Everything you should know about a TLD business case, but didn’t know to ask Published on CircleID, April 6, 2011, by Architelos CEO Alexa Raad

Applying for a new Top Level Domain 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 on the business

Previous TLD launches also had business cases with projections they felt sure to achieve.  In a benchmarking study on recent 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%.

Most of these can be attributed to over optimistic projections, ineffective pricing strategies, and underestimated marketing costs required to drive demand.  It almost begs the question: “If those applicants had a slightly more accurate business case from the start, what would they have done differently?”

So any investment made now to improve the accuracy and credibility of the applicant’s business case is surely time and money well spent.  Up to now, the knowledge or the tools to build a TLD-specific business case have not been readily accessible.

All that is about to change.  At Architelos, we have developed a menu driven, web-based tool to build your business case: The Business Case Builder.   A license for access and use of the BCB is available for about $7K to $10K.  We are also conducting free webinars titled  “Everything you ever wanted to know about a TLD business case, but did not know to ask.”. If you would like to be invited to this webinar series simply contact us.

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?

The BCB tool was built specifically for the domain industry and takes into account necessary as well as optional variables inherent in any TLD launch and operation, many of which are overlooked, especially by new entrants.  However, it was designed to not only be a comprehensive solution, but also to be so easy to use that a veteran industry insider as well as a novice could obtain full financial projections and KPI graphs in a matter of minutes by choosing from a small series of drop-down menus.

The BCB is innovative because it is built using the SaaS (Software as a Service) delivery model.  It is web-based so it can be accessed from any PC with an Internet connection, and the inputs and results are secure and belong only to the user.

The BCB incorporates the following features and options:

• 3 launch modes (Sunrise, Landrush & General Registration) providing for different pricing drivers for each and the option to view financial results by launch mode or in its entirety
• Multiple pricing points in General Registration as well as registrar segmentation.  This enables incorporating and evaluating options such as co-op marketing and volume discount pricing promotions. The pricing tiers, as well as the registrar mix, can be changed on a monthly basis
• Multiple renewal types (1st Renewals, Veteran Renewals and 2nd Veteran renewals) with separate renewal rates and associated trends
• Multiple term options allowing the user to forecast domain volume terms for 1 – 10 years and change the mix between them on a monthly basis

Building this complexity in an Excel model requires not only significant investment of time and resources, but also numerous nestled formula calculations, which are prone to errors and notoriously hard to detect and QA.  The BCB is ready made and presents the user with two steps: “Assumptions” and “Monthly Volume Projections” to complete in order to view the results.

1. First - Fill out the assumptions page. We built a central point where the user inputs all the key business drivers in one spot.  Here the user simply inputs the key assumptions data on pricing, renewal rates, etc. – no need to navigate around unyielding Excel spreadsheets worrying if you are breaking the model by overwriting formula. The assumptions page is designed with simplicity and clarity in mind.
2. Second - Forecast the monthly volume projections by choosing from drop-down menus. Again, the complexity is hidden away and the user simply chooses the domain volume they expect to sell monthly, broken down by the term years on offer (choose 1-10 years).

With all the inputs completed, the user now is free to run a minimum of three valuable reports:  the “Domain Demand Model Report,” the “Gross Margin Report” and the “Key Performance Indicators (KPI) Report.”

The  “Domain Demand Model Report “ shows the following tables:

• “Domains Under Administration” with new creates, renewals (when they kick in after year 1 or 2) and deletes, as well as a running tally of total domains under administration
• “Cash Sales” split into new creates and renewals
• “ Accounting Sales” split into new creates and renewals
• “Deferred Revenue Balance” showing both cash sales and monthly recognized revenues, including the monthly closing balances associated with each

This information is available for export into Excel in seconds and can be used for business planning as well as insertion in other financial planning software.

The second report is the “Gross Margin Report” that can be generated, again, simply by a click of a button.  This report also provides both cash and deferred calculations and is instrumental in determining when and how to manage costs or inject additional investments.

For detail junkies, there is the option of running a third report that gives further breakdown of cash sales and accounting sales into by individual term. This report could be used for deep analytical review or as a final QA cross-check of the results.

Speaking of timing, the one variable that is currently not built into the BCB is the option and revenue associated with premium names.  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 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.

Architelos also offers the option of evaluating premium names through credible third party partners as well as building the remainder of the financial plan for their clients designing OPEX forecasting, P&L forecasting, balance sheet forecasting & detailed cash flows.

Lastly - users can also run a KPI report to assess how their unique KPIs measure up against the industry incumbents. This is an invaluable check against the working assumptions.  For example, if the first year renewal assumptions are 30% over the industry average, it begs the question: “why is that so?” and “Is that assumption credible, or should it be adjusted?”  The Architelos team can be called upon to evaluate these results and provide the feedback and suggested adjustments needed to fine tune the model and ensure its credibility in advance of submitting a TLD application to ICANN.

To learn more about the economics of a TLD business and the BCB tool, contact us to sign up for the webinar series “Everything you ever wanted to know about a TLD business case, but did not know to ask.”