A US Dollar Crash will give US-based Registrars Huge Advantage

By , September 15, 2010

I have been monitoring this situation for literally as long as I’ve been in the domain name business, which is nearly 15 years. easyDNS, based in Canada,¬† does nearly half of all it’s revenues in US dollars. In the early days of the company, the USD was worth upwards of 1.35 to 1.45 Canadian. We made piles of money on the exchange, and because we weren’t a margin player, the relatively small amount we were paying back to the registries in USD didn’t really bother us.

Of course that began to seriously change to the point where we really started noticing it after 2003, 2004 area. The Canadian loonie has even hit past parity a couple times, and believe me when that happens, we feel it!

We’re basically in the same position as “exporters” to the US, we pull in revenues in USD, but we incur expenses up here in CDN. So when the USD is weak, it reflects in our revenues.

I look at things in an extremely long-term perspective, so much so, that I often look crazy. When I placed a bet with my former accountant circa 2004 that the Canadian dollar would hit parity within 5 years, I think those were his exact words “You’re crazy”. I wish I could find a usenet discussion board I said the same on back in the early 00’s, where I was also assured¬† by the resident pundits that the Canadian loonie would never, ever rise higher than .75.

So here we are today, where a loonie in the .95 to parity range is the new normal and we’ve been actively executing our strategy for protecting against a weak USD for several years.

That strategy included:

  1. Switching our non-US, foreign customers out of remitting in USD to remitting in Canadian dollars some time ago. Yes, we lose a few points on that now, but we are positioning ourselves for a secular decline in the value of the USD, one where the next “new normal” puts the CDN dollar well above parity with the USD.
  2. Trying to pickup market share at home in Canada as much as possible. We’re fortunate in that as far as domain registrars go, we’re small, so there is still a lot of market share we can grab. (As far as DNS companies go, we’re actually medium-large. DNS Companies being such a rarity).
  3. Moving expenses south: bandwidth, data centers, transit, etc. If we can earn more stronger Canadian dollars and incur our expenses in weaker US dollars, it helps offset the revenue hit we take in the USD.
  4. Outright hedging. We use rolling forex hedges to lock-in a price range on about 50% or our USD revenues one-year out, and if there’s another “spike” in the USD, say during another financial panic, we’re using the opportunity to go out an additional year, giving us an above parity exchange rate on our USD for two years.

As you can see, we’re bracing for a massive devaluing of the US Dollar, something you can’t even talk about in some circles. The last guy who said the US would in one way or another default on it’s debt, lose reserve currency status, and face a massive devaluation was practically run off of CNBC by a pitchforks and mobs.

I get called an idiot enough by domainers to not to mind going on record to say that I agree with the people who say that where all this is headed is some kind of new monetary regime that will see the US dollar lose it’s sole reserve currency status. When that happens we’re talking a massive devaluation in the value of the US dollar relative to other currencies and to commodities.

I think a lot of people won’t even entertain this prospect because they think it means a post-apocalyptic Mad-Max landscape, where people are fighting over dogfood with clubs, a la James Rawles Patriots: Surviving the Coming Collapse. Instead they should be looking at a more reality-based account of how history simply marches on (even when an empire impodes), like Dmitri Orlov’s Reinventing Collapse.

So What does this mean to the domain business?

It means that Godaddy is going to reign supreme. It means that low-cost, low margin domain name players outside of the US are going to get their nuts squeezed. At the registry level, everybody will be paying for their domains in USD. US-based registrars like Godaddy and Enom will be able to keep charging customers in USD, and they will be incurring their costs in USD, so if all goes well, a massive decline in the value of the USD will actually help US-based domain registrars drive their foreign competitors out of business.

Outside of the US, companies will be faced with falling revenues, and they won’t be able to charge their US customers in their home currency. Those customers will just switch to US-based registrars. (The plight of domain parking company Dark Blue Sea is a harbinger of things to come: earning all of their revenues in USD against their soaring Australian dollar, their stock and fortunes declined so brutally that they were absorbed by the Proton Group at a deeply discounted price).

So non-US based registrars should look at what portion of their revenues come from US customers, and be prepared to kiss it good-bye if and when the US dollar crashes.

What will also happen in this scenario is that other sectors like web hosting, data centers, colocation and transit will face massive adversity outside the US as non-US companies switch as much of their infrastructure costs as they can to the cheaper US-based options.

This could play out either until everybody else starts competitively devaluing their currencies in a race to the bottom, or it all blows out into hyperinflation inside the US, a wider topic I plan to discuss further on Wealth.Net, my newest project.

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