You can read the first part of this series on domain valuations and the industries journey by clicking on:Part 1 - Domain Industry and Valuations
Part 2 - The domain bubble
Part 3 - What caused the domain bubble?
Point A is history now.....what about point B and the journey to it. I believe that this is what many of us are experiencing right now.
A shock hit the wider marketplace towards the end of 2007 and the ripples are still buffeting our industry. The shock I'm talking about is one of those events that are never foreseen until after the analysis has been completed. This shock has now become known as the sub-prime problem.Like me you have probably asked the question, "What does bad home loans have to do with domain name valuations?" The answer is, "Everything!"
Several things happened to the domain name market on the journey from point A to point B. The first is that many of the major players came to the realization that they were largely the market makers, in other words the price setters. The easiest thing for them to do to lower domain prices was to the exit the market.
Next, due to the squeeze in the capital markets domain debt funding suffered and other easy sources of capital to purchase domains dried up. For example, if you wanted to raise debt, banks would now require solid physical security rather than virtual real estate that we all work with.
During the last 8 months the earnings per click for traffic domains has decreased by about 25-30%. This 25-30% has effectively been removed from the marketplace and was largely the discretionary purchasing funds that many domain owners used for buying domains. Domain valuations have suffered since these funds are no longer available for purchasing domains assets.
The banking and finance sector has always been a major contributor to the online advertising sector. This is either directly or via financing for industry sectors that in turn spend in online advertising. What's really interesting and bears additional scrutiny is that despite the sub-prime crisis the global Internet advertising spend has dramatically increased.
The global online advertising giant Zenith Optimedia predicted in December 2007 that the global online spend in 2008 would grow from $36 billion to $44.6 billion. In June this year Marketing Vox estimated that the total global spend would actually reach $65.2 billion. This represents an increase of 146% on Zenith Optimedia's estimation.
Back in Dec 2005, it was reported on Marketing Vox that JMP Securities had revised its forecast of the global online advertising market to $65 billion by 2010. It's clear that the actualities of the online advertising market are far exceeding all of the predictions.
What is also clear is that the online advertising space is not only healthy but it's robust! So why has the sub-prime fall out impacted the earnings per click? To unravel this mystery we need to start by examining the growth of internet users and combine this with the online advertising dollars spent per user per year.
The next article will tackle this challenge and I will try to shed some light on what's happening to our industry.
Source: Posted on WhizzBangsBlog by Michael Gilmour -- Reprinted with permission -- September 19, 2008 Michael Gilmour