Auction

Unbenownst to many Internet users, there is a dramatic shift approaching in the way that website addresses are named. No more will sites be restricted to the .com, .org, .net, .edu, and region specific domain suffixes, as the Internet Corporation for Assigned Names and Numbers (ICANN) will soon issue new top level domains (TLDs) such as those corresponding to brands, cities, industries, affinities, and any other category for which authorized domain registries apply.

One of the most active companies in this space, Los Angeles-based and London AIM stock exchange-listed Top Level Domain Holdings Limited (TLDH), aka Minds+Machines, announced today that it has “conditionally raised” $10 million (£6.6 million) through the sale of 110,375,276 shares of its common stock. This comes in addition to the company’s previously announced $15 million non-recourse debt facility secured for use in TLD bidding. As of its December 2012 financial report, TLDH had £2.418 million in cash and cash equivalents. TLDH was founded by its Executive Chairman and Chief Strategy Officer Fred Krueger, a serial entrepreneur and active investor who is most famous as the founder of Adconion. The company is managed day to day by its Chief Executive Antony Van Couvering.

The new capital, in addition to the approximately $25 million it raised previously through public and private markets, will be used to purchase contested TLD at auction. Over the last year, TLDH has submitted 88 TLD applications, either independently or as a registry service provider. Among the more than 1,900 total applicants, the only registry to submit more was Demand Media partner Donuts with more than 300 applications, while internet giants Google and Amazon submitted more than 100 and 70, respectively. Nearly 50 percent of these applicants were brands.

Of these 88 applications, 22 were uncontested (16 wholly-owned, and six by clients). Another 11 are contested by just a single other applicant, while 17 have two other applicants and 38 have three or more. Later this year, ICANN will host auctions for these contested domains, with several expected to command seven or even eight-figure sums. Hence the need for the additional capital.

Demand registration is a big business, with registry operators receiving approximately $8 per year to host each of the 250 million domains currently in effect worldwide — Krueger says that the average registrar operates at a 50 percent profit margin and indicates that renewal rates are predictably high.

As the internet becomes an increasingly central part of modern life, and with the addition of new TLDs like .News, .Blog, .Law, .Cooking, .xxx, .NewYork, etc., the total number of domains is expected to explode. In addition to individuals and business who want to use these new domains as their primary online address, many millions more will look to secure them as a defensive maneuver to ensure that others do not. For example, the Coca-Cola Company is unlikely to leave Coke.xxx floating out in the ether.

For companies like TLDH and others who can correctly bet which of these TLDs will be the most popular and then secure the rights to own and operate those domains, there is real money to be made.

Four-year-old TLDH already operates the .FM domain, which is popular among internet radio services such as Turntable.fm. The company was uncontested in its application for .Work, .Cooking, .Beer, and other topical domains, and has further secured requisite governmental support to apply for .London, .Miami, .Budapest, and .Bayern which were also uncontested.

There’s some risk in bidding for TLDs, as ICANN operates “auctions of last resort,” meaning that the (considerable) application fees paid by the losing bidders do not get returned. One alternative which TLDH and others have considered pursuing is to host private auctions, through which the losers could receive a portion of the winning bid. Another alternative is forming joint ventures, as TLDH did with Uniregistry for the .country domain. Another clear risk in the process, regardless of the structure it takes, is that the winning bidder ends up with a TLD that proves less popular than expected. After all, there’s no guarantee that people will be willing to pay for JimmysBikes.cycling, et al.

Most VCs have shied away from the domain business, in part due to the bad taste left by the domain-squatting era of the 1990s and early 2000s. It was this reality that led Krueger to list on the London AIM and pursue alternative sources of financing. The strategy seems to have been a wise one now that TLDH has brought in nearly $50 million in equity and debt financing to tackle this one-time opportunity.

The company is in the early innings of building its TLD portfolio. By the end of the year, there will be a much clearer picture of the winners and losers in this game. After that, it will take several more years to determine if the rewards will be a large as Krueger and others are predicting.