owner a couple of grand).

… OR …

2. That you in fact want some complicated system whereby, instead of first-come-first-served, domains are handed out to people with ideas that are judged to be worthy of the domain. Luckily, in that fantasy vision, no-one else has, in the past twenty years, put forward an idea worthy of your preferred domain, it is just sitting there, waiting for you, nervously adjusting its mini-skirt.

So …

… unless you actually have a solution to the fact that the domain system was thrown like a bone to the corporate masters of your elected representatives, have a little class and don’t lash out at people who were working hard, thinking up ideas and names while you were blowing your teens on video games and porn.

 

Yin YangAlthough it isn’t a regular column to this blog, consider this my weekend musings, if you will.  The following are some thoughts I was having a moment ago while giving my head and beard a quick trim for the coming week.

Several days ago I caught a post on Abdul Basit’s blog, New Year Starts With a Five Figure Sale.

First of all I want to congratulate Abdul on the very nice sale of a 4L .com, BMGL.com for $25,000.  Congratulations are also in order to Jessica Ebanks from DomainNameSales who helped close the deal.  I have communicated with Jessica before and found her to be very professional.

I want to present another side to the story though.  It in no way is meant to diminish Abdul or his approach to the sale, or the sale itself, but I only feel it’s worth mentioning to provide a balanced perspective.

It is always good to hear the successes.  We need them to stay motivated in business, and to see what is possible, so we can help break through our own walls and all try to raise the bar a little higher.  However there is a Yin to the Yang of a successful domain sale such as this, which is important for anyone who wants to be successful in this business to at least pay some thought to.

In my personal experience, (and your mileage may vary) for every ten fish that you throw back into the ocean – fish meaning,  a buyer with a serious expression of interest in the form of at least a halfway decent offer on the table – probably nine of those fish aren’t coming back.

There are many different types of domain investors, and numerous ways to skin the proverbial cat in this business. So what I say may not apply to everyone.  You’ll have to be the judge, or else take it with a grain of salt.

For instance, if you are the sort of portfolio owner who holds mostly top generic 1-word .coms, LL.coms, or LLL.coms, and the like, then you can almost always afford to say no, and it isn’t going to cost you, since there is a much wider pool of buyers, you likely receive steady inquiries on your domain, and should have more of a command over negotiations.

In the Rick Schwartz school of domaining, that means holding out for the one right end-user who will pay top dollar.  With these sorts of domains and this sort of approach, a handful of big sales or less might carry you through the year.  Plus those names are likely generating a bit of parking revenue too which helps keep the boat afloat.

For many other domain investors though, if you’re trying to run a profitable business on more of a, shall we say, diversified portfolio including two and three-word .coms, brandable names, and various alternative TLDs, then you have got to stay cash flow positive and to do so you must keep the cash register ringing.

In the case of Abdul Basit’s sale, the buyer’s offers went from an initial $1,500, to $8,000, $11,000 and $15,000 to which Abdul held firm at his asking range of $25,000.  In retrospect we have to admire Abdul for sticking to his guns and making it rain Benjamins.  On the other hand, there were a lot of points which the negotiation could have soured or the buyer decided to walk for good.  They came back, but they don’t always and you must be prepared for that reality.

Of course, every negotiation and every domain name is like a box of chocolates, to borrow from dear old Forrest Gump’s Mama.  As such, each one requires a certain sensitivity and should be approached according to whatever variables are in play.  You should also have a real idea of your domains value, or at least its potential value.  I am not advocating taking every offer that looks good and is served on a silver platter.  Of course that would be silly.

What I am trying to say, is that aside from maximizing a sale of a single domain, which we should all be striving for all the time, one also needs to consider how to maximize overall profits, and that may mean trying to close more sales consistently, even if at less than homerun pricing.

For instance, what would be the opportunity cost of passing up nine sales in the $8,000 – $15,000 range for every one sale you are able to push to the top of a $25,000 range?

Again, a lot will depend on the circumstances around a particular sale, but this is something to think about.

In some ways I am speaking here specifically to those wide-eyed, bushy tailed domainers, perhaps newer to the business, who will come across a story such as Abdul’s, and either develop overly optimistic expectations about domain sales, or come to believe that the only fish worth hauling is a whale and must as a matter of course throw back every marlin they manage to hook.

And yes, I know a whale is a mammal! :)

Again, this won’t apply to all domain owners, and all domains, in all situations.  And I will further reiterate that it is not a strike against Abdul.  From what I can tell, I have the rough impression he is a diligent, motivated person with his head in the game, deserving of the type of success he has had.

What I am saying is simply a point to ponder – take it or leave it – for purpose of adding some balanced discussion and a little Yin to the Yang.

Wishing everyone a great week to come.

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