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Everything You Should Know About a TLD Business Case, But Didn’t Know to Ask

Applying for a new Top-Level Domain (TLD) is an expensive and lengthy process, costing an estimated $500K for application and various legal and professional services. Central to the application is the business case. Even though ICANN requires an albeit simple version, most applicants must have a credible business case, especially if they need to secure internal approval, or more importantly attract and secure outside investment. Given the truth to the maxim “if you fail to plan, you plan to fail,” some closer scrutiny of your business plan will pay dividends in the long-term by helping you:

1. Decide the likelihood of achieving the expected ROI—and hence the prudence of an application

2. Better understand the economics of a registry business so you can negotiate more effective agreements for outsourced services, know when to time your marketing and PR investments, and even when and how to time your launch etc.

3. Focus senior management on the strategic business goals, and help achieve consensus on the long-term financial targets for the business

Registration volumes of new gTLDs introduced since 2001 relative to their projections (as stated in their applications, where publicly available). Source: New gTLD Program: Benchmarking of Registry OperationsPrevious TLD launches also had business cases with projections they felt sure to achieve. In a benchmarking study on recent generic Top-Level Domain (gTLD) launches (2001 and 2004) done for ICANN, it is clear that accurate projections were the exception rather than the norm. By year 4, seven of the gTLDs had missed their projections by an average of negative 83%.

What makes a domain industry business case complex in comparison to other ventures is not the cash calculation, but rather the accounting rules that call for recognizing the revenue of any single registration, not at once, but rather over the life of the domain registration (which could range from 1 to 10 years and any period in between). This is often referred to as the “waterfall method” or the “deferred revenue” calculation. Investors will wish to see financial projections on a dual cash sales basis and accounting sales basis.

Cash sales based reporting is more useful for business performance measurement, but the accounting sales basis will be required to be maintained for a statutory compliance basis.

Domain sales are like magazine subscriptions: The publisher collects the cash upfront, but provides the service over the life of the subscription. Hence two methods are needed to accurately evaluate your financial position: Cash and Deferred. The calculations required to determine accurate monthly deferral revenues are complex, especially given multiple price points to resellers, multiple term lives of domains (1-10 years) , and different renewal rates associated with specific registrations. This is one of the main reasons why many financial projections will not be accurate.

Add to this other complexities: What phases will you have for launch and how would those registrations be priced? What is your channel strategy? And if indirect, which of the 900+ registrars would likely make up your projected volumes? And what would it cost you in co-marketing and promotional pricing? What do you expect your renewals to be, and are those expectations reasonable? How many domains will renew only once versus twice, three times or more consecutively? What are the Key Performance Indicators (KPIs) that markedly change your projections and success if adjusted?

If the TLD presents a viable opportunity for capitalizing on premium names, then the key consideration is the size and value of the premium name inventory, and the right timing for releasing various batches into the market. This can be used to stimulate awareness and generate additional cash for investment back into the registry to support other costs such as security, product development or simply additional marketing funds.

The details of a TLD or registry specific business case aside, your model must include OPEX, P&L forecasting, balance sheet forecasting & detailed cash flows. Building a solid business case and supporting financials is not an easy undertaking. But spend the requisite time to understand and build a credible business case; you will be glad you did.

We are also conducting free webinars titled “Everything you ever wanted to know about a TLD business case, but did not know to ask.” The webinar will cover the basics of a TLD business using the Business Case Builder tool Architelos has developed. If you would like to be invited to this webinar series simply contact us.

By Alexa Raad

Architelos provides consulting and managed services for clients applying for new top-level domains, ranging from new TLD application support to launch and turnkey front-end management of a new TLD. She can be reached directly at [email protected].

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