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Taking Stock of New gTLDs in the Public Markets

A woman on the radio talks about revolution, though it’s already passed.

The window is now closed. A snapshot can be taken. A baseline can be set. How have the public markets valued the new gTLD program? And more importantly, how will public markets value it going forward? Until a few months ago, the new gTLD program was arcane policy discussion among a very narrow technical population of the Internet community. Within the general population it is widely unknown, within the corporate brand community it is widely misunderstood and within the Internet domain name community it is widely anticipated.

On May 30, 2012, ICANN’s window for applications closed, establishing the fourth major milestone for the ground-breaking program. The preceding milestones included:

  1. June 26, 2008 – GNSO Approves New gTLD Policy
  2. June 20, 2011 – ICANN Boar Approves New gTLD Program
  3. Jan 12, 2012 – New gTLD Application window opens
  4. May 30, 2012 – New gTLD Application window closes

We decided to look back and used these milestone dates to measure the financial performance of publicly traded stocks associated with the Internet’s domain name system (DNS). The stocks included are: Tucows (TCX: Toronto), Verisign (VRSN: Nasdaq), Neustar (NSR: NYSE), Top Level Domain Holdings (TLDH: London) and Demand Media (DMD: NYSE). Below is a table of the data and associated graphs.

Growth from Date to 30 May 12
Company26 JUN 200820 JUN 201112 JAN 201230 MAY 201226 JUN 200820 JUN 201112 JAN 2012
NSR21.6925.7535.9632.9552%28% 8%
TLDH3.5010.058.308.07131% 20% 3%
DMD14.587.059.13 37%30%
IXIC231636532711283722% 22%5%
Source: Yahoo Finance & Architelos Analysis

There are some very interesting observations that can be taken from the data.

Verisign has only increased 1% in stock price since the GNSO approval of the program on June 26, 2008. As of May 30, 2012 that is almost four years of performance. And it should be noted that the Dow Jones Industrial Average is flat at zero (0%) improvement during that same time and the Nasdaq (IXIC) is up 5%. Verisign shows the least volatility of all the stocks. Also, during those past four years it should be noted that Verisign has posted $750M in cumulative net income from continuing operations with net margins rising from 22% in June 2008 to 32% in March 2012. Having announced recently that Verisign is supporting 220 new gTLD applications, including some of their own, it will be very interesting to see how the quasi-deregulating new gTLD policies impact the Versign financial fundamentals.

From a purely numerical comparison, Tucows is the clear winner to date. Since June 2008, Tucows has posted an impressive 138% growth in performance and since the opening of the ICANN new gTLD window on Jan 12, 2012 an impressive 88% growth. The 2012 performance has almost tripled the closest comparator, Demand Media at 30%. But Tucows has not announced any new gTLD applications and there is no causation tie between 2012 performance and new gTLDs. Tucows performance demonstrates the age-old strategy that “magic is misdirection”. While the whole industry has been consumed with new gTLD this and that, Tucows has quietly launched TING, a cellular phone service. Quite an interesting diversification move that has some very interesting upside when one considerers that the recurring revenue from one cellular customer is an order or orders of magnitude greater than the sale of a domain name. So no new gTLD performance reflected in Tucows.

Top Level Domain Holdings is closely behind Tucows at 131% stock growth since June 2008. And for completely opposite reasons. In the case of TLDH, the entire performance is predicated upon the potential financial returns of the new gTLD program. If there is a bellwether stock for the new gTLD program, TLDH is the pure-play candidate announcing possibly the largest applied-for portfolio total at 92. The performance would indicate that TLDH performance over time reflects strong expectations from 2008—2011 that the new gTLD program will provide opportunity. And since the window opening in January 2012 the market has taken a wait-and-see attitude leaving the performance slightly down at minus 3%. The slight dip in performance of minus 20% from June 20, 2011 reflects the impact of program delays on return expectations. It should be noted that those losses have been largely recovered as of May 30, 2012. To steal a phrase from Texas hold ‘em poker, TLDH is all-in, and quite a contrast to Verisign in scale, speed and flexibility.

Demand Media and Neustar are not pure-play domain companies. Both have significant business operations beyond their DNS-related businesses. However, both are substantially invested in the new gTLD program. Demand Media recently announced that they have strategically invested over $18M on new gTLDs. At this point in time it is unclear what strings they have submitted, but soon all will be know at ICANN’s “big reveal” on June 13, 2012.

And what of Neustar? As all the new gTLD applications get announced, each of the major back-end providers will be compared against how many applications they have been selected to support. This will include the basic attribution of bragging rights for the volume winner and meticulous analysis by competitors. The real latent value of the application portfolios could be the distribution of brand applications that each back-end provider has secured.

What is the “so what”? Not much at this point in time. It is too early to tell. But it is not too early to begin measuring. We need to set baselines before the “big reveal” because life in our industry will not be the same after. Over 1,900 applications have been submitted. Applying isn’t the end, it is only a entrance ticket to the dance. Applicants still need to pass initial evaluation and financially survive resolution of their string contention set.

Google has announced more than 50. The Facebook IPO is a mess. Anybody want to guess this niche set of DNS public stock performance over the next 6 months? Or for that matter, the swirl of private funding that will come into this market over the next year. Last year KKR et.al. invested billions in GoDaddy. Deregulation changes the status quo. New entrants rapidly rise. Incumbents are challenged at every turn. Don’t forget, magic is misdirection—what aren’t we seeing? After the big reveal, things will move pretty fast. See you in Prague… there is no other place I want to be… right here, right now… watching the world wake up from history. (Thank you Jesus Jones – Right Here Right Now)

By John Matson

Mr. Matson has advised Fortune 500 companies on cost structures, margin enhancement and implementation of new growth-oriented business models. He has performed several projects for ICANN, including advising on the new gTLD program and benchmarking previous gTLD launches. Architelos provides Top-Level Domain (TLD) application guidance and front-office services for clients in the DNS and IP industry. Mr. Matson can be reached directly at [email protected].

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