Archive for the ‘ Economics ’ Category

Newer Entries »

The Quest for Recurring Income

Thursday, August 12th, 2010
The Quest for Recurring Income

Back in the good old days, domainer owners would buy a name, park it, and wait for the check.  During the 2008-2010 recession, that model largely broke down. Since then, we have seen a period where liquid domainers bought inventory from the illiquid domainers.  However, recently, domain traders are reporting that they are having a tougher time to move the inventory as they are selling to a shrinking universe of wholesale buyers who can choose from abundant supply.  It is time for a new model.

Pain 2.0
Back in September 2008, very few people saw the storm coming.  Tremendous wealth was destroyed in a very short period of time as the world endured the fallout of casualties (Lehman Brothers and Bear Stearns), nursed the too-big-too-fail (AIG, Goldman, JPM-Chase, Citi, etc.), and sustained the walking dead (Fannie Mae and Freddie Mac). And with trillions of dollars of conjured liquidity, the financial system was able to step back from the abyss. Or so it seemed.

Flash forward to Summer 2010. My personal view is that the Double Dip has arrived.  Not coming. Arrived.  Welcome to the recession that never really ended, otherwise known as Pain 2.0. And with that comes more uncertainty, more dog-eat-dog, and more pressure on household finances.  This is the highly regrettable reality of the leading economic indicators.  The ECRI’s leading indicators is flashing trouble: -10.3.% versus +10.8% a year ago. See the green line below.


The 30 year US mortgage rate dropped this week to an all-time low of 4.44% — assuming you and yours have the balance sheet strength with which to secure said “cheap money”.  The notion of further debasement of the US dollar through the Fed’s Zero Internet Rate Policy (ZIRP) is nothing new.  Printing currency to buy treasuries, also known as “Quantitative Easing”, is also nothing new. And Record US trade deficits are also nothing new and not going away. And the issue of structural unemployment is unsolved which means budget deficits as far as the eye can see.

However, as an internet entrepreneur, the true canary in the coalmine for me was Amazon’s latest earning report, which I blogged about here.  They missed by a lot despite executing brilliantly in so many ways. Since then, the flurry of IPO filings (e.g. Demand Media … ), KKR’s cancelled offering, and Fortune 500 CEO “resignations”, all scream one thing: an “inflection point”. Add to that, Massive fires in Russia, epoch flooding in China, Fidel pontificating about the imminent risk of global conflict. What next?  It doesn’t matter.  The smart money is already heading for cover and for higher ground.

What to do? Bootstrap Baby
A double dip, should it indeed happen, does not mean that commerce stops.  It means negative growth which in turn means that there is a tougher battle for a smaller pie.  This favors two types of people: (1) the deep-pocketed folks who can ride out the downturn, and (2) scrappy, nimble, adaptable people that can out-compete and/or out-innovate more bloated players.  Said another way, even an extended period of US/EU deindustrialization does not mean there are no opportunities to create value.

So, welcome to the era of “You, Inc.”  If that concept sounds scary, perhaps the alternative of being singularly dependent on the generosity and well-being of your employer will cause you to reconsider.  The truth is that becoming financially independent is not really all that hard and is often less stressful than wondering if your job will be there in 3 months.   Becoming financially independent won’t happen overnight, but anybody with discipline and self-awareness can do it.

Recently, Epik partnered with domainer Oliver Hoger to build a portfolio of mostly product portals.  Oliver is quite possibly the next Kenny Hartog. And by that, I mean an Epik developer whose Epik portfolio alone is a basis for financial independence.  Kenny and Oliver both work from their home offices, as do I.  They don’t have secretaries. Nor do I.  With low overhead, your new startup is almost instantly profitable. Overhead is overrated!

A portfolio of Epik-powered sites, features low setup costs, and essentially no operating costs.  Acquire and Develop new properties when you have funds. Optimize and Sell existing properties when you don’t. You can do it.  Get started here.  Or come to the Epik Developer Conference in September and the growing community of successful domain developers will teach you what you need to know and help you on your way.

The Quest for Recurring Income

Tags: , ,
Posted in Economics, Internet trends | 9 Comments »

The Chinese are coming

Tuesday, August 10th, 2010
The Chinese are coming

Back in November, I blogged about what is sometimes referred to as The Pacific Century.  There are a number of scenarios that could still play out that would make this not the case. However, the odds-on favorite to emerge as the next global economic super-power is China.  And right on queue, the Chinese are also becoming prolific global domainers.

Chinese Investment — you ain’t seen nothing yet
The history of Chinese Foreign Direct Investment (FDI) has historically been dominated by State-owned enterprises.  However, in this next phase we are seeing a significant regulatory easing of outbound FDI controls, not just for enterprises but also individuals who have access to online payment platforms, credit cards and overseas bank accounts.  As China continues to increase its Foreign Exchange Reserve, look for more of these reserves to get promptly converted into hard assets.

In recent years, a significant portion of the FDI has been in the form of acquisitions of arable land — notably in Africa and South America.  Some people call this neo-colonialism, only instead of having to conquer territory by force, or threat of force, in these cases, land is acquired from legal owners, and the right to use the acquired asset is protected by domestic or international rule of law. And with China racking up a $28.7 billion trade surplus in July alone, look for more cash to get put to work in the months ahead.

What does all of this mean for ownership of the Internet?  Private ownership of the Internet is well-established.  If the Internet economy is going to be a significant foundation for the continued expansion of global commerce, it goes to follow that the most desirable raw land on the internet will also become contested territory.  And so, look for the Chinese to stake their claim on a territory near you.


Chinese Domainers going global?
Recently, I, and others, have noticed a trend.  Chinese domainers are aggressively buying domains on the drop.  One of the main themes is that these individuals have been buying the .com versions of existing China-based companies that are going global.  I believe this is just the tip of the iceberg.  The bigger story is only starting to unfold. Here are a couple of scenarios to look out for in the not-too-distant future.

  • Converting dollars into hard assets:  I have long argued why Domains are better than dollars, including here and here.  The decision by the Fed today to continue the policy of loose monetary policy — loose for major banks at least — puts further pressure on dollar holdings to find safe haven elsewhere.  The Chinese are among the most aware of this because of their enormous holdings of US Treasuries.  The DXY dollar index is one to watch, particularly at levels of around 74 and 70. As the below chart shows, the DXY has never gone below 70.

  • Direct export of finished goods to consumers:  The other scenario that I think is highly probable is direct sale of finished products via the Internet to consumers.   Consider for a moment whether you have ever talked to a live person at Amazon.com.  If you are like most people, odds are against.  So, if the consumer can engage in a direct transaction with Amazon.com, and Amazon is in the business of distributing product manufactured by others, at what point does the supply chain close the loop and start shipping directly to the consumer?  I believe that day is not far away at all. If that is the case, (Chinese) manufacturers of consumer goods will be looking for ways to take more direct control of the online retail supply chain. With Epik now powering more than 3,000 online stores, we are watching this area with great interest as we prepare to integrate dropshipping and e-commerce.

Coming to Seattle in September?
The upcoming conference and auction on September 15-17 in Seattle is a great opportunity for China-based Domain developers and investors to build their portfolios with income-producing properties.   Here are some key opportunities worth noting:

  • The live auction event on September 16 will feature 100 developed websites.  The extended auction will feature an additional 200 developed websites.   These turn-key websites are fully operational and ready to go to the next level. Price points for turn-key sites are as low as $500.
  • The domain swap event on September 17 is the domainer’s version of Ruilverkaveling, or land exchange, between domainers as domain owners optimize their portfolio to have more of what works for them, and  find a safe landing for the names they will never develop.
  • Also, on September 17, there will be an opportunity for domainers who are long on domains but short on cash to put their domains to work by working directly with Epik to trade domains for development services, as well as finalize development partnerships that turn undeveloped domains into income-producing developed sites.

And for the Chinese who plan to attend, we extend a hearty Ni Hao, in advance and hope to see you in Seattle in September!  The early bird registration has been extended to this coming Friday, August 13 and the Edgewater Hotel still has some discounted rooms available through August 16.  Register here.

The Chinese are coming

Tags: ,
Posted in Economics, Internet trends | 3 Comments »

Amazon.com — cracks in the foundation?

Thursday, July 22nd, 2010
Amazon.com — cracks in the foundation?

Amazon’s Q2 earnings are out. They missed the analyst estimates and the stock tanked 15% in after-hours trading.  Domain owners with product category names, take note, as I believe this has implications. I previous blogged about Amazon here. I continue to follow Amazon closely, not just because they are a Seattle-based internet success story, but because they are a bellwether for web commerce. When Amazon catches a cold, it is meaningful because it suggests something is afoot.

The results were good, but below expectations
Today, after the US markets closed, Amazon came out with their latest earnings report. The company earned $207 million  ($0.45/share) on $6.57 billion in revenues.   The  analyst consensus was at $0.53/share on $7.16 billion. For a public company with an out-sized market valuation, that would be a …. BIG swing and a miss!    Why the shortfall versus forecast? Well, the analyst expectations were a bit giddy, for one thing. However, could it be that Amazon’s ability to squeeze stakeholders is finite? I think so.

Symptom #1: Google is Kingmaker
I have a theory that Google has become a significant threat to Amazon’s business model.  Google is increasingly not ranking Amazon product pages at the top of the SERP. On any given day, IceCreamMaker.com is #1 or #2 on Google.  At Epik, we see the same with other fast-risers like IceCreamMaker.com, GirlsSwimwear.com, and Bra.net but also on the vast network of long tail category names that are getting traction like psylliumhusk.com and reloading-press.com. As more competitors compete for these top category terms, Amazon will have to battle even harder to maintain a top position in organic search. Easier said than done when operating on such vast scale.

Perhaps more importantly, what is the incentive to Google to rank an Amazon page? As near as I can tell, there is none whatsoever. If Google sends a consumer to Amazon, that consumer has just been trained to go shopping at Amazon the next time they are wanting to shop online.  It is foregone conclusion that Amazon’s pages will be less favorably ranked than they are today. The writing is on the wall as there is a growing number of domain developers who are learning affiliate marketing, dropshipping and e-commerce. Some of these new entrants are going to execute well. CSN Stores and Hayneedle proved the model but neither has scaled it to 100,000 stores.  And they won’t!

Symptom #2:  The affiliates are waking up
Affiliate marketers are increasingly aware that Amazon is paying out lower and slower.  Our affiliate network pays out an average of 3 times higher than we were earning when we used Amazon feeds.  In the short-term, it makes logical sense for Amazon to (1) increase chargebacks, (2) discount click volume and (3) delay payouts. However, affiliate marketers are generally not idiots, and will eventually wake up and smell the raw deal. When they do, they will come up with counter-measures. Epik already did. Sure, there will be a new generation of affiliates, but if enough of the top-ranked competitors defect from Amazon, that spells trouble for Amazon.

Symptom #3: The consumer is still hurting
At the end of the day, Amazon’s success is tied to a robust consumer economy.  This may or may not be in the cards.  Of note, the ECRI publishes the best non-tampered economic indicators that I have found.   The leading indicators are not good and flashing double-dip recession. See the green line below.

ecri


WWAD  – What would Amazon Do?
So, the operative question for domainers is this?  Given Amazon’s balance sheet strength, and the implied risk of 100,000 category-defining domains being powered by something other than Amazon, when will Amazon embrace a domain strategy?  I don’t know if Amazon has a domain strategy. I do know that the price of not having a domain strategy is going to go up rapidly in the months ahead.

A look ahead at Epik Stores (formerly known as Product Portals)
Luke Webster, EVP Operations of Epik, is normally based in Sandpoint, Idaho where we operate our call center and fast-growing production center.  This week, Luke spent 2 days in Seattle working with the team here for strategy meetings.  A core purpose of the meetings is the planned migration to Dropship, and eventually, e-commerce for many of our online stores.  Luke’s previous work in the e-commerce field, as well as the work of Epik’s sole outside investor, Tal Moore (Founder of Gumballs.com) has taught us that there are categories where there is as much as 90% gross margins — a far cry from the $0.18 average CPC currently being earned on our affiliate networks.  Stay tuned.

Amazon.com — cracks in the foundation?

Tags: , , , ,
Posted in Domain Development, Economics, Internet trends | 15 Comments »

Fingers in the dike. Gold fingers.

Thursday, May 13th, 2010
Fingers in the dike. Gold fingers.

As expected, the run for the exits appears to have started as the global fiat currency regimes begin to crumble — starting with the Euro.  Dealers for physical gold and silver bullion have been reporting capacity shortages for months now.  This week’s explosive jump in gold to all time highs suggest that other durable commodity assets — including premium domains — should follow.

The Virtual wants to get Physical
To understand the magnitude of the problem with physical bullion, keep in mind that there are some reports that physical gold has been levered as much as 100:1. In other words, for every ounce of physical gold, there may be as many as 99 paper ounces that lay claim to that same physical ounce. Think of it as fractional reserve banking on steroids.

The use of levering is also what had made it possible for traders to take very large short positions. Like other commodities, it has historically not been common to take physical delivery.  Rather it was normal to hold the commodity in its paper-equivalent form.  After all, physical anything has to be securely stored, and in the case of precious metals,  if it “disappears”, there is no paper trail to get it back!

What is going on now is a battle between the highly leveraged shorts and the increasingly finite available supply.   As more owners take delivery, the supply that can be leveraged goes down.  The largest of the shorts may well have bet their entire existence on containing a run on physical gold (and silver). The stakes could not be higher.

A Gold Moonshot and a Speculative attack on the Euro
The interesting development this week was the $1 Trillion Euro defense fund announced last Sunday before the markets opened in Tokyo on Monday morning.  Speculators smelled a turkey shoot and have been shorting the Euro all week.  The price of gold in Euros is a good indicator of what happened.

10 year gold

This is the price per ounce, denominated in Euros. However, the real crux of the problem is that virtual gold is priced the same as physical gold.   Virtual gold can be created by shorting physical gold 100:1. While virtual gold is still available, physical gold increasingly is not.

You can see the problem very clearly at the micro level. Talk to your local coin shop. In fact, these dealers have known about this problem for months.  Hence the deafening din of “Cash for gold” everywhere you look.  Houston …. we have a supply problem.

A long legacy of asset inflation
The banking community uses the term “Hawk” to describe a central banker that is quick to act on signs of inflation.   A “Dove” describes a central banker that has an “accommodative” stance towards inflation.  Quantitative Easing — the creation of money by buying debt with newly-fomented debt –  would be considered highly Dovish.  Fed Chairman Bernanke is Dovish.  The term “Helicopter Ben” refers to Bernanke’s academic banking concept of dropping money from helicopters to stimulate the economy out of Depression.

Before Bernanke, we had Alan Greenspan. Alan Greenspan’s tenure as Central Banker is legendary. It was also decidedly Dovish.  Greenspan presided over the biggest financial bubble the world has ever seen, starting with his appointment to Fed Chairman in 1987. One of his first moves was a massive liquidity injection in 1987 in the wake of the Long Term Credit Management bailout. Greenspan went on to serve a record five terms during which we had record wealth creation.

Dovish tenure notwithstanding, what is interesting is that decades ago Greenspan had some pretty Hawkish ideas. Here is a quote that is widely attributed to Alan Greenspan way back in 1967 — long before Bretton Woods (1973):

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

In other words, abrogation of the Bretton Woods agreement — the unilateral decision by the US to take the dollar off of the gold standard — was one ballsy banker move. It worked. However, as you can see from the 1967 Greenspan quote, the central bankers were knowingly playing with fire.


Implications — It is approaching “too late” for gold. It is not too late for Domains.
The bottom line is that the central bankers know the score. Increasingly the public does too.  Paper metals are not really a viable hedge, and physical metals have their challenges. This is why I am increasingly convinced that domain names for wealth preservation makes sense. Here’s why:

  • Rare:  There is a significant but finite number of development-worthy com and net domain names.
  • High value to weight: Domains can be easily transported — virtually and in real-time
  • Traceable:  There is only one of each name.  It is impossible to “counterfeit” a domain. If your name goes missing, there is a process for recovering it.
  • Intrinsic value: Domains are the raw land of the Internet — the increasingly dominant platform for communication, commerce and community.

This is not to suggest that domains be a primary store of wealth, though for many domainers that is probably the case. The point is that high quality, professionally managed, domains are a viable component of a balanced investment portfolio.

Fingers in the dike. Gold fingers.

Tags: , , , , ,
Posted in Domain Names, Economics | 2 Comments »

Why Greece matters to all of us

Wednesday, April 28th, 2010
Why Greece matters to all of us

It could not happen to a nicer country.   2500 years ago Greece was the center of Democratic humanity. Remember Solon’s reforms? Old glory. Today, the country Greece is for sale.  What’s next? Endorsement rights for the Parthenon? Pay attention since this actually matters to the domain name asset class.

epik-parthenon

Why it matters?
This is not going to impact only Greece. It is going to hit right at the heart of the European Monetary Union — which is a fiat currency backed by nothing, and governed by a monetary policy that has no binding influence on national fiscal policy.  As for Greek fiscal policy, a promise made was a promise broken.  The 3% EMU budget deficit maximum was never even achieved during the boom times, and is now completely toast in the bad times.  It was a whopping 13.9% of GDP in 2009.

So, unfortunately for Prime Minister “G-Pap”, the Greek credit card has been shredded.  The IMF is orchestrating what is effectively “Debtor in Possession” financing for the country’s assets.   That would technically include historic treasures like The Parthenon and a bunch of nice islands in The Aegean Sea.

The European Union, just recovering from the “EuroKill” volcanic ash-induced chaos, is scrambling to contain the collateral damage before it spreads to Spain, Portugal, Italy and Ireland. A re-financing of Greece spares other countries — notably France and Germany — from having to write down the principal on their Greek debt holdings.  Bankers call this practice “Extend and Pretend” or “Mark to Fantasy” (as opposed to “Mark to Market”).

Meanwhile, the EMU policy coordination efforts go something like this:

dilbert-meeting

The EMU will be the first to go — and I actually believe it will go. This is one reason why we see the inexorable rise in the price of gold, particularly if you look at it denominated in Euros:

gold_10_year_o_eur

Fiat currencies in general are at risk as central banks continually debase their currencies, effectively accepting asset reflation (some would say levitation!) as the price of wholesale currency debasement. The US is by no means out of the woods here but it is a beneficiary of “flight to quality” in large measure because major commodities are priced in dollars and there is no credible alternative reserve currency, at least for the moment.

The stakes for the global economy are high and going higher.  US budget challenges notwithstanding, the US dollar will continue to benefit from being “backed” by the world’s most powerful armed forces, which provides some assurance of continued access to strategic natural resources, notably Middle East oil, which are to be paid for in … US Dollars.  Google “The Great Game” for more context on that topic.  Here is a politically incorrect primer on where Greece fits into the sequence of dominoes.

Although the timing of the next major bout of economic volatility is not entirely known, certain financial markets are functioning as a “Prediction Market” (anyone want to develop Prediction-Markets.com?).  Two of the more notable prediction markets are VIX — an index of volatility — and Credit Default Swaps.  The VIX index was up 30% yesterday:

vix

And then BAM, Greek Credit Default Swap spiked higher again today (chart) while 2 year Greek Sovereign bonds are being placed with 20% interest rates. Ouch! Greek bonds are now officially Junk status, otherwise known as “not investment grade”.  The smart money knew this long before.

greekcds

There was a good panel today at the Milken Global Conference if you want more.

The Bottom line: Expect the Unexpected.
I stand by my theory that Domains are better than Dollars which I argued here and here.  And even though your personal financial advisor might beg to differ on this advice, I would use any strength in the US dollar to consolidate a position in development-worthy domain names.

At Epik we are also putting our money where our mouth is and are buying domains every day.  If you want to know what we buy (and sell), you can request to receive our Daily Acquisition Report by contacting me at rob -at- epik.com.

In the meantime, expect the unexpected.

Why Greece matters to all of us

Tags: , ,
Posted in Domain Investing, Economics | 13 Comments »

The shell game

Thursday, April 8th, 2010
The shell game

It has been a little busy over here at Epik HQ. As a result, there has not been as much time to comment on the global economy.  For anyone needing a quick update on what is going on with fiat currencies, and the US dollar in particular, here is an informative post on a great site.

The site is a personal favorite, called ZeroHedge, which is slightly irreverent but provides a perspective on the financial markets that is not available from mainstream media. Their coverage of Greek economy and the collateral risk to the European Monetary Union is unmatched.

The author of the article, entitled “The Greatest Shell Game Ever”, is Chris Martenson, who runs a site of his own at ChrisMartenson.com.  Here is the link to the article. His crash course is a video primer on the present state of the economy and how we got here. It is slightly depressing for anyone who is not naturally optimistic. You can check out the crash course here.

Another entertaining pundit on global finance is Max Keiser, who operates MaxKeiser.com. Here is a typical video post from earlier today:

I believe the more you research, the more you will agree that Domains are better than Dollars which I have explained here and here.

The shell game

Posted in Domain Names, Economics | 1 Comment »

Why domains are better than dollars – Part II

Tuesday, February 9th, 2010
Why domains are better than dollars – Part II

The financial wizards are hard at work so far in 2010. On the heels of the annual Davos summit, central bankers and finance ministers from around the world have been on world tour — from Sydney to the Arctic. There would appear to be a lot of fingers in the dam right now as national economies try to wean themselves from government stimulus. Herewith are a couple of major developments to watch in the coming weeks along with the implications for domainers.

roller coaster

Precious Metals
Precious metals, notably gold, is what some economists call Armageddon Insurance. Mathematically, for gold to function as a global currency, it would need to trade in the range of $3,000 to $5,000 per ounce — well above the current level of $1,077 which is already more than the intrinsic value. In other words, the trading price is partly about intrinsic value, but mostly it is a bet on the viability of traditional national currency systems as an enduring store of value.

What is interesting about precious metals as a store of value is that most of it is held in the form of paper rather than physical metal. The typical paper forms are (1) Exchange traded funds like GLD, (2) long or short commodity contracts, and (3) shares in mining or resource companies. In recent days there has been chatter about the breakdown of the physical market for bullion.  Here is one relevant analysis about the Breakdown in the Gold Market.

Although not being covered in the mainstream press, many mints and dealers are reportedly out of stock and backordered of physical precious metals.  In other words, supply is greater than demand when it comes to the physical good.  Unlike fiat currencies, or paper contracts, one can’t conjure up more physical supply of a rare metal. New supply has to be discovered, mined and processed. This is a development worth watching.

Greece — why it matters

In other news, pay close attention to recent movements in Greek’s Sovereign debt.  This is more significant than Iceland’s national bankruptcy.  It is a test case for the future of the Euro as a currency union. It is part of the larger PIGS story, which stands for Portugal, Ireland, Greece and Spain, all of which are pushing the boundaries of EMU membership compliance.  The below picture tells the story of a nation whose credit card is in the process of being shredded:

greek spread

For the moment, there is more rumor than news.  If Greece is bailed out, as is now being rumored, the whole thesis of EMU fiscal guidelines (e.g. 3% maximum deficit as % of GDP) is completely out the window; member nations will have been granted an implied license for moral hazard.  STRATFOR did a good analysis of why Greece matters, and notably why Germany is stuck between a rock and a hard place.

Domain names as asset class

The implication here is that as the global economy struggles to resume a sustainable and endogenous growth track, the fundamental risks are still largely unchanged.  At the same time, the list of attractive alternatives to the US Dollar is shrinking — this at a time when the US Dollar is not all that attractive! The silver lining for Domainers is that the online economy is healthy, capital efficient and increasingly profitable.

Premium domains have many of the characteristics of being a desirable alternative asset class.  Over the last several weeks, I have had a series of discussions with asset management groups and hedge fund managers about the “Domain names as asset class” thesis. The light bulbs are going on and for a growing percentage of these fund managers, there is serious consideration of domain names as a store of value in uncertain times.

Why does this make sense? Simple. Domain names can be priced in any currency, operated from anywhere, and owned by anyone. In other words, domain names are a portable store of value that can be transferred instantly across the globe from one owner to another. They can even be owned anonymously. This message of “Domains as an asset class” is an important one to reinforce as it is key to moving beyond intrinsic value and unlocking speculative value.

For more on the topic of domain names as asset class, see my prior post on why “Domains are better than dollars“.

Why domains are better than dollars – Part II

Posted in Domain Names, Economics, Uncategorized | 9 Comments »

The Gini is out of the bottle

Friday, December 4th, 2009
The Gini is out of the bottle

The Gini coefficient is a topic that I expect we will be hearing a lot more about in the coming months.  For domainers, it is worth understanding because it is a reliable indicator of seismic changes in national economies.  It also happens to be good news for domainers.

What is the Gini coefficient
Simply described, the Gini coefficient is a mathematical index for income inequality. The coefficient has a value of between 0 and 1, where  1 represents complete inequality and 0 represents complete equality. Is this a useful statistic? The CIA uses the Gini coefficient as one predictive indicator of social unrest. If you look at a database of national Gini coefficients, you see some patterns. Countries like Switzerland, Sweden, Canada, and Japan have Gini coefficients in the range of .25 to .35. Countries like Zimbabwe, Namibia, South Africa, and Argentina are all above 0.5.  For calibration, the US was just under 0.5 before the Great Recession, and is now probably at or above 0.5. This is troubling, particularly when you consider that this is national average.

Should we care about income inequality?
My wife, Jill, and I were out for dinner this evening. At one point, Jill asked the young server how it was going. To which, the college-aged man replied “I am doing great. Earning minimum wage … Living the American dream!” He said it with the type of cynical optimism that just tugged at your heart. People are frustrated, and increasingly vocal and upset. The tone is shifting from forward-looking hope to growing despair. As a right-leaning, serial entrepreneur, I am all for free markets but this is crazy. The Gini is out of the bottle.  To put the Gini coefficient into historical context, here is a useful trendline:

Gini coefficient in USA

Gini coefficient in USA

Anyone longing for the 60′s, may well be “Dreaming of Gini” — when the US experienced its lowest Gini coefficient in recorded history. Incidentally, the last time the US Gini coefficient was at 0.5 was in 1929 — the end of “The Roaring 20′s” and right before the Great Depression. In other words, when the separation between “haves” and “have nots” gets this wide, the historical precedent is that a major intervention occurs.

What’s a Government to do?
The US Federal government is scrambling. This week’s Jobs Summit was a blatant appeal to the private sector for employment creation. Don’t hold your breath — these businesses are competing globally for customers and capital at a time when labor is plentiful. Keynesian public works projects are a replay of the FDR formula of the 1930′s — roads, bridges and public transportation. It worked well in the 1930′s. Yet, the situation is different this time. Why? Over the last 80 years, we have gone through 3 distinct cycles:

1. Tax and spend –  The New Deal, under FDR, public works were funded through taxation. The term “Tax and Spend” comes from the FDR era. It worked.

2. Borrow and spend — This was the growth formula under Reagan, Bush I and Bush II. Cut taxes, and borrow the difference. It too worked.

3. Print and spend — The current practice of Quantitative Easing, whereby the Federal Reserve “prints” currency which the US Treasury then borrows.

The United States is executing the plan that looks rather similar to Zimbabwe and the Weimar Republic. For the moment, the US is getting away with it, in part because of the brand strength of the US dollar as international reserve currency, overwhelming military superiority of the US, and hat-in-hand diplomacy by our Commander in Chief. The following cartoon, courtesy of Ramsay Devreux, tells the story well:

how-to-greet-foreign-leaders

Looking ahead to 2010, Healthcare Reform, a lot more public works projects, more extended unemployment benefits, and now the surge in Afghanistan, will come at the cost of debasing the US Dollar since raising interest rates would just increase the deficit even faster. The alternative would be massive tax increases, notably on the rich. The problem this time around is that (1) the rich are a shrinking population, and (2) the truly rich hold capital that is not captive to the boundaries of any sovereign nation.  Wealth, and the people who control it, can live anywhere and work anywhere.

Implications for domainers
So, what does rising inequality in the US mean for domainers.  If we get Great Depression II, I believe domains are a better store of value than currency.  However, in the more moderate U or W scenarios, I believe there are tectonic shifts in the value chain that are equally interesting for domainers. Here are a few examples:

  • Products – As more products are sold online, more producers will go direct to consumers.  The US retail shakeout is far from over. During 2010, I expect that producers will be looking for more ways to sell directly to consumers. Concerns about channel conflict will be trumped by the need to protect profit margins. Producers that are selling online through Amazon, Wal-Mart and Target, are getting squeezed by free shipping and price comparison. At what point do these producers start selling directly to consumers in a risky effort to regain pricing control? It will happen and when it does, these producers will need memorable, trademark-safe, SEO-friendly domain names on which to sell their products. Advantage: domainer.
  • Content — Book publishers, Newspapers, TV and Radio are all feeling the heat. The cost of production and distribution has plummeted and now anyone can produce and distribute content. If it is good content, the world will discover it because social media has leveled the playing field.  Content producers no longer need printing presses or broadcasting towers to distribute content. However, once a content producer’s brand is established, why not take control of the online brand and host the content on your own domain name? Content producers — notably journalists and authors — are finally waking up to to this and the mainstreaming of eReaders will be a huge accelerant. Advantage: domainer.
  • Professionals — The unemployment trend in 2009 has not bottomed yet. In normal economic cycles it would have bottomed by now. It has not. Jobs are still being lost on a monthly basis, though at a decelerating rate.  Sooner or later, people will realize that to an increasing degree we are living in the era of “You, Inc.”.  In a growing number of professions, providers will be better off selling their services directly to consumers. I actually expect this trend to accelerate in 2010.  These newly independent professionals will need their own websites through which to ply their trade. If they can’t get a great TrademarkAttorney.com, they might settle for a subdomain, e.g. Seattle.TrademarkAttorney.com. Advantage: domainer.

In summary, I believe the real path out of rising inequality is not more taxation or more public works. It is entrepreneurial courage by capable producers who are currently underutilized.  The Founding Fathers of the United States knew this well:

“A government big enough to give you everything you want, is strong enough to take everything you have.”

– Thomas Jefferson, Founding Father and 3rd President of the United States (1801-1809)

The Gini is out of the bottle

Posted in Domain Names, Economics | 11 Comments »

The Times They are A-Changin'

Sunday, November 22nd, 2009
The Times They are A-Changin'

Over the weekend, I had an opportunity to catch up on some reading.  A few of the articles I read were particularly helpful to understand what is going on in the world. The first 3 articles are also related to my recent posts about China and the outlook for the US dollar. The last article  falls into the category of Christian theology and offers interesting perspective on the outlook for the US dollar, and by inference, for domain names as a global asset class.

Advice from Grandma
Thomas “The World is Flat” Friedman’s latest Op-Ed piece starts to throw cold water on the whole Pacific Century thesis saying that the US remains an innovation powerhouse and will come back. He then back-pedals and says that globalization has made the US sovereign borders less relevant, and goes on to draw a parallel between Arnold Schwarzenegger’s roll in governing the de facto bankrupt State of California, and President Obama’s declining credibility as savior of US global hegemony:

“A lot of the disappointment settling in among Obama voters today is prompted by their dawning realization that maybe, like Arnold, he can’t.”

This is notable because Mr. Friedman is a respected pundit who has supported Obama in the past. The next 2 months leading up to the January State of the Union address to Congress are pivotal for the Presidency and Democratic-controlled Congress.

United States Economy At Zero Hour To Service Debt Mountain
Simply stated, the article makes the case that the world largest importer is approaching an impasse with the largest exporters.  The formula that worked brilliantly for the past decade is starting to crack. 

Many countries that relied heavily on exports as a growth strategy are now geared up to provide goods and services to heavily indebted countries that no longer have the will or the means to buy them.

The article includes some useful trend charts, and draws some parallels between the US in the 2000′s and the Japanese in the 1990′s. Having lived in Japan, I would draw some distinctions between the US and Japan: (1) The Japanese cultural norm is one where there is a huge social duty to pay one’s bills in full and on time.  In fact, Japan is still mostly a cash economy. (2) Japan  maintained a healthy export machine while moderating its imports.  And (3) the Japanese never had the luxury of producing an international reserve currency.

Gold Market Reaching The Breaking Point
I received this article from domainer — and fellow skeptic of fiat curency — Ramsay Devreux with whom we are developing names like EmergencyFood.com, ModelShips.com, among other active projects.  The article raises some familiar questions about the accounting of physical gold.  It is almost 100% certain that a lot of physical gold has been sold multiple times, and that if everyone who owns physical gold actually took delivery on the gold they think they own, there would be a run on gold. While it was never the intent for a physical commodity to get levered, it turns out that it was. Here is an interesting visual from the article:

All the gold that has ever been produced would fit in a solid cube of about 19 meters on each side, and this cube is only expanding by about 12 centimeters a year (2%).

I also thought this statistic to be telling:

Statistics from United States Geological Survey show that the united states has exported 5000 metric tons of “Gold compounds” in last two years, and the US Census Bureau has assigned an astronomically high value to these exports.

One emerging conspiracy theory is that the “compounds” are composite of Tungsten, which conveniently has the same density as gold, but costs just $10 per pound, versus $1,030 per ounce for gold.  That’s one reason why some people are buying older numismatic gold and silver coins that were produced long before there was a need to “inflate” physical gold.

The Coming Epiphany
I came across a slightly dense eBook that is worth a read.  The book is  a primer on Christian End times theology. Revelations is pretty hard to parse due to heavy symbolism.  This book does a decent job of interpreting Scripture though it makes for slightly gloomy reading. Page 251 addresses the author’s academic analysis for why he thinks February 22, 2010 is judgment day for the US Dollar. You can download the eBook for free here at Lulu.com, the self-publishing platform.

The Times They are A-Changin'

Posted in Domain Names, Economics, Life | 3 Comments »

The Pacific Century

Saturday, November 21st, 2009
The Pacific Century

This past week was historic.  For the first time in probably a century, the President of the United States was not the most important person in the room.  As a US citizen — albeit of Dutch blood — this is not exactly the easiest thing to watch unfold. While troubling on one level, it just might be good news for domainers with a global view.

obama-japan

Oh my, the US President bowing down to Japan’s Emperor Akihito -- this is the son of Emperor Hirohito of WW II!

My first encounter with the Pacific Century was in 1994
In 1994, I was based just outside of Frankfurt, Germany in the town of Schwalbach working for Procter & Gamble. My boss in Germany was a Polish-American named Jacek Kedziora. Jacek had just moved to Japan. We had a successful run working together in Europe.  When he invited me to come work for him again in Asia, I jumped at the chance. I moved to Kobe, Japan in January 1995, a few weeks after the Great Hanshin Earthquake. Kobe was ground zero.

Although the next 5 years were pretty demanding, working with the Japanese was an amazing experience as was traveling throughout Asia.  By 1997, I was working on some of P&G’s first global projects while still based in Kobe.  By 1999, I had become a global expert on developing better baby diapers having developed them for every region of the world, including Latin America. Around the same time, it was becoming increasingly apparent that the Internet was going to transform a lot of industries.

In 1999, most people in Asia had no idea about the Internet. I developed the idea of creating an internet company that would address the challenge of conducting multi-country market research surveys using the web as the platform for collecting survey data. The idea for Global Market Insite was born. I quit my day job on June 12, 1999, moved the family to Seattle, and then spent the summer of 1999 teaching myself Linux, Apache, MySQL and Perl, wrote the first version of the software, and filed 5 patents.

The decision to be based in Seattle was not an accident. Seattle has an important geographic advantage that I think many people have yet to realize. Seattle is about 8 hour flying time to Tokyo, 9 hours to London and about a 5 hour red-eye to the US east coast. In other words, in the Pacific Century, Seattle is a reasonably central location from which to build global companies that would be well-positioned to bridge the gap with emerging Asia, and in particular, Japan and China.

In economic terms, China is crushing it
China’s foreign exchange reserves hit $2.2 trillion in the 3rd quarter. While this number is huge, in all likelihood it understates the reality. The official pace of growth of foreign exchange reserves is on the order of $600 billion per year. That is actually what is left over after actually spending a large portion of the inflows.

Message in a cookie: How do you expect to pay back all the money you're borrowing from us?

Message in a cookie: How do you expect to pay back all the money you're borrowing from us?

A lot of this foreign exchange is held in US dollar denominated assets.  The Chinese have kept the Yuan pegged to the dollar at around 6.83 Yuan/Dollar since December 2008. The next big exchange rate reset is coming, likely after the Chinese New Year in January. In theory, the US administration wants and needs this revaluation of the Yuan. The downside for China is that it represents a step-wise discounting of the US debt, and will create further margin pressure on US importers of Chinese goods.

The revaluation writing is on the wall. China’s purchases of US Treasuries has already peaked. Moreover, the most recent purchases are short-term, in spite of the anemic interest rate of short-term US treasuries. The US will have no choice but to ask the US Federal Reserve to print currency in order to pay the debt. This practice is called Monetizing the debt. It is among the more blatant forms of Quantitative Easing.

china-treasury-flow-22

So, what is China doing with all those extra dollars that it no longer wants to hold?

  • China is buying vast amounts of arable land, notably in Africa.   The headfake here is that this is supposedly about securing the national food supply. In reality, the domestic food supply risk becomes a factor in about 2030 based on current projections. That alone would not justify buying 2.8 million hectares of sub-Saharan arable land. They are dumping dollars.

What are the implications for Domainers
The twilight of the American century, and the start of the Pacific century is not the end of the world, and certainly not for the prepared domainer.  Unlike physical real estate which has a finite number of potential users or acquirers, domains can be accessed by any of the nominally 1.7 billion users on the internet in a near-instant.  The universe of potential buyers for a given domain name is similarly global.  What are some things that domainers can do to thrive in the Pacific Century?

  • Design global websites:  Founded in December 2007, Patents.com serves a global audience of nearly 1 million monthly visitors.  The site was designed to be global from day one because the addressable market for intellectual property is already global — to the tune of $500 billion per year.  Patents.com started out with a focus on global patent search. In the next phase, we’ll layer on efficient ways for global IP licensing and sale.
  • Learn to work with the Asians:  The Chinese term of Guanxi is not so different than the Japanese practice of nemawashi. Unlike the US, it takes a long time to build a commercially meaningful business relationship with a Chinese or Japanese partner. This can be a good thing if you are willing to invest the time to understand the cultural norms and differences.
  • Partner with Asia-based businesses: Epik recently agreed to develop 3 language-related domains — Japanese.com, German.com and Russian.com — in partnership with Brian Gilbert of Innovation HQ.  The first one to get developed will be Japanese.com using technology and content sourced from World Friends Network, a Shanghai based social network group that I first met in 2007.  The company is led by the talented founder and CEO, Dominic Penaloza.
  • Experiment with Drop-Ship:  As the international supply chain gets more efficient, I expect Chinese producers to start looking at ways to cut out the middle-man, a.k.a. WalMart and Amazon.com.  As part of this transition, I am convinced that there is a meaningful business opportunity to combine a network of product portals with an international drop-ship supply chain. Epik has released more than 150 product portals in the last 6 weeks and is producing new ones at the rate of 30-40 per week. And at $249 one-time setup fee, it is a domain development bargain.

In summary, I believe we have just experienced a seismic shift in the global economy.  What many economists predicted in the 1990′s is now a reality: the torch of global economic leadership passed to Asia — and specifically China — last week in Beijing at the Great Hall of the People.  The global Internet will be too important for China not to have a global strategy. How much longer before the Chinese start to acquire significant amounts of the raw land of the Internet? My prediction: it is coming in 2010.

The Pacific Century

Tags: , , , ,
Posted in Domain Development, Domain Names, Economics, Growing up | 13 Comments »

Newer Entries »