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The only time I have ever visited Las Vegas was to promote a software product at an exhibition. We flew in from Tokyo and had to work long hours. One day, someone mentioned a gun shooting range so I went with a friend. After some brief training, I received a gun, loaded it, and was ready to shoot. Then, I suddenly froze. The noise, the flying bullets, and the thought of the killing power of this little machine just overwhelmed me. It felt like ages before I could finally pick up the courage and pull the trigger. Wow, what a sensation! Away with the bullets went all my work stress. It was truly a spectacular experience. However, next time I'm in Vegas, I'll likely be shooting with questions instead of bullets -- at Namescon. Although I can't go this year, I wish a great success to all who will attend Namscon from January 22 to 25. Here's the post.

January 18, 2017 (Wed)

Chinese domain market: the next 30 years


Jack Ma in a recent speech talked about the 50-year growth pattern in a technological revolution: the first 20 years are all about the technology itself and the next 30 years about application of the technology. He pointed out that the internet has just finished its first leg and is now being increasingly applied to every aspect of our lives.

This means many companies will spring up to incorporate the internet technology in products and services to meet demand from consumers.

The scene in China echoes what Jack Ma has described. The State Administration for Industry & Commerce reported that 4 million new Chinese companies were formed in just the first 9 months of 2016, showing a 27% growth over the same period in 2015. [1]

Since businesses underpin the growth of the domain market, let's explore the fundamentals driving business growth.


The fundamentals

Large population. The USA has 323 million population with 27 million companies. China has a population more than 4 times that of USA but only 77 million companies. With the Chinese economy continuing to grow faster than the USA, we can therefore expect large growth in Chinese companies. [2] [3] [4]

Savvy internet users. China has the largest number of internet users in the world: 710 millions. With a penetration rate of only 51.7%, there is room for massive growth. Equally important, these are savvy users who have skipped the PC era and moved right into the mobile age. Their demand for sophisticated products and services will spur major business growth. Ironically, iPhone's largest market is not USA but China. [5]


Supportive government. This starts from the top where President Jinping XI can often be seen at internet-related conferences. Xi once said, "Let the Internet better benefit the country and the people." Positive policies include: Mass Entrepreneurship and Innovation (大众创业、万众创新) to encourage creation of new companies; Internet Plus (互联网+) to encourage traditional industries to move online; Made in China 2025 (中国制造2025) to bring innovation to manufacturing; and One Belt One Road (一带一路) to economically connect with a large number of economies across the world. [6]

Booming startups and incubators. Suzhou, a city west of Shanghai, shows you how hot the startup circle is. The city has announced it will open 300 incubators by 2020 to house 30,000 startups. Startups also grow fast. For example, group buying service Meituan was founded in 2010 but within 6 years has become one of the largest ecommerce companies in China. Incubators are plenty, and Beijing is destined to become the "Silicon Valley" of China. [7] [8] [9]

Aggressive VC funding. The number of VC firms in China is estimated to be over 1,000. In the first 6 months of last year alone, US$37 billion was invested in Chinese startups. Some major players have come from the domain industry. For example, China's domain king Mike Cai has invested successfully in many companies such as 58.com, Meitu, and eName. [10] [11]

These fundamentals propel business growth in China, and businesses are major users of domain names. Now, let's focus on the Chinese domain market.


Domain market

Size. The domain market is still in its early growth stage. China has 77 million companies, but has only 40 million domain names registered and only 12% of them have been developed into websites. That means the majority of the companies own no domain name and therefore no website. This is possible if the companies use platforms such as Alibaba to run their business. Total value of domain names traded in 2015 was about US$1.7 billion, indicating the market is still very small. [12] [13]

But, the market is growing fast. In the last two years, domain names increased by more than 50% and 30% respectively. See the chart below. Note that growth was disrupted in 2010 and 2011 due to new government rule requiring registrants to submit personal information and photo identification.



Extensions. In terms of market share by number, .cn is the biggest (53%), followed by .com (29%), .net (3%), and .org (1%). However, in terms of preference by users, .com is No. 1. My two studies to look at the 2016 Top 100 Internet Companies in China and 2016 Top 300 New Internet Companies give the conclusion that .com is favored by both the current as well as future leaders in corporate China. When major brands lead, the rest will follow. .com is truly king in China and its solid position will unlikely be challenged in the foreseeable future.

Direct traffic. Quite interestingly, major brands like to embed their .com name in their logo. This may be due to the fact that direct traffic is the No. 1 source of website visitors and if consumers remember a domain name they can go direct without relying on search engines. This may explain why major brands are obsessed with ultra short .com names such as Le.com and JD.com, which can easily fit into a logo and save million dollars in search engine placement.

Upgrade. Chinese companies like to upgrade to a shorter name and from .cn to .com. Qihoo 360 is a good example, The company upgraded from 360Safe.com to 360.cn and finally to 360.com. By the way, 360.com cost them $17 million to acquire.

Regulation. While .com will remain solid, .cn may grow more rapidly and importantly within China because of a new regulation being proposed. If it becomes law, any major company wanting fast access of their website by consumers must locate their website within China and the domain name be registered within China too. This may lead to global players keeping their .com (global operation) outside China while setting up local presence on their brand-matching .cn domain name.

New extensions. In the area of new extensions, China is leading. My weekly NewG series constantly shows China accounting for the majority share of 9 out of the top 10 new extensions. As more and more of these extensions are approved by the Chinese government, they can be used to build websites in China. It is therefore possible to see some new extensions becoming major players in the domain market.

The future may see different extensions playing different roles: .com for global operation, .cn for local operation, and new/Chinese IDN extensions for marketing, for example.

China as No. 1? Some may ask the question: is China already the largest domain market? It is not clear yet. According to a report published by China Academy of Information and Communications Technology, there were 100 million domain names registered in USA in 2015, which was far more than the 31 million domain names registered in China in the same year. However, China is catching up fast. In the same year, China captured 62% of growth in new .com registration. [14] [15]

Auction results at domain conferences paint a strong China in domain sales. For example, Namescon 2016 reportedly sold about $2.5 million domain names. In China, 2015 Chinese Domain Festival reported auction sales of $23 million and 2016 Global Domain Industry Summit reported sales of $45 million. [16] [17] [18]


Opportunities

Even though it's been over 30 years since the first domain name was registered in 1985, domain name usage is still in its early stage. Many Chinese companies do not own domain names or are still using subpar domain names. This natural growth alone will expand the market. In addition, new use of domain names may further increase the number.

One idea that has been floated is to associate domain names with RFID tags to provide information of tagged products. Another is to link phone numbers with domain names.

The recent launch of mini programs by Weixin may trigger new demand for domain names. These mini programs are said to be better than mobile apps because they don't require download, install, and upgrade from app store. Instead, they can run immediately when accessed from a website. Some investors have even suggested .cx domain names as good match because CX may mean 程序 (program). [19]

I have been toying with the idea of a digital home. If we see the internet as digital land, then only the commercial real estate has been developed and residential real estate has yet to come. If each citizen on earth has a domain name to build digital home (website), then we can store our digital assets (messages, music, videos etc) in the digital home instead of relying on the kindness of Google or Facebook. We can lock our digital home, and invite only people we know to come in and chat. We'll have full control of our own digital assets. Is it possible? I think so. Who could imagine some 15 years ago that each person would own more than one email account? The same can be said about domain name. The day may come when every person will have a domain name. When it happens, expensive digital residential real estate will develop as well.

A more likely area of opportunity is domain speculation, and the 2015 domain bubble already points us to that possibility. Speculation and money game are part of the Chinese culture, so domain speculation is not foreign to Chinese. As the technology improves, domain trading becomes very simple for the average consumer. Compared with stocks or bonds, domain names are much easier to understand. If 80% of daily trading of currency is for speculation, why not expect the same to happen to domain names? If this is coupled with easy loan and setup of a global domain exchange, the domain market will see explosive growth. [20]


Threats

Although remote, risks do exist to disturb the domain market. One is the idea of a decentralized, blockchain-based model to replace the current, centralized domain name system. An example of such idea is Namecoin. Even Doman Name System inventor Paul Mockapetris suggested a similar idea to ICANN when he was acting as its consultant. If such decentralized domain name ever succeeds, value of current domain names may disappear. [21] [22]

Another risk is the rise of .brand to dethrone .com as king within the domain market. If .brand is widely adopted and actively used by corporate China, then .com will be demoted to Number 2. So far, this is not happening. For example, .sony, launched in April 2015, has only 6 sites as of this writing.

There is also discussion that AI-based voice assistants such as Siri and Alexa may eliminate the need for navigation to websites. However, businesses still need email, use of domain name for offline promotion, etc. so it is unlikely companies will abandon their domain name.


Conclusion

We are still at the early stage of the Chinese domain market and there will still be many opportunities. .com is king; .cn has the number; and other extensions may become popular too. Regardless of domain extension, "short" will be key to domain investing in China.

China will remain important for a long time and here is a hint. Pay attention to what Monte Cahn said regarding the upcoming domain auction in Namescon: "The extended or online auction was originally going for 10 days afterward but, because of the Chinese New Year, we are respecting that some of the buyers will be busy during the holidays. We are moving the auction now to February the 9th." [23]

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References:

[1] 新华社:前三季度全国新登记企业401万户同比增长27%. See http://www.saic.gov.cn/ywdt/gsyw/mtjj/201610/t20161018_171717.html

[2] The total number of companies in China as of 14 January 2016 was 77,469,000. See https://www.chinacheckup.com/blogs/articles/how-many-companies-in-china

[3] The populations in China and USA are 1,372,966,977 and 323,199,340 respectively, with China being 4.2 times of USA. See http://www.livepopulation.com/country/united-states.html.

[4] The total number companies in of USA as of 2014 was 26,500,000. See http://www.statisticbrain.com/new-business-statistics/

[5] "It’s official—China is the largest iPhone market in the world" See https://qz.com/687017/its-official-china-is-the-largest-iphone-market-in-the-world/

[6] 习近平:让互联网更好造福国家和人民. See http://news.xinhuanet.com/politics/2016-04/19/c_1118672059.htm

[7] "Venture Communism: How China Is Building a Start-Up Boom". See https://www.nytimes.com/2016/09/04/business/international/venture-communism-how-china-is-building-a-start-up-boom.html?_r=1

[8] "After three weeks in China, it's clear Beijing is Silicon Valley's only true
competitor". See http://www.recode.net/2016/5/13/11592570/china-startup-tech-economy-silicon-valley.

[9] "Top 5 incubators in China". See http://www.allchinatech.com/top-5-incubators-in-beijing/

[10] "CHINA STARTUP REPORT: INTRODUCTION TO CHINESE VENTURE CAPITAL (PART 3 OF 5)". See https://www.startupgrind.com/blog/china-startup-report-introduction-to-chinese-venture-capital-part-3-of-5/

[11] "China’s startup funding is still booming, $37b ploughed in during first half of year". See https://www.techinasia.com/china-tech-funding-boom-first-half-2016

[12] "截至2016 年6 月,我国域名应用率仅为12.3%". See page 40 in互联网域名发展与管理报告2016年.pdf

[13] "2015年米市整体交易额112亿元左右". See http://www.niaoyun.com/info/domainNews/6446.html

[14] "截至2015 年底,美国gTLD 域名注册量接近1 亿个". See page 30 in 互联网域名发展与管理报告2016年.pdf.

[15] "中国市场贡献了“.COM”增量的62%". See page 43 in 互联网域名发展与管理报告2016年.pdf.

[16] Listen starting from 1:06 on Domain Sherpa interview with Monte Cahn on December 19, 2016.

[17] "拍卖总额就达到1.5449亿". See http://www.niaoyun.com/info/domainNews/6446.html

[18] "域名拍卖总金额破三亿元". See http://news.ename.cn/yumingjiaoyi_20160606_104677_1.html

[19] "微信小程序正式上线或引爆.cx域名注册潮". See http://news.163.com/17/0109/17/CABRLQT300018AOP.html

[20] "However, these day-to-day corporate needs comprise only about 20% of the market volume. Fully 80% of trades in the currency market are speculative in nature..." See http://www.investopedia.com/articles/forex/06/sevenfxfaqs.asp

[21] For Namecoin, see https://en.wikipedia.org/wiki/Namecoin

[22] Paul Mockapetris speaking at a Cloudflare event on April 12, 2016. See https://www.youtube.com/watch?v=VcwQPK4GTMs

[23] "Monte Cahn – DNW Podcast #117". See http://domainnamewire.com/2017/01/03/monte-cahn-dnw-podcast-117/