Cloudflare announced they are offering domain registration services for zero markup over the wholesale registry fee & ICANN fee.

Two phrases kept coming up: “bait and switch” and “endless upsell.” If you’ve ever registered a domain, you know the drill. You get a discounted price when you first register, but with each renewal the price soars. In the best cases we’ve found, it’s around two times the original offer. In the worst, it’s more than twenty times. It’s gross. That’s in addition to the constant upsells for other products that either should be included for free (for example, DNSSEC) or that you just don’t want (for example, worthless trusted site seals).

Domain privacy services offered registrars a huge mark up on a low margin sale. $10 domain with $8 in core fees = $2, less the 30 cent credit card fee = $1.70. Add in an all-margin $10 per year domain privacy service and the profit on the domain goes up from $1.70 to $11.40.

The passage of GDPR has meant some people who previously paid for domain privacy services will likely stop as more registrars redact the data by default.

  • 2014 revs: $1.39 billion
  • 2015 revs: $1.61 billion
  • 2016 revs: $1.85 billion
  • 2017 revs: $2.23 billion

Since their 2015 IPO their stock has quadrupled from $20 to $83.2.

GoDaddy is trading at about a 100 year P/E. They’ve done a great job growing revenues by using their dominant share in the domain name market to expand into other higher growth markets while other domain-related companies (outside of Tucows) have languished.

Verisign sees the domain registration market growing about 2% per year, with the .com & .net TLDs representing over 100% of the aggregate growth.

The second quarter of 2018 closed with approximately 339.8 million domain name registrations across all top-level domains (TLDs), an increase of approximately 6.0 million domain name registrations, or 1.8 percent, compared to the first quarter of 2018. Domain name registrations have grown by approximately 7.9 million, or 2.4 percent, year over year.

Total country-code TLD (ccTLD) domain name registrations were approximately 149.7 million at the end of the second quarter of 2018, an increase of approximately 3.5 million domain name registrations, or 2.4 percent, compared to the first quarter of 2018. ccTLDs increased by approximately 5.5 million domain name registrations, or 3.8 percent, year over year.

The .com and .net TLDs had a combined total of approximately 149.7 million domain name registrations in the domain name base at the end of the second quarter of 2018, an increase of approximately 1.4 million domain name registrations, or 0.9 percent, compared to the first quarter of 2018. The .com and .net TLDs had a combined increase of approximately 5.3 million domain name registrations, or 3.7 percent, year over year

In the face of lethargic domain name registration growth across the industry, GoDaddy grew their customer base by 6.5% to 18 million customers & grew domain revenues 16% YoY. Their revenue mix is as follows:

  • Domain names $304.8 million, up 15.8% YoY / 47% of total revenues
  • Web hosting $244.6 million, up 13.8% YoY / 37.3% of total revenues
  • SaaS business applications $102.2 million, up 28.4% YoY / 15.6% of total revenues

And then the quarterly breakdown between international & domestic

Revenues 2017 YoY change 2018
total $557.9 m 16.8% $651.6 m
international $187.7 m 24.3% $233.3 m
domestic $370.2 m 12.9% $418.3 m

So long as GoDaddy can keep doing tuck-in acquisitions of b2b SaaS plays they should be able to follow the Salesforce model of growth by cross-marketing all the new acquisitions to their existing customer base.

But how long can they keep growing their core customer base ~ 3 times as fast as the market they are in when they are already closing in on being half the market?

Every day more pages are added to the web, so the increasing use of the web would suggest the market for domains will keep increasing. However, there are a few core headwinds:

  • GoDaddy already has a significant share of the domain registration & web hosting markets to where it might be hard to keep gaining share at the rate they have. They already have over 62 million domain registrations between their core company and Wild West Domains.
  • In many ways the web is becoming more like TV by the day, with greater attention being spent on fewer core channels. The core services keep expanding their breadth. YoY Google keeps owning a higher share of the search market, Amazon keeps owning a higher share of the ecommerce market, etc. Google keeps adding more informational features, ad unit types & interactive content units like appointment booking directly to the search results.
  • The longtail risks are not just the risk of perpetual obscurity, but also as the core central attention merchant networks like Google & Facebook have increased their ad load that has drove down reach for other publishers who previously relied on those channels for high-margin revenues.
  • Those expanded ad features lower the margins of smaller niche businesses which were formerly getting free exposure. If it costs more to rank, it costs more to maintain rank, and the value of ranking slides due to ads displacing the regular results then costs rising while value drops leads to less investment. That leads to some domain investors pruning their domain holdings.
  • The value of generically descriptive domains has in many cases dropped precipitously in many markets as the barrier to entry has increased & signals of brand awareness have become relevancy signals.
  • Verticals with high commercial value (like travel) have seen more aggressive ad placement in the result set, which has led to Expedia acquiring a fallen Orbitz & Travelocity. This sort of consolidation has occurred in many other markets as well. In market after market after market the leading vertical publisher brand names have been gobbled up by private equity. TheKnot, BankRate, Blue Nile, WebMD, etc.
  • Programmatic ad spending has drove CPMs into the ground for years while ad blockers also gained popularity. The technical cost of gaining & maintaining exposure has increased (even upstart web-first publishers like Vox & BuzzFeed are missing revenue targets).
  • In some emerging markets where the web is less developed & growing far quicker some businesses simply share their Facebook names rather than listing their domain name on their shopping bags or such. In addition, in emerging markets YouTube, Facebook & other such properties often have a far lower ad load than they do in the U.S. That ultimately acts as a subsidy which prevents the emergence of local competitors (outside a few key markets like China).

My account manager at GoDaddy has been great to me & GoDaddy has done a great job building a premium portfolio of names for sale at reasonable prices, but GoDaddy will likely need to push their ecommerce software sales & other services to quick growth as shopping cart companies like Shopify, Squarespace, Volusion, Big Commerce, & Square (which acquired Weebly) take share in the domain market & companies like Cloudflare push to commoditize the core domain registration market.

Verisign, which administers the .com TLD, currently charges $7.85 per year to register a .com domain. ICANN imposes a $0.18 per year fee on top of that for every domain registered. Today, if you transfer your .com domain to Cloudflare, that’s what we’ll charge you per year: $8.03/year. No markup. All we’re doing is pinging an API, there’s no incremental cost to us, so why should you have to pay more than wholesale?

About 6 weeks ago longtime GoDaddy shareholders KKR, Silver Lake & Bob Parson’s YAM Special Holdings announced the sale of  10,390,942 shares of Class A common stock. At the company’s current market cap that is nearly $1 billion in shares out of a market cap of $14.31 billion.

Some news publishers are trying to push through mandatory taxes on the central networks to force revenue sharing. In the past such efforts have fallen flat on their face. Google’s regular organic search results have an “in the news” section which only contained approved news publishers until the compulsory copyright tax stuff was first pushed & then shifted to listing personal blogs and other sources in that. That was years ago & Google hasn’t undone the blog inclusion.

Two big positives on the shift away from an ad-funded web to a more balkanized set of closed silos are:

  •  It should allow somewhat neutral players with strong usability to shine & gain share against sites with heavy paywalls.
  • As people become more acclimated to paying for content, that should help a lot of small indy players develop niche publications & services. In China – long known for piracy – people are spending over $7 billion per year on podcast subscriptions.

I wouldn’t dare short GoDaddy, but it wouldn’t hurt to buy a few put options. Put options with a $75 strike price on January 18, 2019 are going for $2.10 & have over 1,000 open interests. If GoDaddy rallies and those options fall much further they could be a good risk/reward. Another option to consider would be the political chaos risk off idea. The November 16, 2018 options would be a way to play the run up to the midterms, the election itself & whatever batshit crazy violent response may happen as a result of the media constantly fomenting hyper partisan hate. Put options with a $70 strike price are going for 40 cents. Of course a 15% drop would be a big move, but if you are long the market broadly or heavily long tech plays a few of those options might be ok insurance on other positions.

Leave a comment

Your email address will not be published. Required fields are marked *