The domain name system (DNS) market is going through significant change. Barriers to entry have dropped, as hundreds of new generic top-level-domains (TLDs) are being introduced. Substantial new sources of capital have invested in the market. While at the same time, overall domain name sales volume has slowed. Recent M&A activities suggest market consolidation focused on building scale. Greater transparency of wholesale and retail pricing shows some TLDs have raised wholesale prices, while simultaneously encouraging deep retail price discounts. Other TLDs have taken a different path, choosing to emphasize exclusivity and quality as a differentiator and as a bulwark against commoditization. These are all the hallmarks of a deregulating market.
The DNS market is generally divided into three major segments: “legacy” generic TLDs, country code TLDs and new gTLDs. Each of these segments is experiencing their own pressures due to deregulation with very few immune from any impact. In general, the legacy gTLDs (.com, .net, .org, .biz, .info, etc.) have the luxury of being the long-established incumbents which normally means scale, reach, stability and management talent. The legacy TLDs have been primarily consolidated within the control of Verisign, Neustar and Afilias — all for-profit companies. In contrast, the ccTLD segment is hugely fragmented. Although many are also long-established incumbents, each ccTLD is mostly a stand-alone entity focused on administering their country’s namespace. Most ccTLDs have some form of public benefit mandate and many are not-for-profits. Finally, there is the new gTLD segment that is an eclectic collection of incumbents, new entrants, ccTLDs and entrepreneurs.
The pressures of deregulation impinge upon each of the segments differently as well as uniquely on each of the players. Most ccTLDs are facing slowing to declining growth for the first time in their existence. Until recently, the predominant experience of ccTLD managers had been one of managing growth, in domains under management (DUM), budgets and staff. For the first time, some are now faced with looking inwards to cut budgets, lay off staff and dip into financial reserves. These challenges are often very personal and can distract the leadership from addressing urgent and changing market conditions or other business challenges.
The ccTLDs who have decided that their response to the changing market is diversification are then challenged to expand their revenue base and to find new and sustainable revenue sources beyond domain names. This often results in challenging discussions of the role of the ccTLD registry and where diversification fits with this role, with the inevitable potential clash with public benefit mandates and not-for-profit constraints.
What can ccTLDs do? The good news for many is that they have strong financial reserves and experience of managing change. The bad news is that the market is changing rapidly and ccTLD Boards may well have a harder time than the ccTLD management in grasping the implications or in making rapid decisions. In time, this can put the current leadership at odds with their boards at a time when alignment and collaboration is critical.
There are three areas that we are encouraging our ccTLD clients to focus on at this time: performance metrics, channel management and cost structure.
First, we look at performance metrics. Although we work within an industry that is awash with data, we are often surprised how little ccTLDs know and understand about their actual name base. Most measure statistics such as overall size, renewals, consecutive renewals, growth and seasonality. What we find is often missing are comparative metrics or content metrics that help management understand how their name spaces are being used or where potential vulnerabilities are. We call these metrics “canaries in the coalmine” and as early indicators of change they are critical in a rapidly changing market. We ask what percent of new creates have a website within 30-60-90 days?
Next, we encourage a more meaningful understanding of the registrar channel. Very often the efficacy of the registrar channel is measured via rudimentary metrics such as overall rank by DUM volume, new creates, and renewal rates. However, these methods often obfuscate real issues. The high growth registrars may be growing only by offering severe price cuts and taking exiting business from other registrars. If the registrar’s growth strategy is encouraging churn and a “race to the bottom”, without contributing to top-line growth, are they really “high growth” registrars? Instead we encourage our clients to ask: Which registrars are contributing to growth in proportion to their share of the TLD’s domains under management? And which registrars are “punching above their weight” and why?
Lastly, we consider costs. Taking a long and hard look at a registry cost structure is difficult if all you have known is the challenge of scaling for 8-11% growth for ten years+. Where do you start and how do you ensure savings are made in the right areas of the business? Benchmarking can be valuable, as can collaboration. Country code TLDs have the current benefit of mostly being non-competitive with their peers — although exceptions exist. This provides the opportunity for collaboration on cost restructuring that has been successfully performed in many other industries. Collaborative sourcing models, shared customer support infrastructure or alternative financial reporting approaches are possible. The DNS market is not the first to go through these difficulties and can look to other industries for proven solutions.
In this blog we have shared some of our observations on the challenges facing the ccTLD market. We look forward to sharing additional observations on the other market segments in future blogs.
By Alexa Raad, CEO of Architelos. 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].