Rafael Sosa’s Weblog

A twelve year-old boy wrote a letter to Justice Felix Frankfurter requesting advice on the ways to start preparing while still in junior high school. Frankfurter responded:

My dear Paul:

No one can be a truly competent lawyer unless he is a cultivated man. If I were you, I would forget all about any technical preparation for the law. The best way to prepare for the law is to come to the study of the law as a well-read person. Thus alone can one acquire the capacity to use the English language on paper and in speech and with the habits of clear thinking which only a truly liberal education can give. No less important for a lawyer is the cultivation of the imaginative faculties by reading poetry, seeing great paintings, in the original or in the easily available reproductions, and listening to great music. Stock your mind with the deposit of much good reading, and wide and deepen your feelings by experiencing vicariously as much as possible the wonderful mysteries of the universe, and forget all about your future career. With good wishes,

Sincerely yours,

Felix Frankfurter

If y/a = Z, and (y+x)/a = Z, (where Z doesn’t equal 0) then we could logically assume that the value of x = 0, right? When it comes to decision-making and behavioral economics, the answer many times is no.  x could have a significant value in our decision process. Our brains are susceptible to influences that cannot rationally be explained. In the video below, you will see this in more detail. It is interesting to understand it for the applications that it could lead in the formation of pricing structures, establishment of public policy, and many other areas.

Dan Ariely asks, Are we in control of our decisions?

There’s something many of us are missing when we judge success, when we make ourselves goals, and when we put too much emphasis on “I”. Here’s an interesting and well explained take on measuring success by Alain de Botton.

I have just returned from a trip across several countries in Latin America and Europe and noticed a consistent trend – ccTLDs are dominating the visual space of major cities outside of the US. Yes, in the US dot com is king, but not for Argentina, Chile, Greece, nor Spain.

Argentina and Chile

In Argentina, .com.ar dominates almost completely in all forms of commercials and billboards that I saw. The local extension is very popular, even though it has had the limitation of not allowing second level registration (i.e. .ar).

The same popularity for the Chile domain extension can be seen throughout their capital, Santiago. Unlike Argentina, the most popular form of the domain is the direct second level domain. Dot com or any other domain extensions other than the .cl are almost non-existent.

Greece and Spain

At Greece I had the opportunity of visiting several places mainland, as well as several of their islands including all of the most popular ones. Again, the ccTLD .gr was by far the most dominant in all the places I visited. In Athens, I saw a few dot com addresses, but possibly no more than a 10%.

Finally, in Madrid and Barcelona I continued to see the same tendency as the other places. One significant difference was Barcelona – which might be indicative of what’s to come. The official extension in Barcelona was not the ccTLD .es. Rather, the gTLD of choice is .cat, which is short for Cataluña – the region Barcelona belongs to. Aside from the government using .cat as their official extension, and many businesses using .es, there was also a few .com and .info domain names used by businesses.

Conclusion

Important regions like Cataluña could push for having their own regional extensions (and they currently are), opening the opportunity to register domains under those new gTLDs. The new CEO of ICANN has expressed ICANN’s path towards the creation of new gTLDs.

“For example, the chief of the Zulu tribe, His Majesty King Goodwill Zwelithini kaBhekuzulu, recently sent a letter notifying us of his intent to register the dot-zulu domain name so that different but related businesses and other groups can be linked by their domain name to the entire Zulu community. According to His Majesty, “We believe that the .Zulu TLD, as conceived and proposed by the Dot Zulu Project Inc. represents the best interests of the Zulu community and will be able to provide a viable structure for us as an evolving community.” New York City and the city of Berlin have expressed a similar interest in their own domain names. It is impossible to imagine the possibilities that could occur when these and a multitude of other TLDs are opened.”

If we extrapolate from Barcelona, when trying to enter a local market outside of the US, descriptive or generic domain names including the region or country (Berlinicecreams.com) will most likely be less desirable or useful than the new forms of gTLDs covering those regions (icecreams.berlin). I can see a dot com as being more desirable if it is in the travel industry, where the visitors are not the locals, but rather a population of foreigners.

There are many countries out there that still have high value generics available for registration. There are also still relatively low prices for premium generics in the secondary market for some countries. However, one big impediment has been the management of these domains, scattered through multiple NICs all having their own particular ways of renewal. So, if you are willing to deal with that inconvenience, then ccTLDs and new regional gTLDs could be a good pocket of growth for Domain Investors.

For the past few months I have been working together with Andreas Krohn on a new project called Blendapps. The first solution is a mashup integrating chat rooms from Meebo and Userplane with the user base of facebook and Ning. More details to come…

“There must certainly be a vast Fund of Stupidity in Human Nature, else men would not be caught as they are, a thousand times over, by the same Snare, and while they yet remember their past Misfortunes, go on to court and encourage the Causes to which they were owing, and which will again produce them.” – said Cato several thousand years ago (from The Battle for the Soul of Capitalism)

Here’s an interesting analysis from John C. Bogle’s book “The Battle for the Soul of Capitalism“

“When the S&P Index rose from 130 in March 1981 to 1,527 in March 2000, the return on investor capital, excluding dividends, was 13.8 percent per year. Earnings growth amounted to 6.2 percent annually, less than half of the return, with the remainder the result of a rise in the price-earnings ratio from eight times to thirty-two times. That increase alone accounted for 1,100 points of the 1,400-point gain, or 7.6 percent per year. If one were to attribute even a 5 percent corporate cost of capital as a threshold for stock option grant- a return a company might have earned merely by placing all of its assets in a bank certificate of deposit- corporate management could claim responsibility for an extra 1.2 percent per year.” (emphasis added)

So how does Wall Street manage to “meet” or “exceed” their generous quarterly guidance with such a high success rate? Here’s an example:

“In 2001, Verizon Communications reported a net income of $389 million and awarded its executives bonuses based on that amount. Net income would have been negative, however, had the company not included $1.8 billion of pension income. Thus, Verizon was able to use pension earnings to convert net income to profits, giving the firm cover to provide managers with higher bonuses [and meeting expectations, and keeping their stock options way high in the black]. It gets worse. It turns out that Verizon’s pension funds did not generate any real income in 2001; they had negative investment returns, losing $3.8 billion in value [What?!]. How then, could Verizon report income of $1.8 billion from its pension assets? The company merely increased its projection of future returns on pension assets to 9.25 percent, a move allowed under the accounting rules then in effect. Thus, the $1.8 billion in pension income used to move Verizon into the black did not even reflect actual returns generated by the pension funds. The pension income was simply the result of a change in the accounting assumptions. This certainly did not create any value for the firm or its shareholders.” (emphasis added)

OK, so lets do this simple math. They claim they made $389 million in net income, because of the $1.8 billion of magic pension fund money that doesn’t exist. This means they actually lost $1.4 billion, but that’s not it. They didn’t make $1.8 from pension, rather lost $3.1 billion in value for that fund.

Who ends up carrying those losses? The individual investors, fooled to believe a company is stable, holds the stock and takes the heavy losses when all the cards in the table are finally shown at once.

Last time I analyzed CNET’s individual assets, the company was acquired 4 months later. Now, amidst the current economic nightmare, there is a fresh new opportunity to grab a gift – Marchex (MCHX). Yahoo, who’s recent conflicts have left many asking for Yang’s head and who’s stock has lost almost 50% since failed negotiations with Ballmer, has a small opportunity to vindicate themselves.

Of course, there’s also Google who needs to continue increasing their revenues in order to support their generous stock PE. Although I would insist that this is a more logical acquisition for Yahoo! to build themselves into a more attractive position for Yahoo! to be acquired, possibly still by Microsoft.

So, what does Marchex bring to the table?

High quality traffic and prime Internet Real Estate.

By its own, Marchex is priced slightly below their current value. However, when you take Google or Yahoo’s advertiser base and traffic sources and fuse it with Marchex’s high quality domain portfolio you get a multiplier effect.

Marchex has made two brilliant moves:

1. Spanish domain portfolio acquisition

This portfolio contains over 100 of the most attractive Spanish domain names and was calculated to generate more than one million unique visitors per month. Of course, these are mostly visitors coming straight to the sites, because of type-in traffic. Take a look at the jewels:

mujer.com (women.com)
fotos.com (photos.com)
deportes.com (sports.com)
salud.com (health.com)
peliculas.com (movies.com)
mascotas.com (pets.com)
futbol.com (soccer.com)
cocina.com (kitchen or cook.com)
tarjetas.com (cards.com)
dietas.com (diets.com)
computadoras.com (computers.com)

The whole list is found here http://www.emediawire.com/releases/2007/5/emw527846.htm

The value of these domain names are like a slow curve that quickly accelerates exponentially as the Spanish market (Spain, Mexico, Caribbean and South America) online advertising solidifies. One must understand that this market has been extremely slow to develop, mostly because of the number of computers available in each household and lack of understanding from old school marketing executives. However, the panorama is changing quickly and will fuel advertiser dollars to the ‘net.

The Spanish domain portfolio could be easily worth $500 million to $2 billion in a 5 year window, depending on the development of all these domain names into fully usable content and social portals.

The second source of value in Marchex is their 2004 acquisition of UltSearch’s domain portfolio.

In this portfolio, there are over 100,000 domain names of high search traffic value. There are also a few generic jewels in the mix like beijing.com, debts.com, and remodeling.com.

It’s hard to value the whole portfolio and I suspect that most of the names would probably not be of any significant worth. However, assuming even 1% of the names are of the quality of debts.com and beijing.com would make the portfolio highly attractive.

I wouldn’t doubt that this portfolio had at least $100 million in value (Marchex paid over $150 million a few years ago for the portfolio).

Finally, someone over at Marchex decided to accumulate zip code domain name. Wrap them up, put a bow on top of them and sell it for a few million to some telephone company still figuring out their online strategy. I’d also garage sale the auto content generation technology.

Marchex is currently priced at $300 million. Year-to-date they are down almost 30%. This is exactly how much it is worth.. a 30 to 50% premium on its current price.

An American military supercomputer, assembled from components originally designed for video game machines, has reached a long-sought-after computing milestone by processing more than 1.026 quadrillion calculations per second. – NY Times, Military Supercomputer Sets Record

If you have $133 million in spare change, you could have yourself one of these to install MS Office and type in your thesis.

So, are we getting closer to an answer to “The Last Question“?

Lately, I’ve been inactive in this blog, and one of the main reasons for this was my plan to obtain a Juris Doctor. After being involved in Internet businesses for the past eight years, I’ve been able to appreciate the current legal structures (or lack of) and the scarcity of good lawyers who understand what is going on in the World Wide Web.

I still remember how one of the best law firms failed to understand the Anticybersquatting Consumer Protection Act, when my lawyer sent their client a C&D back in 2003. Much of the ignorance on Cyberlaw still permeates the legal community. And much of this is due to a lack of understanding on how the Internet works, from a consumer and commercial point of view.

I’ve just been accepted to the only Law School I was interested in, and the only one I applied to. For the next 3 and a half years, I will be building the skills necessary to put my grain of salt in the improvement of the necessary legal structures to support a safer and more efficient commercial operation through the net. So, look out for more legally oriented blog posts dealing with domains and internet business.