Diorex

I am not a big domainer, I personally own less than a hundred domains, but I have been getting more and more interested in this space in the last few months. I expect to make sizable investments and own several thousand names within the next few months.

I read with interest today an article from Domain Name News about the beta launch of FUSU, which is a domain name stock exchange similar to Nasdaq or NYSE.

Aside from the potential (and likely significant) regulatory hurdles I find this idea fascinating.

Some of my initial reactions to reading this article:

1. 45% ownership limit makes it almost impossible to compel a purchase or prevent bad management. Say I buy all 45% of a domain that is available. The 55% owner of the site can set any price he wants in a sale and I am forced to go along with it? Just today Morgan Stanley dumped its position in the New York Times because despite being the second largest shareholder it could not control the future of the company. Rupert Murdoch had a similar problem with DowJones, Google someday will have this problem with its founders shares, as Ford and other companies with super voting stock do. Almost every real stock that has this set-up trades at a discount to what it would be worth without that set-up.

2. How do you share revenues? Pre or Post taxes? What about expenses (what is reasonable hosting cost or registration fee)? What about self-dealing selling some leads to an affiliated company for less than their market value? What about the inevitable salaries paid to employees of domains? What about PPC arbitrage to domains?

3. Liquidity will be a huge issue - markets on shares will be percentage points wide even with market makers. Is there a process to short domains? Without the ability to easily short marketmakers cannot make competitive markets. I used to be an onfloor derivatives trader and I know how this works. What about margin? Clearing houses? How will the IPO work? Will this be too easy to manipulate? Just look at the 1880’s with railroad stocks and robber barons.

4. Portfolio Management - Will mutual funds be far behind? Options? Invest in a portfolio of 1,000 generic domain names? The legal industry domain fund, the local markets index, the porn-dex. This can get crazy really fast. Fun as heck, but crazy.

5. Listing requirements - what kind of criteria will be used to keep the listing quality listings? or will everydogdomainname.com be listed?

6. Fraud - Fraud in parked pages is less of an issue right now because I dont click on my names because i dont want to lose my privileges, what happens when 1000 people own a piece of a parked domain how do you monitor that? If you could earn IBM $$$ every day without it costing you money and you owned IBM would you do it? Would thousands in concert or otherwise not do it? How do you deal with a domain that has one overzealous minority owner?

7. liquidity - I already mentioned this, but the reason the stock market is as robust as it is, is because there are people like I used to be who would step up and catch the falling knife and cushion the overall blow by providing liquidity. What happens when there is a mad rush for the exits and no buyers?

Update - 8. Potential Deal Killer - this is a non-US based company. I am pretty sure my hedgefund friends that are salivating at the domain name industry will be less ecstatic when they realize this investment may be subject to the laws of Slovakia of which they know next to nothing about the judicial system. To succeed this will need to be either US based or maybe UK or Japan. Those 3 probably have 90%+ of the worlds stock market wealth and for good reason.

Oh this sounds like so much fun…I cannot hardly wait. Virgin territory with a bunch of unsophisticated investors (both buyers and sellers) in an inefficient and illiquid market. Oh the opportunities…

This entry was posted on Wednesday, October 17th, 2007 at 3:49 pm and is filed under Cool Sites. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.