The Chinese government has granted licenses to operate in the country to its first tranche of new gTLDs — .vip, .club and .xyz.
The agreements mean that Chinese registrars will be able to give their Chinese customers the ability to actually use their domains for web sites.
It also means the companies will be obliged to censor domains the government does not like, but only those domains registered via Chinese registrars.
The Ministry of Industry and Information Technology announced the licenses, given to the Chinese subsidiaries of Minds + Machines, .CLUB Domains and XYZ.com respectively, today.
M+M CEO Toby Hall told DI that it’s “a great moment of support for Chinese registrars”, giving them a “very clear signal about which TLDs they can focus on”.
XYZ.com said in a blog post that some of its Chinese registrars (its biggest channel) are planning on offering discounts to celebrate the approval.
It’s always been possible for Chinese people to register new gTLD domains via Chinese registrars — it’s estimated that 42% of the 27 million new gTLD domains in existence today are Chinese-owned.
However, Chinese citizens need a government license if they want to launch a web site, and the government only issues licenses for domains in approved TLDs.
In addition to .cn and China-based gTLDs, which were the first to be given the nod, Verisign was approved earlier this year for .com.
Hall said that while .vip has been popular with Chinese domainers, the MIIT license means it can start to tap the small business market there too.
Obtaining the license means that the three registries, which are all based in the US or Europe, will have to comply with Chinese regulations when it comes to Chinese customers.
That basically means the Chinese government gets to censor pretty much anything it doesn’t like, up to and including sites that “spread rumors”.
Hall said that there’s no chance of this censorship bleeding out to affect non-Chinese customers.
M+M, along with XYZ and .CLUB, are using Chinese registry gateway ZDNS to act as a proxy between their own back-ends (Nominet for .vip, Neustar for .club and CentralNic for .xyz) and Chinese registrars.
“All of our Chinese web sites go through ZDNS, so only web sites going through ZDNS would be affected,” Hall said, referring to the censorship rules.
Hall added that he was “not aware” of there being a blocklist of politically sensitive strings that Chinese customers are not allowed to register.
Minds + Machines made a profit, kinda, in the first half of the year, due to the popularity of .vip in China.
The company today announced a loss of $1.9 million for the six months to June 30, compared to a $1.6 million loss in the comparable 2015 period, on revenue that was up 115% at $7.4 million.
But factoring out discontinued operations — M+M started to close its registrar and registry back-end businesses during the half — it actually managed to sneak a profit of $56,000.
Its revenue was also unaffected by one-time gains from gTLD auction losses, something which had pumped up its top line regularly for the last few years.
Chairman Guy Elliot said in a statement to the markets that M+M “has successfully been navigated out of troubled waters”.
The turnaround is due in no small part to the success of .vip, which racked up over 400,000 registrations in its first month (back in May), the large majority of which were sold to Chinese investors.
The company said that $5.5 million of the $8 million in H1 billings were made in the first 21 days of .vip’s availability.
Having started 2016 with no sales in Asia whatsoever, it expects 45% of its revenue to come from China by the end of the year.
As a direct consequence of .vip’s sales, M+M has received a £5.5 million ($7.2 million) investment from Goldstream Capital Master Fund I, a Cayman Islands shell company owned by Chinese private equity firm Hony Capital.
Hony, which manages $10 billion in assets, is perhaps best known for owning the pizza restaurant chain Pizza Express, which it acquired for $1.54 billion in 2014.
According to its web site, Hony’s own investors include three large Chinese state-owned investment vehicles.
The investment deal includes clauses preventing Hony from trying to get a director on M+M’s board and/or launching a hostile takeover bid.
It will own 7.17% of M+M after buying 50 million shares at £0.13 each, assuming M+M’s simultaneously announced £13 million ($17 million) share buyback is fully subscribed.
M+M opened a subsidiary in China (a Wholly-Owned Foreign Enterprise) during the half, in order to better serve the Chinese market and comply with Chinese government regulations.
It simultaneously laid off 44% of its staff in the US — engineers no longer needed due to the shift into an almost entirely marketing-focused business — and expects to end the year with only 13 employees there.
The Global Domain Industry Conference, held in China over the weekend, has led to a huge boost in .vip domain sales.
Registry Minds + Machines told the markets this morning that the recently launched gTLD hit 404,892 as of 1600 UTC yesterday, up 49% from Friday.
CEO Toby Hall confirmed to DI that China is very much behind the spike, and that the conference helped raise the profile of .vip.
Billings and orders have now hit $5.5 million, up from $3.2 million on May 22, M+M said. That number includes sunrise and premium sales.
At GDS, M+M sold eight .vip domains auction for a total of $232,000 before auction commissions, which very likely inspired the spike in base-fee registrations.
Photos of GDS published on social media yesterday show a packed auditorium, with hundreds of attendees.
— 西部数码 (@westdotcn) June 6, 2016
While M+M makes much of the fact that it has not used a “freenium” strategy for .vip — which it says may lead to better renewal rates than competitors — retail prices are still pretty damn cheap.
At West.cn, its leading Chinese registrar, a .vip can be had today for about $3. It’s closer to $10 at GoDaddy.
Today’s batch of zone files have not yet been published by ICANN for verification, but yesterday there were 245,872 names in .vip.
Minds + Machines has billed $3.2 million in .vip domain names sales after the first five days of operation, the company said this morning.
It’s already managed to pay off the cost of acquiring the domain at the September 2014 auction, which was $3.1 million.
Between 1600 UTC May 17, when .vip went to general availability, and the same time May 22, the gTLD racked up 203,720 domains, the company said.
The $3.2 million is a “billings” number, which will convert to accounting revenue over the lifetime of the domains.
For comparison, billings in the whole of 2015 was $7.9 million.
M+M now has over half a million domains under management, a 64% increase from the start of the year, the company said.
Registrations from China, where presumably owning a .vip name does not make you look like a douchebag, accounted for over 80% of the registrations. Almost half of its registrars are Chinese.
Major Chinese registrars are currently selling .vip names for CNY 25-26 (about $4) apiece.
The discrepancy between that low price and the $3.2 million (which implies an average wholesale price of about $16) is due to the effects of premiums, sunrise and multi-year registrations, CEO Toby Hall told DI.
M+M, like the vast majority of TLD registries, is not currently licensed in China, so these names will not legally be allowed to be developed into sites until the company has gone through the full governmental approval process.
Hall said in a press release:
The Chinese market for top-level domains is real and we are delighted to have accessed this key region through the .vip launch… It is a major milestone for the Company, the new management team and our business model centred on working with best-in-class partners across every aspect of our business so as to best monetize our assets while maintaining a tight control on central overheads. It demonstrates that, when properly executed, how quickly the initial investment costs for a domain can be recovered and the potential for a strong recurring revenue established. The .vip launch equally illustrates how as a b2b business we do not have to burn funds on marketing to reach end-consumers and achieve outstanding results.
He’s referring there primarily to M+M’s ongoing restructuring, which has seen the company ditch its registrar business in favor of a more heavily channel-focused approach.
Minds + Machines today reported a 2015 loss of $10 million and further outlined its “transformative” restructuring and China strategy.
It’s the second full year of operating results M+M has posted since its first new gTLDs went live, and they’re not encouraging.
Revenue for accounting purposes was $6.3 million, but the cost of sales was $6.2 million, leaving gross profit of just $101,000.
Factoring in $12.1 million of operating expenses, a $7.9 million gain from losing new gTLD auctions, and other expenses, the total loss before tax was $10 million.
That’s compared to the $22 million profit M+M reported for 2014, a number entirely reliant on $33.7 million of auction loss payments.
The company also reported its “billings”, a line item that does not use the accounting method of deferring revenue across the life of a domain and is therefore more in line with incoming cash.
Billings for 2015 were $7.9 million, compared to $5 million in 2014. Gross profit under that measure was $1.7 million, but the $12 million of operating costs still made the company very unprofitable.
Ignoring the auction benefits in 2015, which will not last forever, it’s pretty clear that M+M was a company spending much more operating new gTLDs than it was making from them.
COO/CFO Michael Salazar said in a statement:
However, billings of $7.9 million for the year were simply not of a sufficient scale to cover the associated cost of sales ($6.2 million) and operating expenses ($12.2 million), which combined reached $18.4 million for 2015. Similarly, the $0.6 million savings achieved in the period by the decisions mid-year to stream-line the existing operational set-up were not of a magnitude to have any material impact in the year under review. That said, forfeited cost of sales and operational expenses as a result of the 2015 cost-cutting decisions will amount to $2.7 million in 2016
It’s perhaps little wonder that activist shareholders, apparently not prepared to play the long game, threw out half of the board and key senior executives during the period.
Former PR man Toby Hall took over as CEO in February, replacing co-founder Anthony Van Couvering, and announced earlier this month that M+M is dumping its registrar and back-end registry businesses.
Its registrar customers have been sold to Uniregistry, and it will outsource its registry back-end to Nominet, to save costs.
Salazar said that the two deals will lead to $2 million in savings, but won’t be complete before the fourth quarter. It seems unlikely they’ll have a great impact on 2016 numbers.
Headcount has been reduced from a peak of 61 to 43 at the end of the year, and is expected to drop further to 25. Salazar said this will save it $4.7 million a year.
Even with these cost reductions, M+M will still need to essentially double its revenue in order to hit operating profitability, it seems.
The company is pinning some of its growth hopes on .vip, which it expects to do well in China. It launches May 18.
Hall said in a statement that M+M would not follow the lead of competitors (Famous Four Media springs to mind) by offering first-year registrations for free to build market share. He said:
Based on the enquiries received during Sunrise and feedback gained through our two recent marketing trips to China, it is clear that there is genuine interest in the domain both within and outside of China. As a result, we will not be using a year-one freemium approach to simply inflate year-one registrations. Instead, we intend to be keenly priced to ensure margin to ourselves — and registrations — as well as protect the integrity of the domain. The volume we anticipate to be generated through keen pricing will then support the sales of our premium names in this domain.
The company also plans to invest in its .law sales team, because billings for that gTLD have been behind expectations.
M+M had $34.6 million in the bank and eight outstanding contested new gTLD applications at the end of the year.