What GoDaddy and Neustar get out of the deal.
On Monday, GoDaddy announced it is acquiring Neustar’s domain name registry business and renaming it GoDaddy Registry. After long resisting vertical integration, GoDaddy decided it was time to own a registry business. GoDaddy will now be both the wholesaler and retailer when a Neustar domain is registered at GoDaddy.
To understand the context of the deal and why it makes sense for both parties, let’s look at GoDaddy’s previous forays into the registry business, the current state of registry services, threats to GoDaddy’s business, and why this could be good for consumers.
GoDaddy’s prior registry efforts
In my first article about the acquisition, I noted that GoDaddy had long avoided owning a registry. That’s not entirely true.
GoDaddy is one of the partners in a joint venture that runs Montenegro’s .me domain name. When Warren Adelman was president of GoDaddy, the company struck a deal with its partners for .me and then aggressively pushed the domain on GoDaddy. This could be a blueprint for Neustar’s domains.
The registrar publicly flirted with becoming a registry operator two other times.
In 2007, it partnered with Afilias (also a partner on .me) to try to wrest control of .us from Neustar. Its bid failed.
In the new top level domain round, it applied for .home and .casa but later withdrew its applications. (It owns the dot-brand .GoDaddy, which is on Afilias’ back end.)
So, although GoDaddy did partner on .me and made two false starts to the registry business in the past, its foray into the registry business has been limited.
That will change with the Neustar acquisition. It will now control the .biz domain. It will be the registry on contracts with Colombia for .co, the United States for .us, and India for .in, among others. It will also be the registry back end for many clients who have launched their own top level domains.
Neustar was publicly traded but struck a deal at the end of 2016 to go private when it lost a $500-million-a-year contract to manage phone number portability for the U.S. government. Golden Gate Capital has owned it since then.
But there have been a lot of challenges to the registry business over the past few years.
Australian country code manager auDA dropped Neustar in favor of rival Afilias in a deal announced in 2017. Neustar managed 3 million .au domains.
Colombia considered ditching Neustar for a rival, perhaps Afilias, to run .co. Last week, Colombia announced that it extended its agreement with Neustar for five years but on drastically less favorable terms for the registry.
The news hasn’t been all bad for Neustar. It won a contract with India to run .in, beating incumbent Afilias.
But the details of the .in deal show another challenge facing registry providers like Neustar. A lawsuit disclosed that Neustar agreed to charge just 70 cents per .in domain registered. Years ago, it might have charged $3-$5. There has been a race to the bottom amongst registry providers for how much they charge to manage other entities’ domain names.
While Neustar has made a name for itself as one of the best registries, the economics of the business have undoubtedly changed.
Threats to GoDaddy
GoDaddy is the world’s largest domain name registrar by a long shot.
It faces competition from other domain name registrars and, increasingly, by website builders such as Wix and Squarespace. It faces another threat, though, and that’s from wholesalers (i.e., the registries).
ICANN removed price caps on most top level domains last year, including .org, .info and .biz (Neustar manages the latter). This means that prices on these domains could increase dramatically in the coming years.
Adding fuel to the fire, a private equity company is trying to buy the non-profit Public Interest Registry (PIR), which controls .org. PIR has kept prices the same for several years, but the private equity buyer has different plans. Bowing to pressure, it recently agreed to limit price increases to “only” 10% per year, on average. That’s still a lot.
ICANN also agreed to let Verisign increase prices of .com domain by 7% a year for each of the next four years, and then the latter four of every six years after that.
While GoDaddy’s competitors will pay the same prices for these domains, increasing wholesale prices are bad for GoDaddy’s business. Especially if the price changes are drastic.
It’s possible that, by keeping wholesale prices of its own top level domains in check, GoDaddy could apply some pressure on Verisign and PIR to keep their prices in check. .Com and .org still have market power (people want the .com first, and non-profits want the .org), but at some point, Verisign and PIR might find it challenging to raise prices and maintain current volumes.
GoDaddy is also competing in an environment in which some of its competitors have already vertically integrated. Donuts owns Name.com, CentralNic owns several domain name registrars, and Afilias, which was founded by a number of registrar shareholders, owns 101domain. These companies are reaping some of the benefits of being the wholesaler and retailer.
Oh, and Verisign is now allowed to start a domain name registrar as long as it doesn’t sell its own .com domains.
How GoDaddy can help Neustar TLDs
GoDaddy can make Neustar’s business more valuable, and hence make the acquisition accretive.
Let’s start the discussion by looking at how GoDaddy pledges to avoid conflict of interest. It has four core pillars to keep the registry business separate from the registrar.
Conspicuously, one of these is not that the registrar won’t give preference to Neustar’s domains. Paul Bindel, VP Domains of GoDaddy’s registrar, told Domain Name Wire that it wouldn’t make sense for the registrar to give preference to Neustar domains. It would be a bad customer experience, and GoDaddy wants to make sure it gets the right domain in the customer’s hands.
This is true to an extent. GoDaddy is not going to suddenly show a .biz domain when the .com domain is available. But look at what GoDaddy did with .me. It marketed it on the GoDaddy home page. It made sure it got good exposure in search results. Without GoDaddy, the .me namespace would be a fraction of its current size.
It did the same with .co through a marketing deal, even featuring .co in Super Bowl commercials. .Co paid for this opportunity, but there’s no doubt that it helped the .co namespace become what it is today and it shows what GoDaddy can do for a domain extension. GoDaddy has marketing muscle and it can flex it to promote top level domains.
The registrar has a growing presence in India and could help .in grow. It could help .us grow in the United States. It can still get the right domain in consumers’ hands while also helping Neustar’s stable of domains.
Neustar can now offer back end clients access to shelf space at GoDaddy. Companies shopping for a back end registry provider may believe that, if they choose GoDaddy Registry, then GoDaddy Registrar will sign a registrar-registry agreement with them.
A win for consumers?
Consolidation is often bad for consumers. This transaction might actually be good for consumers.
Neustar is going from PE-backed to GoDaddy, a publicly-traded company. Both entities have a duty to their shareholders to maximize profits but GoDaddy’s exposure to the domain market is more holistic. Because domains are just a stepping stone to higher-margin products, GoDaddy has an incentive to keep domain prices reasonable.
As the wholesaler, Neustar had an incentive to raise prices when it could. With price caps lifted on .biz domains last year, you could bet that the company would push the limits on .biz price increases in 2020. It took advantage of the previous 10%-per-year caps to their fullest.
It will be harder for GoDaddy to raise prices. It can’t blame the registry by saying it’s just passing along the buck when it is the registry.
In fact, Nicolai Bezsonoff, who heads Neustar’s registry services team and will lead GoDaddy Registry, says the company won’t raise wholesale prices on its top level domains. It is considering decreasing some of them.
There’s no doubt that lower prices are good for consumers.
Clearly, this deal makes sense for GoDaddy and Neustar. I expect that GoDaddy will gobble up more registries through its new registry division. Neustar was acquisitive, but I believe GoDaddy can move faster and pay more for registry businesses because it will get the benefit of being both wholesaler and retailer for the domains.