Today, an internet company named GoDaddy will be presenting two SuperBowl commercials. I am going to tell you a little bit about this company's history, and then I will tell you why they are amazingly profitable enough to afford this expense out of their excess cash reserves.
Many years ago, the United States government handed out the role of assigning top-level domain names to a company named Network Solutions.*** Top-level domain names- or TLDs- refers to .com, .net, .org and .edu. Also, Network Solutions was previously known as InterNIC, and domain names used to be free. Network Solutions happily registered domain names to internet users for $35 per year. As the internet became more popular, so did domain name registration. What was initially a government hand-out to outsource responsibility and administrative headaches soon turned into a multi-million dollar business for Network Solutions.
After receiving complaints about unfair pricing, the United States government assigned an independent board of advisors - known as ICANN - to bust up the Network Solutions monopoly on domain name registration. A year later, in 1999, the first competitors began offering domain name registration. Some, like Register.com, didn't exactly make free market history. (Their prices were equal to Network Solutions.) Others, like TuCows and Joker.com, offered significant price discounts but often confusing sign-up procedures or bulk-order requirements.
GoDaddy began offering its services in 2000 with rock-bottom domain name pricing. $8.95 per year was almost half of what the other low-cost registrar, Joker.com, was providing. Because the set fee for each registrar was around $7 or $8 per domain name, many questioned how GoDaddy could stay in business long enough to uphold their registrations.
Today, almost five years later, GoDaddy.com will be showing two advertisements on the SuperBowl. How did an entrepreneurial ex-Marine Vietnam Veteran named Bob Parsons turn GoDaddy into the #1 domain name registration company? Two words: Full service. Parsons realized that GoDaddy was not in the domain name registration business. If you have ever signed up for a domain name using their service, you have probably noticed the number of pages offering you full service domain name features. GoDaddy Spam Guard, GoDaddy Web Hosting, and GoDaddy Home Page Software - these are all amazingly profitable web services to offset GoDaddy's bargain basement domain name pricing. With millions of domain names currently under management, GoDaddy needs only a very small percentage of value-added clients to enrich its bottom line.
What Bob Parsons realized with GoDaddy is an example of what we're seeing with open source software right now. I learned about about Clayton Christensen's book, The Innovator's Dilemma, in a speech by Tim O'Reilly where he quotes Christensen's Law of Conservation of Attractive Profits.
When an industry becomes commoditized, value migrates to adjacent levels.
O'Reilly shows examples of this law in the commoditization of the IBM personal computer and the resulting rise of Microsoft. As thousands of parts suppliers bubbled up, value moved away from the hardware and into the software.*** Today's example is open source, enabling companies like Amazon.com and eBay to offer web service platforms using commodity software.
I think that Bob Parsons of GoDaddy realized a similar commoditization was about to happen in the domain name market. All he had to do was create the adjacent layers, and value would naturally migrate in.