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Activist investor says eNom was sold too cheap

Kevin Murphy, February 20, 2017, Domain Registries

J Carlo Cannell, the activist investor who has been circling Rightside for the last year or so, was unimpressed with the company’s recent sale of eNom to Tucows.

In a letter published as a Securities and Exchange Commission filing last week, Cannell announced that he has started up a support group for fellow “concerned” investors.

In the distinctly loveless Valentine’s Day missive, Cannell called for Rightside to be acquired, go private or issue a big dividend to investors, and said he intends to campaign to have the board of directors replaced.

On the eNom sale, Cannell wrote that the $76.7 million deal “marks a step in the right direction” for the company, but that he was “not satisfied” with the price or the $4 million legal fees accrued. He wrote:

Conversations with management suggest that the Company took only two months to evaluate and close the transaction. Perhaps if they had been more patient and diligent, shareholders would have enjoyed more than the 0.5x 2016 revenues which they received in this “shotgun sale”.

This price was a fraction of Tucows’ own valuation of 2.6x 2016 estimated revenue. For the two trading sessions following the eNom transaction, NAME traded up 10% while TCX was up 32%, suggesting that investors believe it was a better deal for TCX shareholders than NAME shareholders.

The deal was described at the time by Tucows’ CEO Elliot Noss as an “individual opportunistic transaction”.

Noss later told analysts that the eNom business was floundering, “a flat, potentially even slightly negative-growth business”.

Cannell said last week he has formed Save NAME Group, named after Rightside’s ticker symbol, as a means to exert pressure on the board.

He said it is currently “difficult to justify” the company remaining publicly listed, and that the “sale of the entire company” or a “special and substantial dividend” could help appease shareholders.

He said Rightside agreed last August to let him name a new director, but has dragged its feet approving his suggestion, adding:

SNG intends to become more active and vocal in its efforts to force change at NAME. SNG has compiled a slate of qualified candidates. The names and identity of these candidates shall be disclosed periodically together with other neutral and reliable facts to support the contention of SNG that some or all of the board of NAME needs to be replaced.

Cannell, who owns about 9% of Rightside, first emerged as a critic of the company a year ago.

At that time, he called for the company to ditch its “garbage” new gTLD registries in favor of a focus on its higher-margin eNom business.

He was supported by Uniregistry CEO Frank Schilling, then also a Rightside investor in addition to a competitor.

Tucows says eNom may be shrinking as Melbourne IT drives 2016 growth

Kevin Murphy, February 8, 2017, Domain Registrars

Tucows yesterday reported an 11% increase in revenue for 2016, driven partly by an acquisition, but warned that its more recent acquisition, eNom, may be shrinking.

The company reported revenue for 2016 of $189.8 million, up from $171 million in 2015. Net income was up 41% at $16 million.

For the fourth quarter, revenue was up 9% year-on-year at $48.8 million. Net income was down 9% at $2.8 million.

In a conference call, executives linked some of the growth to the April 2016 acquisition of Melbourne IT’s reseller business, which added 1.6 million domains to Tucows’ DUM.

While Tucows also operates its Ting mobile phone service, the majority of its revenue still comes from domains and related services.

In the fourth quarter, revenue was $30 million for this segment. Of that, $23.1 million came from domains sold via its wholesale network and $3.8 million came from Hover, its retail channel.

CEO Elliot Noss noted that the acquisition of the eNom wholesale registrar business from Rightside last month made Tucows easily the second-largest registrar after GoDaddy, but made eNom sound like a neglected business.

“The eNom business is a flat, potentially even slightly negative-growth business in terms of gross margin dollars,” he told analysts.

eNom’s channel skews more towards European and North American web hosting companies, which are a growth challenge, he said. He added:

We acquired a mature retail business and associated customers which for the past few years has been more about maintaining and servicing eNom’s existing customers as opposed to growth. It has not been actively promoted and as a result has a flat to declining trajectory. It’s something we don’t intend to change in the short-term, but as we look under the hood and get a better sense of the platform as we will with all of the operations, the long-term plan might be different.

The acquisition was “overwhelmingly about generating scale and realizing cost efficiencies”, Noss said.

Tucows paid $83.5 million for eNom, which has about $155 million in annual revenue and is expected to generate about $20 million in EBITDA per year after efficiencies are realized.

Donuts sticks with Rightside despite Google support

Kevin Murphy, February 8, 2017, Domain Registries

Donuts has renewed its back-end registry services contract with Rightside, Rightside has announced.

That’s despite indications a few months ago that it might have been preparing for a switch to Google’s new Nomulus platform.

Rightside said yesterday that the deal, which has seen Rightside handle the registry for Donuts’ portfolio of almost 200 gTLDs for the last five years, has been extended.

It’s a “multi-year” deal, but the length of the extension has not been revealed.

Donuts had suggested last October that it might be ready to move to Nomulus instead.

The company revealed then that it had been quietly working with Google for 20 months on the software, which uses Google’s cloud services and is priced based on resource usage.

Then-CEO Paul Stahura said Nomulus “provides Donuts with an alternative back-end with significant benefits.”

Now-CEO Bruce Jaffe said yesterday that “Rightside’s registry platform has the right combination of innovative features, ease-of-operation, scalability, and highly responsive customer support”.

Now MMX kills off premium renewals

Kevin Murphy, January 23, 2017, Domain Registries

Are we witnessing the beginning of the end for the premium renewal business model?

MMX, aka Minds + Machines today became the latest new gTLD registry to announce it is getting rid of premium renewal fees for all of its premium domain names.

The price changes are retroactive to January 6 and affect all MMX gTLDs, such as .beer, .fishing and .horse.

“We started the process of rebooting our strategy in July last year, when we alerted our many registrar partners that 100% of our premium names sold after January 6th 2017 would have standard, GA [general availability] renewal prices,” CEO Toby Hall said in a statement.

MMX also said today that it is “revisting” its existing pricing tiers.

The reduced pricing will make the domains more attractive to domainers and end users alike, but I suspect the former will be more likely to exploit the new deal at first.

It’s the second new gTLD registry, after Rightside, to announce such a move this month.

Rightside said it was abolishing premium renewals on its expensive Platinum-level domains, though they will remain on more modestly priced premiums.

Rightside sells eNom to Tucows for $83.5m

Kevin Murphy, January 23, 2017, Domain Registrars

Tucows is to become “the second largest registrar in the world” by acquiring eNom from Rightside, paying $83.5 million.

The deal will give Tucows another 14.5 million domains under management and 28,000 resellers, giving it a total of 29 million DUM and 40,000 resellers.

That DUM number, which appears to include ccTLDs, makes Tucows the undisputed volume leader in the reseller world and the second-largest registrar overall.

GoDaddy, the DUM leader, had about 55 million domains just in gTLDs at the last count.

Tucows CEO Elliot Noss told analysts that the deal, along with the April 2016 acquisition of Melbourne IT’s reseller business, were “individual opportunistic transactions”.

He said that Tucows will take its time integrating the two companies, but expects to realize cost savings (presumably read: job losses as duplicate administrative positions are eliminated) over 24 months.

The reseller APIs will not change, and Tucows will not migrate names over to its own existing ICANN accreditations. This could help with reseller retention.

For Rightside, the company said the spin-off will allow it to focus on vertical integration between its gTLD registry business and its consumer-facing registrar, Name.com.

Rightside had come in for a certain amount of high-profile investor criticism for its dogged focus on new gTLDs at the expense of its eNom and Name.com businesses.

Activist investor J Carlo Cannell, supported by fellow investor and Uniregistry CEO Frank Schilling, a year ago accused Rightside of putting too much emphasis on “garbage” new gTLDs instead of its more profitable registrar businesses.

Since then, Rightside has rebuffed separate offers for some or all of its gTLDs by rivals Donuts and XYZ.com.

Last June, it also announced plans to modernize eNom, which Cannell and others had accused of looking stale compared to its competitors.

RightSide cuts super-premium fees in half, drops premium renewals

Kevin Murphy, January 11, 2017, Domain Registries

New gTLD registry RightSide has slashed the minimum price of its so-called “Platinum” tier premium domains and dropped renewal fees for these domains down to an affordable level.

The price changes come as part of two new marketing initiatives designed to start shifting more of its 14,000-strong portfolio of super-premiums through brokers and registrar partners.

The minimum first-year price of a Platinum-tier name has been reduced immediately from $50,000 to $25,000.

In addition, these domains will no longer renew every year at the same price. Instead, RightSide has reduced renewals to a more affordable $30.

“We weren’t selling them,” RightSide senior VP of sales and premiums Matt Overman told DI. “There is not a market for $50,000-a-year domain purchases.”

Now, “we feel comfortable enough with amount money we’re going to make up-front”, Overman said.

However, premium renewals are not being abandoned entirely; non-Platinum premium names will still have their original higher annual renewal fees, he said.

RightSide has sold some Platinum names in the five and six-figure range, but the number is quite small compared to overall size of the portfolio.

But Overman said that “none of them sold with a $50,000 renewal”. The highest renewal fee negotiated to date was $5,000, he said.

Before yesterday’s announcements, RightSide’s Platinum names were available on third-party registrars with buy-it-now fees that automatically applied the premium renewal fees.

However, it seems that the vast majority if not all of these sales came via the company’s in-house registrars such as Name.com and eNom, where there was a more flexible “make an offer” button.

Under a new Platinum Edge product, RightSide hopes to bring this functionality to its registrar partners.

It has made all 14,000 affected names registry-reserved as a result, Overman said. They were previously available in the general pool of unclaimed names and available to registrars via EPP.

Each affected name now has a minimum “access fee” of $25,000 (going up to $200,000 depending on name) that registrars must pay to release it.

They’re able to either negotiate a sale with a markup they can keep, or sell at “cost” (that is, the access fee) and claim a 10% commission, Overman said.

A separate Platinum Brokerage service has also been introduced, aimed at getting more professional domain brokers involved in the sales channel.

Brokers will be able to “reserve” up to five RightSide Platinum names for a broker-exclusivity period of 60 days, during which they’re expected to try to negotiate deals with potential buyers.

While no other brokers will be able to sell those names during those 60 days, registrars will still be able to sell those reserved names.

Overman said that if a registrar sells a name during the period it is under exclusivity with a participating broker, that broker will still get a commission from RightSide regardless of whether they were involved in the sale.

“We won’t give that name to any other broker, but if it sells through a registrar they still get their 10%,” he said. The registrar also gets its 10%.

This of course is open to gaming — brokers could reserve names and just twiddle their thumbs for 60 days, hoping to get a commission for no work — but the broker program is expected to be fairly tightly managed and those exploiting the system could be kicked out.

RightSide will be making the case for the two Platinum-branded offerings at the upcoming NamesCon conference in Las Vegas, where it also expects to name its first brokerage partners.

Google could shake up the registry market with new open-source Nomulus platform

Kevin Murphy, October 19, 2016, Domain Registries

Google has muscled in to the registry service provider market with the launch of Nomulus, an open-source TLD back-end platform.

The new offering appears to be tightly integrated with Google’s various cloud services, challenging long-held registry pricing conventions.

There are already indications that at least one of the gTLD market’s biggest players could be considering a move to the service.

Donuts revealed yesterday it has been helping Google with Nomulus since early 2015, suggesting a shift away from long-time back-end partner Rightside could be on the cards.

Nomulus, which is currently in use at Google Registry’s handful of early-stage gTLDs, takes care of most of the core registry functions required by ICANN, Google said.

It’s a shared registration system based on the EPP standard, able to handle all the elements of the domain registration lifecycle.

Donuts contributed code enabling features it uses in its own 200-ish gTLDs, such as pricing tiers, the Early Access Period and Domain Protected Marks List.

Nomulus handles Whois and likely successor protocol RDAP (Registration Data Access Protocol).

For DNS resolution, it comes with a plug-in to make TLDs work on the Google Cloud DNS service. Users will also be able to write code to use alternative DNS providers.

There’s also software to handle daily data escrow to a third-party provider, another ICANN-mandated essential.

But Nomulus lacks critical features such as billing and fully ICANN-compliant reporting, according to documentation.

So will anyone actually use this? And if so, who?

It’s too early to say for sure, but Donuts certainly seems keen. In a blog post, CEO Paul Stahura wrote:

As the world’s largest operator of new TLDs, Donuts must continually explore compelling technologies and ensure our back-end operations are cost-efficient and flexible… Google has a phenomenal record of stability, an almost peerless engineering team, endless computing resources and global scale. These are additional potential benefits for us and others who may contribute to or utilize the system. We have been happy to evaluate and contribute to this open source project over the past 20 months because this platform provides Donuts with an alternative back-end with significant benefits.

In a roundabout way, Donuts is essentially saying that Nomulus could work out cheaper than its current back-end, Rightside.

The biggest change heralded by Nomulus is certainly pricing.

For as long as there has been a competitive market for back-end domain registry services, pricing has been on a per-domain basis.

While pricing and model vary by provider and customer, registry operators typically pay their RSPs a flat fee and a buck or two for each domain they have under management.

Pricing for dot-brands, where DUM typically comes in at under 100 today, is believed to be weighted much more towards the flat-fee service charge element.

But that’s not how Nomulus is to be paid for.

While the software is open source and free, it’s designed to run on Google’s cloud hosting services, where users are billed on the fly according to their usage of resources such as storage and bandwidth consumed.

For example, the Google Cloud Datastore, the company’s database service that Nomulus uses to store registration and Whois records, charges are $0.18 per gigabyte of storage per month.

For a small TLD, such as a dot-brand, one imagines that storage costs could be reduced substantially.

However, Nomulus is not exactly a fire-and-forget solution.

There is no Google registry service with customer support reps and such, at least not yet. Nomulus users are responsible for building and maintaining their registry like they would any other hosted application.

So the potentially lower service costs would have to be balanced against potentially higher staffing costs.

My hunch based on the limited available information is that for a dot-brand or a small niche TLD operating on a skeleton crew that may lack technical expertise, moving to Nomulus could be a false economy.

With this in mind, Google may have just created a whole new market for middleman RSPs — TLD management companies that can offer small TLDs a single point of contact for technical expertise and support but don’t need to build out and own their own expensive infrastructure.

The barrier to entry to the RSP market may have just dropped like a rock, in other words.

And Nomulus may work out more attractive to larger TLD operators such as Donuts, with existing teams of geeks, that can take advantage of Google’s economies of scale.

Don’t expect any huge changes overnight though. Migrating between back-ends is not an easy or cheap feat.

As well as ICANN costs, and data migration and software costs, there’s also the non-trivial matter of shepherding a horde of registrars over to the new platform.

How much impact Nomulus will have on the market remains to be seen, but it has certainly given the industry something to think about.

Rightside new gTLD renewals can top 80%

Kevin Murphy, October 14, 2016, Domain Registries

Rightside says it is seeing encouraging renewal figures from its oldest batch of new gTLDs.

The company this week revealed that renewals after two years of ownership on average stand at 81%.

In a blog post, Rightside broke out some numbers for .dance, .democrat, .ninja, .immobilien, .social, .reviews and .futbol.

Those seven are the only ones in its portfolio to have gone through two full renewal cycles.

The renewal rate after year one was a modest 69% — in other words it lost almost a third of its installed base after 12 months — but this increased to 81% after the second year.

The actual number of domains involved in quite tiny — 81% equates to just 21,000 names across all seven TLDs.

Breaking out a couple of TLDs, Rightside wrote:

Our first gTLD to market, .DANCE, saw a 70% renewal rate in year one expand to 83% in year two for that same subset of domains. Our best performing gTLD of the seven is .IMMOBILIEN, which renewed at 83% in its first year, and grew to a stupendous 87% in its second—which certainly makes sense given the permanent nature of real estate.

But Rightside reckons the numbers reflect well on the new gTLD industry. It said:

domain investors with portfolios including new gTLDs recognize the long-term value of these domain names, and rather than let them drop after the first year, are holding onto them to find the right buyer continue to earn parking revenue. Second—and likely the more significant driver—is that end users are actually picking up these domain names and putting them to use.

Donuts rolls the dice with $22.5 million .web lawsuit

Kevin Murphy, August 9, 2016, Domain Registries

Donuts is demanding ICANN pay up the $22.5 million it reckons it is owed from the auction of the .web gTLD, which sold late last month for $135 million.

The company yesterday amended its existing California lawsuit against ICANN to allege that Verisign tried to avoid regulatory scrutiny by secretly bankrolling successful bidder Nu Dot Co.

The updated complaint (pdf) reads:

VeriSign’s apparent acquisition of NDC’s application rights was an attempt to avoid allegations of anti-competitive conduct and antitrust violations in applying to operate the .WEB gTLD, which is widely viewed by industry analysts as the strongest competitor to the .COM and .NET gTLDs.

Donuts wants a minimum of $22.5 million, which is roughly what each of the six losing .web applicants would have received if the contention set had been resolved via private auction.

(I previously reported that number as $18.5 million, because I accidentally counted .webs applicant Vistaprint as losing .webs applicant, when in fact it won .webs, paying $1.)

The company’s claims are still based around the allegation that ICANN breached its duties by failing to root out Verisign as the puppet-master.

The complaint alleges breach of contract, negligence, unfair competition and other claims. It says:

ICANN allowed a third party to make an eleventh-hour end run around the application process to the detriment of Plaintiff, the other legitimate applicants for the .WEB gTLD and the Internet community at large.

ICANN intentionally failed to abide by its obligations to conduct a full and open investigation into NDC’s admission because it was in ICANN’s interest that the .WEB contention set be resolved by way of an ICANN auction.

The irony here is that Ruby Glen LLC, the Donuts company that applied for .web, is subject to an arrangement not dissimilar to NDC’s with Verisign.

Ruby Glen is owned by Covered TLD LLC, in turn a wholly-owned Donuts subsidiary.

It’s well-known that fellow portfolio registry Rightside has rights to acquire Covered TLD’s over 100 applied-for strings, but this is not disclosed in its .web application.

ICANN will no doubt make use of this fact when it files its answer to the complaint.

Verisign itself has not been added as a defendant, but much of the new text in the complaint focuses on its now-confirmed involvement with NDC. The suit reads:

Had VeriSign’s apparent acquisition of NDC’s application rights been fully disclosed to ICANN by NDC… the relationship would have also triggered heightened scrutiny of VeriSign’s Registry Agreements with ICANN for .COM and .NET, as well as its Cooperative Agreement with the Department of Commerce.

The fact that Verisign is allowed to collect over half a billion dollars cash every year as a result of its state-endorsed monopoly is a longstanding cause of embarrassment for the Department of Commerce.

It has taken an interest in regulating Verisign’s .com contract in the past — it’s the only reason Verisign has not been able to raise .com prices in the last few years.

But the US government is not a party to the .web contract (unlike .com, where it has a special relationship with Verisign) and is not involved in the new gTLD program’s management or policies.

The complaint also makes reference to a completely unrelated Independent Review Process declaration from last week, which slammed ICANN for its lack of accountability and transparency.

Donuts faces the additional problem that, like all new gTLD applicants, it signed a covenant not to sue ICANN when it applied for its new gTLDs.

A judge in the DotConnectAfrica v ICANN can has allowed that lawsuit to proceed, regardless, but it may prove a stumbling block for Donuts.

It all looks a bit flimsy to me, but I’ve learned not to second-guess American judges so we’ll just have to see how it plays out.

Rightside refuses Donuts’ “opportunistic” $70m gTLD offer

Rightside has rebuffed Donuts’ semi-hostile takeover attempt for its portfolio of gTLD registry contracts.

The question now is: will Donuts up the offer from the $70 million already on the table?

In a pre-markets statement today, Rightside said the offer “undervalued” the assets.

CEO Taryn Naidu is quoted as saying:

After thoughtful evaluation, Rightside’s Board has determined that Donuts’ proposal significantly undervalues Rightside’s Registry assets. We believe Donuts’ proposal is an opportunistic attempt to acquire Rightside’s valuable portfolio of domain extensions with an undervalued price and in a manner that would not be in the best interests of Rightside shareholders.

The company reckons its gTLDs will be bringing in $50 million to $75 million in revenue a year in the next three two five years, which would represent substantial growth over current levels.

It made $2.6 million from the registry business in the first quarter this year.

Donuts’ offer could be considered “opportunistic” given that there’s some shareholder dissatisfaction with Rightside’s success rate with new gTLDs today.

Activist investor J Carlo Cannell and Uniregistry CEO Frank Schilling, both of whom own small but significant chunks of Rightside, have called on the company to get rid of some of its under-performers.

By announcing the offer publicly — apparently after months of private offers — Donuts might have been trying to capitalize on this unrest.

But pissed-off investors don’t necessarily want these gTLDs sold off cheap.

Rightside has 40 new gTLDs. A $70 million offer equals $1.75 million per gTLD. That’s fair way below the average sale price for gTLDs at ICANN auction, which is $7 million (or $3 million if you take the median).

Will Donuts now increase its offer, or back away?