451 Research: Tucows buys eNom from Rightside, creating world’s second-largest domain registrar

Source: 451 Research. Report republished by permission.
Report by Rory Duncan and Ian Eagle

Network access, domain name and internet service provider Tucows has announced the acquisition of wholesale domain name registrar eNom from Rightside for $84m. The purchase doubles the firm’s number of managed domains from 14.5 million to 29 million, making it the second-biggest global domain registrar after GoDaddy. Additionally, the purchase brings 28,000 reseller partners, increasing Tucows’ ecosystem network to over 40,000 resellers globally. The target generated $117m in revenue through the first three quarters of 2016.

Tucows’ OpenSRS brand has been the firm’s partner-focused wholesale business, providing domain management, hosted email, SSL certificates and some web security products. The eNom business unit has shared this target market, making the addition of its partners an exercise in building scale and increasing the combined company’s global footprint. For eNom’s owner, Rightside, the sale of the firm allows it to double down on higher-growth areas of its existing retail businesses.

The 451 Take

Wholesale domain registration is a steady but not particularly high-growth business. While new registrations of domains continue, and new resellers of domains sometimes emerge, the traditional web hosting space – the main part of the market for wholesale domain registration services – is mature, with relatively few new entrants. The value in creating a single dominant wholesale player via the combination of Tucows and eNom is fairly self-evident. Theoretically, it could allow some resources that would otherwise be used on the customer-acquisition battle to be redirected to development efforts that could help Tucows’ resellers grow.

Deal details

Tucows acquired eNom from Rightside, which shed the unit to focus on its top-level domain (TLD) business. The $84m cash deal combines the second- and third-largest domain registrars (measured by domains under management). After the sale, eNom will continue to be a reseller of Rightside’s TLD offerings.

Tucows suggests the combined organization will have more than 29 million domains under management – a huge number, but still a distant second to GoDaddy, which reports more than 63 million. Nevertheless, this is still well ahead of third-largest Network Solutions (owned by Web.com), which has somewhere in the range of 6.5 million managed domains. Barclays Capital advised Rightside on the sale.

Deal rationale

The hosting sectors in both North America and EMEA have seen a significant amount of rationalization in the last six months, with the purchase by GoDaddy of Host Europe the most notable from a domain management perspective. In the case of Tucows and eNom, it is the wholesale side of the business (as opposed to the retail market) that is the most affected. Tucows describes this sector as challenging and complex, with scale a goal for continued success. Additionally, the wholesale domain sector is not the most innovative part of Tucows’ and Rightside’s businesses. It could be described as steady and reliable, but it is not high-growth. Rightside is focusing its efforts on the new TLDs it owns and operates now – such as .republican, .news, .software and many others – while the headline aspects of Tucows’ business currently are its Ting mobile carrier business and local broadband offerings.

There are other new emerging domain service areas – for example, SaaS website builders such as Wix and Squarespace, and traditional marketing businesses like Vistaprint. Elsewhere, leading North American hosting provider Endurance International Group (EIG) – the parent of HostGator, Bluehost and Hostmonster, among many others – is a channel distributor of web presence tools and has a strong partnership with retail provider Weebly. Generally, this is less of a core business for the providers in this sector, and something considered much more profitable for those providing dedicated servers, virtual private servers and bare metal.

Target profile

ENom provides a mix of domain management, web security, website building, email and other hosting services to the SMB/web professional sector, with a significant portion of its business gained from the reseller channel. A key brand of Rightside, eNom was the firm’s main wholesale domain business alongside its name.com and Rightside Registry brands. Rightside was founded in 1997, and has progressively developed its TLD business from the legacy .com and .net extensions to more than 1,300 generic TLD and branded TLDs, including .attorney, .reviews and .social.

Acquirer profile

Publicly traded Tucows is an Ontario, Canada-based provider of internet and telecommunications services that was established in 1994. Best known for its OpenSRS platform for domain resellers, the company also offers Hover, an end-user-focused domain management tool, as well as mobile phone and fiber internet connectivity services (Ting Mobile and Ting Internet). Tucows reported FY2015 net revenue of $173m – up 17% on FY2014 – of which its OpenSRS Domain Service generated about $18m. The nine months up to September 30, 2016, saw a more modest 11% year-on-year growth.

Competition

With consolidation among midsize to large hosting providers continuing, some of Tucows’ biggest competitors are now larger than they were even 12-18 months ago. While none has the same proportion of business from the wholesale market, the domain management sector is still cutthroat. Aside from the large domain providers, such as GoDaddy and EIG, many others provide bundles of products and services at discounted prices to entice customers to switch at renewal time, including 1&1, Futurehost, JaguarPC and others. While not overtly focusing on the domain management sector, French hosting firm OVH appears to have gained the confidence from its Canadian operations to establish datacenter space in the US as a potential market entrance.

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