Last week, the biggest land grab in Internet history began. Over the coming months, thousands of new generic top-level domains, or gTLDs, will be unleashed, giving businesses the opportunity to be more creative with their website addresses. This article will examine which companies are vying for power and who could benefit from what may very well be an Internet revolution.
What are they?
The web currently consists of only two types of domain suffixes: generic top-level domains, gTLDs, and country code top-level domains, ccTLDs. In total, there are currently 22 gTLDs, which include the widely used .com, .net, and .org suffixes, and a large number of country ccTLDs such as .us, .uk, or .cn.
However, in 2008, the Internet Corporation for Assigned Names and Numbers, or ICANN, the governing body responsible for managing the directory functions of the Internet, decided that in a bid to make the Internet more inclusive, it would open up the system to allow companies to create any gTLD names they liked. After a lengthy application and bidding process, which is still ongoing, the first four new gTLDs were rolled out last week. They are: شبكة (Arabic for "web"), 游戏 (Chinese for "game") and онлайн and сайт (Russian for "online" and "web site").
In total, there are currently 1,913 new gTLDs undergoing the bidding and registration process, which is expected to last well into 2015, with thousands more expected in coming years. These include generic domains such as .news, .music, .mail, .search, and .london, as well as company and brand-specific names like .ferrari, .playstation, and .mcdonalds.
The players
As you might expect, most of the usual suspects are bidding for top-level domains, with Google (GOOG +0.66%) and Amazon (AMZN +0.55%) being two of the most active, bidding for 101 and 76 domains, respectively. VeriSign (VRSN +3.50%) has also bid for a number of non-latin equivalents of the .com domain (Arabic, Chinese, Japanese, Hebrew, Hindi, Japanese, Korean, Russian, and Thai.) and .net domain (Chinese, Hindi, and Korean). Most large multinational companies have also registered some brand-specific domain names. For example, Microsoft (MSFT 1.33%) has made 11 applications for domains such as .xbox, .hotmail, and .bing.
Competition is fierce, with multiple companies bidding for the very popular domains such as .music, .app, .shop, .search, and .movie. This is highlighted in the diagram below, which shows the domains Amazon and Google have bid on, including the 16 domains for which they are going head-to-head.
Source: Icann.org
The opportunities
New gTLDs are expected to revolutionize the Internet in countries where the main language is not derived from the latin alphabet. This includes languages such as Chinese, Japanese, Arabic, and Russian, where users must currently type web addresses consisting of unfamiliar Latin characters, which is a major hurdle for many users. New gTLDs will enable use of non-Latin characters and will make the Internet significantly easier to navigate in these countries, and could increase Internet traffic to websites adopting these language-specific gTLDs.
There could also be an opportunity for companies to generate increased traffic to their websites by associating their brands with more product-specific domain names. Recent research from Microsoft indicates that there is a bias among users toward domain names, rather than position in search results. This could be why Google and Amazon are so intent on obtaining so many domains, as they likely see it as an opportunity to drive increased traffic to their associated products and services.
Domain name registrars
Being named registrar for the most popular domains could also be a cash cow for those companies involved. The domain registration market is currently worth over $3 billion per year , and at the end of 2012 there were over 252 million websites in existence, a growth of 11.8% year-over-year . VeriSign, the largest domain registrar, derives almost the entirety of its revenue from administrating .com and .net domains. Neustar and Tucows are also active in the domain registry market, and would also be beneficiaries from any growth.
| Company | Market Cap | Annual Revenue | % of revenue from domain name registry services | Fwd P/E | Profit Margin |
| VeriSign | $7.46bn | $949.65m | 100% | 20.60 | 37.69% |
| Neustar | $2.96bn | $862.11m | 9.58% | 12.08 | 18.64% |
| Tucows | $121.29m | $120.20m | 76% | 17.50 | 2.27% |
Source: Yahoo! Finance
A word of caution: While it is likely there will be increased growth from language-specific domain names in developing countries, where currently there is only approximately 31% Internet penetration among the population, what is not certain is whether new domain names will cannibalize some of the 252 million existing .com and other current registered addresses. If new domain names were to significantly reduce growth in .com addresses, or even start to reduce yearly renewal rates, this could disproportionately affect revenue at VeriSign, particularly if the company fails to win bids for any of the 12 foreign language transliterations.
Revenues at Neustar or Tucows are less likely to be affected by a similar scenario because domain name registry services make up a lower percentage of their total revenue. Registry services cover a wide number of addresses, and these companies are not restricted by what services they can offer or what they can charge. Conversely, VeriSign, who, due to its monopoly of the .com address, has been restricted by ICANN with respect to maximum yearly subscriptions of $7.85 per .com address until 2018. Additionally, the company cannot implement new registry services without prior approval.
Takeaway
Domain name registrars such as VeriSign, Neustar, and Tucows are likely to benefit directly from the large numbers of people wanting to register new gTLD addresses. However, investors, particularly in VeriSign, should monitor the new gTLD auction process closely, as any failed bids could have a significant impact on future revenue.
The impact on other companies is less tangible at the moment, particularly as the vast majority of gTLDs haven't been auctioned off yet. However, there could be potential growth arising from aligning websites with language-specific gTLDs in developing countries, as well as creating brand-specific ecosystems around certain product-specific gTLDs.
