The domain market: Are the rules of the game changing?

In 2012, after more than a decade of stability in a domain market where the number of actors and top-level domains remained relatively constant, ICANN 1 chose to make a change. They opened up registration of top-level domains to anyone, provided applicants met certain financial and technical requirements. The objective of this liberalization of the market was to give customers a wider range of options and to contribute to increased competition and innovation.

After processing the first round of applications, currently approx. 1,200 new top-level domains have been registered 2. Plans for a new round of applications are under way, but it is not yet clear when the application window for the next round will open.

So, what has happened in the domain market in recent years? Are players competing on the same terms as before, or have the rules of the game changed? And what does this all mean for end customers and others in the market?

Market increase in the number of competitors

So far, there are now five times as many top-level domains in the market, compared to 2012. This means increased competition for both new and established actors.

Most new top-level domains have distinct, meaningful names. Among them are generic descriptions (.top, .club, .global, .app), names of cities and other geographical references (.berlin, .amsterdam), descriptions of industries (.lawyer, .doctor, .ceo), interests (.horse, .cooking), group identities (.mormon) and brand names (.statoil, .gucci, .bbc).

It will take time for the newcomers to establish themselves in this market. As of July 2016, the new generic top-level domains have a market share of approx. 6.4 percent 3. Certain top-level domains dominate in terms of size, both among well-established top-level domains and the newcomers. The world’s largest top-level domain, .com, alone has a market share of approx. 39 percent 4. However, the largest newcomer, .xyz, has managed to carve out a place among the world’s ten largest top-level domains.

For many top-level domains, however, total number of domain names is not a relevant measure of success. The business concept behind .luxury, for example, is to be an exclusive product for the select few, which is not necessarily compatible with rapid growth. Another example includes top-level domains that have not been registered for the purpose of resale, such as .statoil and .bbc.

Is the market becoming saturated?

For decades, actors in the domain market have seen a stable increase in the demand for domain names. Recently, however, there are some indications that the market is maturing. Long-term trends for established top-level domains show growth in demands slowing down. The exception is a short-term spike in late 2015, which was caused by Chinese investors registering a large number of domain names. The growth has begun to return to its previous level. The new top-level domains are growing faster than established domains 5, but for these domains, too, Chinese investors has been buying domain names in large numbers over the last year. For example, in April 2016, .xyz reported that more than 50 percent of registrations were from Chinese customers 6.

If this trend of slowing growth in new registrations under established top-level domains continues, several top-level domains may soon experience zero growth. A saturated domain market will, in turn, lead to more fierce competition.

One additional explanation for the slowing demands may be that domain names have become less visible. Increased use of mobile devices means increased use of apps and clickable links, where the user does not have to relate to the domain name behind the content. At the same time, however, domain names are a central part of the Internet infrastructure, and there is no competing technology in sight.

Branding is still the most common competitive strategy

Technically speaking, all domain names work the same way. As a result, top-level domains must use other means to differentiate themselves from competitors and create value for their customers. The most common strategy is to build an identity for the top-level domain, which, in turn, adds value for customers registering their domain names there. One example in this regard is .com, whose brand is so strong that many prefer a longer and more complicated .com domain name over a shorter domain name under a lesser known top-level domain. Similarly, .no has built a distinct identity as a Norwegian, high-quality domain; .no is the obvious first choice for companies and private individuals with a connection to Norway.

Building a strong identity, however, is not achieved overnight. With more than a thousand new players now entering the field, it is going to take considerable resources and long-term marketing to just be visible in the crowd. New top-level domains need a strong business concept and a solid foundation for income generation to succeed, and the same could also be said for established top-level domains that haven’t been able to build a clear identity before newcomers flooded the market. 7

Can .Club truly be called a successful gTLD? Certainly it has reasonable registration volumes (at time of writing 156,000 names) compared with other gTLDs. These registrations were achieved through hard work and good marketing, but at what cost? With the larger registrars retailing .CLUB domain names at below $10, the total first year revenue (excluding premium domains) will be a maximum $1.5 million even if all registrars were selling at cost. In order to obtain these hard won registrations, .CLUB has reportedly spent way over $5 million on marketing and will be spending an additional $3.5 million next year.

There is no denying the quality and quantity of the marketing efforts expended by .CLUB to date, and as a marketer I applaud the professionalism of their campaigns. However, looking at these (admittedly speculative) figures, would a financial director consider .CLUB to be a successful business at the moment?

– Andy Churley, CMO at Famous Four Media (source: Laursen)

In addition, the identity of a top-level domain is more than just branding. Its identity also reflects the “neighbourhood” its customers become a part of. A top-level domain where the majority of domain names function as its customers’ primary site on the Internet, is more attractive to new customers than if the majority of domain names there serve no other purpose than to redirect visitors to other top-level domains 8. The value of a good “neighbourhood” also manifests itself when some security organizations recommend that companies block all traffic leading to specific top-level domains, because more than 90 percent of domain names there are used for unwanted activities, such as spam, fraud and malware. 9

Identity is a central aspect in the competition between top-level domains, but they do, of course, also compete in terms of price. For example, .tk (Tokelau) has built one of the world’s largest top-level domains by ignoring the aspect of identity altogether, and instead offering .tk domain names for free for the first year. If the customer at the end of the year does not wish to keep the domain name, the organization managing .tk takes over, earning money by directing traffic from the domain names to advertising sites. The new top-level domain with the highest number of registrations, .xyz, also climbed to this position by offering domain names for free when starting up the top-level domain.

New players may change the rules of the game

Even though the number of top-level domains has doubled many times over, the way the domain market works has remained relatively unaffected. Market liberalization often lead to changes in the fundamental “rules of the game” over time, however, as seen in other markets. The telecom market is one example in this regard. In principle, disruptive changes can come from any player, but in the domain market, perhaps the greatest potential for disruption lies with major players like Google and Amazon.

Both have a history of disrupting established markets by introducing new business models and new technology. Today, they hold approximately 40–50 top-level domains each 10, and more will follow as the last pending applications are processed. These players control many links in the value chain, and they also control a number of products that may be used with domain names. This could give them the opportunity to take full control of the customers’ experience, giving customers a seamless, streamlined solution, provided they use their products. So far, not much has happened with their top-level domains, but one would be wise to keep an eye on these players in the domain market in the time to come.

Competition may also be external. Increased use of social media, such as Facebook and Instagram, offers alternatives to dedicated websites and email. Unlike domain names, this option locks customers to a single provider and this provider’s terms and conditions for use. In exchange, these services are free, easy to use, and offer attractive added functionality, including the ability to connect users in a community with other users.

Where are these changes leading?

Operating a top-level domain has become more challenging. Increased competition is placing more and more exacting demands on both established and new top-level domains; they have to generate tangible value for customers, either by the top-level domain’s identity or by additional services. There will most certainly be casualties. .doosan was the first new generic top-level domain to be discontinued, and will probably not be the last 11.

All top-level domains are facing increased competition, regardless of whether the organization managing it aims to make a profit for owners and investors, or whether it is a non-profit organization tasked with a social mission. Norid’s vision is to run the registry for the Norwegian top-level domain to the betterment of Norwegian society, and this still applies in the face of increased competition. The Norwegian top-level domain has a good reputation as a high-quality domain, but the work to keep up with society’s needs will remain a primary concern for us in the future.

For customers, increased competition and the large number of new players in the market mean they have a wider selection of options to choose from. For example, registering domains under several different top-level domains could open up new possibilities for profiling, and reflect an affiliation with specific groups.

The challenge with endless choice, of course, is that it may be difficult to find the way in the crowd. Nobody wants to set up the company’s new site under a top-level domain with a reputation for spam and malware. At the same time, this situation is no different from other industries; customers should always look into the reputation of those providing their critical services.