Category: Domain Name Registry

There is always some degree of confusion in discussions about the “new TLDs”. Some points of view try to be optimistic, others on the contrary only highlight the bad news, and most refer indistinctly to the “new TLDs” as if they did not break down into different segments, each of which obeys dynamics and constraints of its own.

The purpose of this post is to provide some food for thought and to shed some light on those dynamics and constraints, not only for the stakeholders in the domain name ecosystem but also for all those who might want to obtain their own TLD one day.

A second objective is to show that the key success factors for these different types of TLDs are clearly not volume-based, at least for some of them. The concept of volume only makes sense for “commercial” nTLDs, the longevity of which is based on the sale of domain names to third parties. The success of a TLD relies more on its ability to generate value for its registry and the Internet community, and this value is measured differently from segment to segment.

The costs, however, are the same for every registry, and this burning issue cannot be ignored, because it is far from being a neutral factor: in addition to the costs of the technical registry operator, the annual fee of $ 25,000 required by ICANN (for nTLDs with less than 50,000 names in stock) represent a fairly heavy expense.

For a commercial TLD with 5,000 names in stock, the ICANN charges represent $ 5 of fixed costs per domain name. If we add the costs of the back-end registry, the internal operating costs and the promotion and development costs, it can be seen from the outset that the registries concerned are obliged to charge high prices that are relatively uncompetitive compared with those of the major competitors already firmly established on the market, benefiting from the dual advantage of volume and adoption by users.

Unequal business models

The new TLDs are not equal in terms of their business models. Consider each of the major “segments” or “families” that currently exist.

• Brand TLDs (or .BRAND) are domain name extensions created by large groups for their own use. Their use lies in the contribution they make to their holders’ digital strategies. The expected volumes are low and the “cost per domain name” is therefore high, but offset by the added value created for the company. In some cases .BRANDs can be opened to customers, partners etc. of the delegatee company, but for the time being these cases are exceptions. In general, their use is internal and the notion of “tariff” is therefore not applicable, just as the nation of profitability must be analyzed in the context of a large group. Although of consequence for a start-up company, the budget needed to obtain and operate a TLD is fairly modest compared with the investments required to ensure and develop the web presence of a large group and its components, not to mention the budgets for communication. To learn more about .BRANDs, the White Book published by Afnic last July is recommended reading.
• Sponsored (or Community) TLDs are in theory reserved for specific communities, which by their very nature are fairly limited in scope and scale. Their volume expectancy is by definition rather low, up to “average” for large communities and if the TLD is universally-acclaimed. In order to balance their accounts, these TLDs are forced to sell their domain names at high prices, but which can become moderate if successful.
• GeoTLDs correspond to the names of regions or cities. Their catchment areas are often greater than those of Communities, while targeting relatively small audiences. Their problem is very similar to that of the Community, although easier to solve. Their “spectrum” is broader, ranging from a few thousand domain names to several hundreds of thousands in the long run. But initially and for several years, the volumes remain low or average and the tariffs must be aligned accordingly, from high to moderate. However, volume-specific prices allow these players to expect a quick return on their investments, with renewal rates generally high and create operations growing as the reputation of the TLDs increases. To learn more about geoTLDs, recommended reading includes one of our recent articles.

The last segment, that of the “pure generics”, is split into two:

• generic domains that can only reach a small customer base either because of their eligibility rules or because of a key term that can only interest restricted audiences and niche markets. The financial logic of these nTLDs is close to those for geoTLDs and Community TLDs, the expected volumes being low or average and the tariffs high or moderate as the case may be. For the moment there is no example of TLDs such as these having acquired sufficient volumes to offer moderate tariffs, but this will probably occur in the future.
• “open” generics, with terms used worldwide, which are lucky enough to address a global target or at least one that is very broad. These TLDs can forget the approaches targeting niche markets and relatively high prices to adopt mass sales and low-cost strategies. The bet is all the more risky if the TLDs are young but they are probably the only ones capable of considering such a strategy. Here the volumes can range from low to high and the tariffs from low to high depending on the registry’s choice and success.

This brief modelling of the balances between volume expectancies and tariff levels can be used to explore the consequences for registries in terms of marketing strategies.

The consequences in terms of marketing strategies

Because of the specific features of each, “nTLDs” do not play on equal terms and must develop marketing strategies in accordance with their strengths and weaknesses.

For example, the lower the expected volume, with higher the tariffs, and the more the registry is obliged to gamble on the added value of its TLD and/or on the liking that it manages to generate with its target. BRANDs seek added value in connection with their digital strategy. COMMUNITY and GEO TLDs can convey notions of belonging and recognition between the holders and their visitors or prospects. In many cases, these are “love-TLDs”, that holders will be prepared to pay more to acquire because from their point of view they make more sense, for reasons that are most often affective and related to identity (belonging to a city, a region, or a community). Restricted generic TLDs may seek to develop original service models that provide them with the key success factors they may have initially missed.

Conversely, the “pure generic TLDs” will be able to practice low tariffs, and even wager on TLDs that are virtually free of charge, hoping that the proportion (generally very low) of renewed names will eventually enable them to balance the books. Renewal rates are even more problematic for TLDs that have chosen a virtually free approach for create operations, hoping to make up their losses with renewal rates. So far these innovative models have achieved tangible results in terms of volumes in the short term, but without guaranteeing the long-term sustainability of the TLDs concerned.

Exclusive TLDs versus mass TLDs

These are two philosophies that coexist without coinciding: the potential “love-TLDs” tend to be exclusive or selective, while the “mass-TLDs” seek on the contrary the widest range of targets possible.

Both approaches, however, expose themselves to miscalculation. Users interested in a “love-TLD” can be put off by conditions of eligibility that are too drastic, making the TLD cumbersome (checks etc.) and even more dissuasive in that their selective nature does not necessarily create attachment or any perception of added value. “Mass-TLDs”, on the other hand, by their construction, suffer from significant volatility and must maintain high levels of create operations if they do not want to see their stocks collapse. This strategy can be likened to that of a Ponzi operation if it escapes the control of the registry.

The logical result is that for some months now, we have been witnessing the changes expected among some of the registries , with “love-TLDs” disappointed by the volumes seeking to ease their eligibility conditions, and some “mass-TLDs”, after having their fingers burnt by their catastrophic renewal rates, revising their prices upwards.

Bad pricing never pays

That remark is not gratuitous: it should be remembered by future applicants for TLDs in the coming years, when ICANN organizes the next “rounds”.

In a world as competitive as that of domain names, bad pricing can lead a registry to ruin simply because the tariff turns out to be dissuasive (negative effect on volumes) or dilutive (negative effect on the perception of value).

Registrars and users alike are very hostile to rate increases, so it is probably best for a low-to-moderate TLD to start with reasonable rates and allow for the possibility of downward adjustments. as volumes increase.

Rights holders and domainers, two false friends

A fairly large number of new top level domains have built their short-term models on the hope of reaching two particularly promising markets: rights holders and domainers.

Anxious to protect their brands against cybersquatting, rights holders have long been a cash cow in the domain name market. The “sunrise period” which is designed to allow them to protect their names has sometimes even been transformed into racketeering organized by registries more or less created for this purpose. But the rights holders have often been very disappointing. Once they are conscious of the fact that they can no longer eliminate the risk, they increasingly content themselves with managing it and no longer take part in sunrise periods with the same enthusiasm (or the same anxiety) as before. Similarly, their defensive domain registration strategies have become increasingly parsimonious. The abundance of TLDs has helped kill the golden calf.

The domainers for their part have also been sources of disappointment. Some diehards refuse to take the risk of investing in TLDs of questionable longevity, or which are so poorly known to the public that the chances of reselling them with a profit are rare. The policy of “premium” names sold by auction or billed more expensively has also sometimes been disappointing, because domainers cannot afford to invest much on a single name, and the more “natural” holders are not sufficiently aware of the potential returns to accept the level of expenditure required.

Convincing investors

All of these considerations are important for applicants wishing to obtain a TLD (and for those who already have one!) with respect to their investors or principals. It is important to understand the situation of each TLD profile in order to adjust the business model and the marketing strategy accordingly, and not to make “false promises” to backers, even in good faith.

The first precaution to take is to explain to them that volume alone is not a criterion of absolute success.

“Success” or failure is not related to volume but to the relevance of the strategy with respect to market conditions

Our analyses have shown that volume is only the tip of the iceberg, certainly the most visible, but perhaps not the most relevant. A TLD that achieves profitability with low volumes but which reaches its target and wins their loyalty will logically be more sustainable than a TLD with high volume but which is unprofitable and has to base its development on permanently gaining new customers to compensate for a very low renewal rate.

Even if the domain name market sometimes creates ridiculous situations, the principle of reality always wins over in the end. The 1^st “Round” resulted in a proliferation of projects that were sometimes brilliant, but often unrealistic in terms of expectations and a total lack of correlation between targets, eligibility conditions, business models and marketing strategies. We may hope that applicants in the next round will link together these various parameters better and give their entrepreneurial venture the greatest chance of success.

This article by Loïc Damilaville, Deputy Director General at Afnic who manages the French ccTLD as well as 17 new gTLDs, was republished with permission. It was originally published on the Afnic website here.