Activist investor tells dot-word biz to sell off 'garbage' new domains

Also complains about Rightside propaganda and unfed mad aunts

One of the biggest names in the domain name market, Rightside, has been hit with a broadside from an activist investor.

J Carlo Cannell, who owns 7 per cent of the public company through his Cannell Capital company, filed an extraordinary and at times abusive letter with the SEC in which he outlined his frustration with the company's focus on new internet top-level domains at the expense of its existing domain business.

"I am troubled by the pivot toward, and unrelenting propaganda about, new generic top-level domain names," he wrote, noting that while there are "opportunities" in the massive expansion of the internet from 300 to approximately 2,000 domain name endings, "most of these new GTLDs are irrelevant and will never be sold in material volumes."

Cannell argues that the company's efforts to sell domains under such endings as .dance, .army and .democrat are holding back its reseller arm "by pushing garbage extensions to a user base that quietly knows better."

He then takes aim at the company's executives for failing to update its registrar service for more established top-level domains such as dot-com, arguing that "the user interfaces at eNom and Namejet look and feel clumsy and stale" and the "front-end infrastructure is untouched and acts like a time capsule to what existed half a decade ago."

He then makes the same point again but with some unusual imagery. The company's registrar arm is "like a crazy aunt kept in the basement, one that you refuse to adequately clothe or feed, but who steadfastly spins straw into gold used to subsidize a stable of largely substandard new GTLDs."

Cannell proposes an aggressive cost-cutting plan that includes firing 20 per cent of Rightside's staff, shutting down all its offices except one, selling off under-performing new internet extensions that "consume resources at the expense of profitable assets," moving all its operations under the single eNom.com name, and adding two new Board directors.

If they don't undertake his plan, he threatens to "wage an expensive proxy battle to elect my own slate of directors."

Extensions not stretching very far

Cannell is certainly right in that the sales of new internet extensions have been far lower than expectations.

It's been two years since the first new internet extensions went live. More than 1,000 have been added over time, but with very few exceptions, names underneath the new extensions have sold in small numbers and led to financial problems at many of the companies that hoped to cash in on a new internet landrush.

The 900+ live new top-level domains average just 16,000 domains each whereas the largest internet registries on the market have millions. Of the domains that have sold, only a quarter of them are being used to hold actual websites, with the rest either pointing elsewhere or having been acquired as an investment with the hope of selling it for a healthy profit later.

Several extensions have been auctioned off and established players in the market have set up teams to acquire failing registries for rock-bottom prices. Even domain name overseer ICANN, which has profited to the tune of hundreds of millions of dollars thanks to fees that it set by itself, warned that it has to reduce its budget expectations in the face of poor sales.

Lean forward?

Despite this poor performance, Rightside CEO Taryn Naidu vowed last year that the company was going to push past people's uncertainty with new domains and aggressively market the new extensions until they catch on.

Rightside is seen as a critical benchmark for the rest of the domain name industry, since it runs both registries (the top-level domains), its own registrar (a domain seller), a reseller registry model where other companies sell domains through it, and an auction and domain name marketplace.

When it comes to new gTLDs, the company has been one of the more successful, with extensions like .news, .ninja and .rocks all doing well with over 50,000 domain apiece. It also has quite a few middling extensions such as .reviews, .consulting and .social (with 15,000 to 20,000 domains) that people feel could take off when the general public becomes more aware and comfortable with new internet endings.

One big hope is that when big brand names start using and marketing their extensions, the market will take off. There are a few early signs of that happening, such as 20th Century Fox and its nic.fox website or Barclays bank and its home.barclays site.

Cannell is a little unfair when he points to Rightside's worst-performing extensions, however, since they have typically been caught up in restrictions imposed by governments concerned about possible abuse. For example, Rightside's slew of armed forces extensions (navy, airforce, army) have been objected to, as well as its political party endings (republican and democrat). All of those have sold under 1,000 domains and are currently costing the company money to run.

A little more on Mr Cannell

This isn't the first time Mr Cannell has aggressively sought to embarrass companies he has invested in.

In 2014, he pulled a similar stunt with TheStreet Inc, accusing its co-founder Jim Cramer of spending too much time on TV and not enough building up the business. "You are simultaneously an employee of CNBC and a director, major shareholder and employee of TST," he wrote. "To which entity do you ascribe your greater allegiance?" He provided a gameplan too: "Resign from CNBC and align your considerable energy and talents to helping your fellow shareholders crawl back from Hades." Jim Cramer still hosts his Mad Money show.

And back in 2005, the fund manager accused BKF Capital Group of being engaged in Roman-style corruption: "In 63 B.C., did Marcus Tullius Cicero expose corruption and vice in the Roman Senate in his First Oration Against Lucius Catilina," he wrote. "His words are relevant today." ®