Webinar: What is with the crazy secondary IP market?

SecondaryIPMarket

Watch an in-depth discussion from Hartland Ross on the process of buying and selling IPs on the secondary market. We’ll discuss what is the secondary market, why does it exist, why are prices going sky high and what are your options?

Webinar Transcription

Good morning or good afternoon, depending on where you are welcome to today’s session. Today I’m going to be talking all about this crazy secondary IP market. So what is it, how can you participate, why does it exist, and pricing, among other things. So welcome! My name is Hartland Ross. I’m the President of e-Bridge Marketing Solutions and The Host Broker. Just give you a quick background on us. 

eBridge Marketing Solutions

I started eBridge Marketing about 20 odd years ago and we were focused on working with IT service firms specifically servicing web hosting companies, IT companies, and generally including data center operators, infrastructure providers, and some of the vendors to the industry as well as managed service providers (MSPs). So we offer a full range of marketing services, digital marketing for organic growth to service, IT services space and then a few years later we ended up with groups that wanted to grow a little bit more quickly.

The Host Broker

And so we ended up building out due to client demand, an M&A practice that was again focused on the same customer base. So MSPs hosting companies data centers and various IT service firms but also getting a lot of requests for IP address blocks and so as a result of groups that wanted to grow more quickly than they could do organically and in some cases perhaps even less expensively, they were interested in acquiring other companies or customer bases and in other instances of course we had groups that were interested in perhaps moving on and looking for opportunities in another industry and wanted to sell their business and so that was the genesis of The Host Broker. If we fast forward to today, we’re very active in the M&A space, within this community of IT service providers. We publish a list of companies for sale each week, which is free to subscribe to…typically we go out on Wednesdays.

So if you’re interested in acquiring a business I’d highly encourage you to take a look and subscribe and you’ll get access to new listings each week and if you are interested in selling, happy to have our conversation with you and give you an evaluation. You can reach me at [email protected] here or fill in the form on our website as well and of course, if you’re looking for IP blocks, which is a topic for today, then we have those listed as well but happy to have a conversation in terms of some of the nuances in your specific situation.

With that, I’ll jump right into it and just talk a little bit about the background and space.

Introduction

  • Regions – ARIN (1997), RIP (1992), LACNIC (2002), APNIC (1993), AFRINIC (2004)
  • Focusing on IPv4 market
  • Can transfer between all except AFRINIC
  • Can’t buy IPs until you have an account to transfer them into

So we have different regions and I recognize that some of those who are listening to this may be familiar with some of this information but probably not all of it. So bear with me as I cover some of the basics but there are different regions, five in particular here – ARIN, which is a kind of governing group for managing North America and they began in 1997. We have RIP which controls Europe. It started in 1992. LACNIC,  2002 covering Latin America, APNIC covering Australasia, New Zealand, and Asia starting in 1993, and AFRINIC covering the African continent in 2004. So today’s session is really focused on the IPv4 market. I’ll touch on a few things related to IPv6 as well. 

It is now possible for all except AFRINIC for blocks to be transferred between regions and there’s a few hoops you have to jump through but they’re not particularly difficult. So blocks can be purchased from a Ripe seller and moved into ARIN as an example or vice versa. However, and this may seem obvious, but we do get a lot of requests from groups that want to acquire IPs but don’t yet have an account with anybody. 

So if you’re in North America, you have to register with ARIN, create an account with them, pay your annual dues, and then you’ll have the ability to transfer IPs into that account. So nothing can be done until you have an account with a rear and these are all the different rears that you can transfer the blocks into. 

Why buy IPs in the first place?

  • IPv6 not widely adopted yet
  • Cost of leasing – depending on term, use, number, etc. <$0.70
  • Control over assets if / when you decide to sell
  • Control over customer base (not reliant on upstream providers) which avoids renumbering = churn

So what’s the purpose of buying IPs in the first place? How did this come about? Weren’t IPs free or aren’t, shouldn’t they be free? And really there’s a history here but the reality is that we’ve got these kinds of two networks running in parallel. We’ve got IPv4 and we’ve got IPv6 and IPv6 is not widely adopted yet and the big discussion is when will that happen and when will it replace IPv4 but due to the difficulties it’s still at this point and so it’s a very small portion of the kind of network I guess, utilization, and so, as a result, we’re focused on on the IPV4 which has limitations and finite number of IPs. 

So what’s the alternative to buying? Well, of course, you can lease. So this is your classic kind of own or rent discussion. So if you want to lease IPs, there are a number of different factors. So the term obviously, is the length you are looking for is three months? Are you looking for a year or longer? What are you planning on using it for or your customers planning on using them for? So is this going to be for hosting or mailing? If it’s mailing, it’s going to be a lot more difficult to find a group that’s going to lease to you and you’ll have to prove that and satisfy any kind of concerns that these aren’t going to be used for spam purposes. And then of course the block size or number of IPs that you’re looking for. So we’re typically seeing somewhere between the sort of 30 to 70 cents range. So that’s per IP per month. 

Having said that, more commonly in the sort of the 40, 50, maybe 60 cent range would be typical at one point. They actually were about a dollar an IP a month but that was a number of years ago and so, this is where we’re at now with respect to pricing. So what’s the purpose of it? Why would you want to do this versus leasing if you’re kind of trying to evaluate the two? Really it gives you control over your assets. So if at some point you decide to sell your customer base and the IPs that the customers are using are owned, controlled by you, it makes it a lot easier for those customers to be moved to for instance a different facility, and if not, these customers need to be kind of uprooted, disrupted and moved on to different IPs and so this ends up creating a renumbering situation and certainly in terms of a sale process, there’s going to be churn as a result of that renumbering and the impact for you as a seller from a valuation perspective is not going to be great. You’re going to lose customers and there may be some kind of uh structure that’s been provided whereby you as a seller are ending up covering that risk. So ideally if you own the IPs, then you’d be able to have more control, and of course you’re also not reliant on your upstream stream provider which although it would be extremely unlikely that they wouldn’t continue to lease the IP blocks to you are still at their mercy.

IP Pricing – WOW!

Graph showing historical IP address pricing

So this is a chart and it may be a little bit difficult to read but we’ve got pricing on the y-axis on the left and we’ve got time along the bottom, starting in 2015 and going to earlier this year. As you can see, prices are going up and to the right and the dotted line is essentially a regression line here. So you can see that we’ve come from sort of just a little bit more than 5 dollars up to slightly less than 25 dollars earlier this year. Now, I will tell you a couple of things about this. 

First off, there’s a down point in 2018, a downturn that is not a market downturn. I looked at some of the transactions that we’ve done and plotted a number of them but recognizing that different sellers have different motivations for selling their blocks, size of the block is a factor, and then also the region that the block is from, although that makes less of a difference now but at one time there’s a little bit more of a price difference between regions and so conceivably, I’d have to have checked this particular block but I wouldn’t read too much into that. So generally speaking, prices are going up and have been going up on a fairly gentle kind of slope until we see this sort of huge increase earlier this year and so, the interesting part here really is the part that’s not on this chart which is what’s happened since March, which is where this leaves off and so showing right now is about 24 odd dollars, something like that. However, we’re doing a transaction at this point for 40 dollars and we’ve got another one in play for about 42 dollars. So it’s gone up approximately 20 odd dollars here from 2015 to 2021 and we’ve gone up almost 20 dollars. Now just in the past 3 or 4 months, it was at the point where it was going up a couple of dollars a week, it was just unbelievable. So I don’t know where the end is here but I’ve been asked a number of times and certainly, I remember being asked a number of years ago whether I thought that we would hit 30 dollars and I felt that at that point, something else would change and here we’ve gone past that and are still climbing. So unfortunately it’s one of those things where acting sooner than later is going to be…if you’re looking for IPs they’re not going to get any cheaper. 

IP Pricing cont’d

  • Going up steadily and rapidly in the past 2 months
    • With C19 improving, back burnered projects back online = Demand
    • Lack of time for clean-up processes needed to free up space to sell = Lower Supply
    • Double whammy of little supply and lots of demand. Short-lived??

So what’s going on? Why are these prices going up and why are they going up so quickly recently? And although there’s no firm answer for some reasons that I speculate…so with COVID 19 improving the economic outlook Improving, and economies returning and opening up and whatnot, some of the back burner projects are back online. So everybody put everything on ice for a while in 2020, some of those things are back now and so those projects are resulting in increased demand in IPs, and then the other flip side is the supply side and so, these IPs are going to come from somewhere in some cases someone may just have extra blocks that they’re not using but in a lot of cases these blocks need to be cleaned up, freed up, the customers need to be moved off them or whatever is tying them up needs to be removed from those blocks and that takes time, in a lot of cases, time that somebody needs to put in and the smaller kind of IT service firms may be willing to put in that time because especially now the returns are going to be very good for them if they can free those up and put those into the secondary market and so it might make sense for them to invest in doing that.

Some of these blocks get freed up but as a result of…for instance like hosting providers that might be moving their infrastructure into a public cloud or whatnot and so they no longer have their own data center space and don’t need the IPs but also recognize that a lot of the IPs are held by large telcos, by the public cloud providers. And frankly, selling IPs is not their business and so they’re not overly motivated to spend time to clean these blocks up even though they have large blocks and so even if they did want to sell them or felt that they didn’t need them, they don’t have the motivation to clean them up and the people who would have to actually do the work to clean them up aren’t being compensated. It’s not their business. 

And so the fact the market’s gone up is kind of irrelevant to them and so they make a case why they don’t have the time or resources to invest in that process and the returns although it’s great for small business are not overly meaningful for large telcos and whatnot. So as a result, we’ve kind of got this double whammy of a lot of supply and effect, little supply, excuse me, and lots of demand and you know how long is this going to last for, well who knows? I don’t expect it to continue at the rate that it’s been at recently, that’s for sure but I do think it will continue to go up conceivably. Prices may change in the future and actually go the other way and we’ll talk about that here in a second.

IP Pricing cont’d

  • Prices for blacklisted blocks and IPs from other regions
  • Prices conceivably will fall as IPv6 adoption increases for two reasons:
    • Less demand for IPv4 space
    • Increase in supply for IPv4 space as holders become sellers

So another couple of points that I often get is well prices, how are they impacted if I want to buy blacklisted blocks for instance, or I want to buy blocks from other regions. So, essentially IPs are fungible at this point, meaning that they really maintain the same value regardless of the region that they’re coming from, yes there’s a small hurdle to have them transferred but it’s really not overly significant adds a little bit of time not much and so it doesn’t really matter too much if you get IPs from another region. Now there are potentially some geo-blocking issues that can arise from that and there’s also as I say, there’s some transfer fees and a little bit of extra time but really it doesn’t impact just due to the general demand, it doesn’t impact the pricing that much.

Blacklisted blocks at one time did have a slightly lower value, a slightly lower valuation typically sort of one maybe two dollars or so, and we saw that for a number of years. However, the process is pretty straightforward now to have IPs cleaned up, Spamhaus and others look to see that the IPs have changed hands recognizing that if they changed hands or sort of starting fresh and so it becomes a bit more of a rubber-stamping exercise to get them cleaned so as a result, there really isn’t a much of a discount and we’re just not seeing those coming onto the market anyway at this stage certainly not like they were at one time. 

However, as IPv4 adoption increases then we can see a double whammy the other way where prices conceivably could fall less demand for IPv4 space and secondly, as more groups move to IPv6 that there’ll be an increase in supply of these addresses as the block holders become sellers. So it’s as they say, double whammy the other way with less demand and more supply but what’s the time horizon for that frankly just really hard to speculate.

How to acquire/transfer IPs

  • ARIN was giving out 1/24 if you haven’t had allocation yet
  • Secondary market? Shortage of IPs – Depletion dates (when each region one ran out)
    • ARIN – 2015
    • RIPE – 2012
    • APNIC – 2011
    • LACNIC – 2014
    • AFRINIC – still have IPs

So what is the process how can you acquire and transfer IPs and at one time ARIN, it was giving out a free one, free 24 if you hadn’t had an allocation it was a bit like Santa Claus giving out Candy Canes at Christmas, they were basically saying “Look, welcome to ARIN. Thank you for setting up an account. We want to see you be successful here’s a kind of a small block out of the gates to get you started.” And they were giving those out. my understanding is that they’re not doing that at this point that they simply just don’t have the supply to be able to do that. So there is a waitlist which is a very long uh exercise so if you’re patient that might pay off but who knows when uh you’ll get your block and so as a result, it’s created this secondary market, and the shortage of IPs, in particular, has made this difficult and also has pushed the prices up.

So these are some dates when each of these regions ran out of IPs and officially said: “we’re out”. ARIN was 2015 right 2012 as you can see 2011 LACNIC 2014. AFRINIC still has blocks and they still have availability the problem is that you can’t be a member of ethnic unless you’re in Africa and uh you can’t transfer those blocks up to any of the other regions. So they’re effectively not useful. Now that may and probably will change, I expect them to adopt the transfer policy at some point. 

LACNIC was the most recent ones to have done that in the fall of last year, it was a middle October or so, and certainly at that point there was a bit of a free-for-all to grab up LACNIC based IPs and prices were lower than they were for other regions. However, that also has stabilized and that bargain-basement prices that existed relatively speaking are no longer in existence either. 

ARIN Transfer Rules and Options

  • 8.2 – acquired assets (such as customers and equipment) from another organization via another acquisition or merger. The resources being transferred as part of an 8.2 transfer will not be subject to a needs-based assessment during the process of the 8.2 transfer.
  • 8.3 – transfer of IPs for those looking for additional resources (must be approved by ARIN for a specified block size)

So I’m speaking of the ARIN transfer rules here primarily because most of you who are listening are going to be in the ARIN region. 

Having said that, I can certainly talk to you about if that’s your interest but for today’s session, I’m just going to cover the ARIN options. So there’s essentially three main options. They call them section 8.2 8.3 and the next five will cover 8.4 and I copied this off the website verbatim. 

So essentially 8.2 is the process that you would go through if you’ve done an acquisition, a customer base, you’ve purchased equipment, a customer base which is obviously going to associate a revenue stream and a website and brand and whatnot and their IPs that are coming along as part of that transaction. So if that’s the case, you don’t need to justify ARIN using a needs-based assessment as to why you should be able to get these IPs. This is a just a kind of formality, they need to make sure the documentation’s in place and they did in fact complete this transaction and they will then transfer the IPs under this 8.2 process. 

The next one is 8.3, which is the scenario where you’re not doing an acquisition of any sort of other assets but simply you’re out of IP space or close to being out and you’re looking for additional resources. You find someone who’s interested in selling those IPs and in these cases, you do need to be pre-approved for ARIN or a specific block size. So if you’re pre-approved for instance a slash 22 then you can get up to a slash 22 or smaller but not larger. And so this is something that again we get requests for groups that are looking to have to purchase IPs and I mentioned earlier in some cases, they might not have an account in ARIN. So that’s step No. 1 but then the second piece is what are you pre-approved for? And if you don’t have a pre-approval authorization from ARIN, you need to get that and find out what that number is, what block size, and then for us, if you were speaking to us, we would be able to be in a position to see what we can do.

ARIN Transfer of Rules cont’d

  • 8.4 – transfers to or from ARIN to or from another RIR (must be pre-approved for a specified block size by the recipient RIR)
  • Transfer fees – $300 for ARIN
  • # of blocks being transferred increasing but the size of those blocks decreasing which is further exacerbated by price increases but also influenced by approvals needed where ARIN is involved 

So the next one is 8.4 and this is very similar to 8.3. The only difference is that this is a transfer in or out of ARIN from another rear and you must again be pre-approved if you’re moving it from right to ARIN, you still have to…you can’t bypass that pre-approval process. You still need to make sure that you’re buying a block that is no greater than what you’re pre-approved for. And there’s also a transfer fee for any of these transactions. With ARIN charges, it’s relatively minimal frankly and also obviously becomes a smaller component if you’re doing a larger block. Just historically for interest sake, you might be interested to know that the number of blocks being transferred over the last few years has increased but the size of those blocks is decreasing. In other words, we’re no longer seeing 14s and 16s being 2415s being transferred, it’s far more kind of 24s, 22s, 20s, 21s, 23s. So we’re seeing more blocks but they’re smaller and of course, this is exacerbated for a couple of reasons. 

One, there’s the pre-approval process. So those who may want a 16 can’t get it necessarily and secondly, even if you could get it, can you afford it? And so with the price increases, groups are kind of acquiring what they need more than what they speculate they might need down the road or using this as a sort of a speculation play. 

ARIN Transfer of Rules cont’d

  • Can purchase from another region – prices similar across regions except LACNIC at a slight discount although not as much as when they were first released late last year.
  • Be prepared to wait for transfers – esp. LACNIC. We did the first ever LACNIC to APNIC transfer which took about 6 months.

So you can purchase blocks as they say from other regions except AFRINIC and there’s really pretty similar pricing across the board. As I mentioned LACNIC is is at a very slight discount but not much and I think it’s important though just to recognize this transfer process. If you’re working with RIPE or even APNIC the transfer process is not too long, typically you’re talking about a week or so, give or take, depending on time of year and holidays and whatnot. But we had a recent experience with LACNIC where we actually did the first-ever LACNIC to APNIC transfer and it took six months and certainly that the buyer was losing patience for that period of time and I can appreciate why it was a combination of them…I was just sort of going through this process and for the first time with this new transfer policies then layered on COVID  and that most of their employees were working remotely and it just meant that this process took a long, long time. So we’re not that long at this point for these transfers. But having said that, you do need to be patient and recognize that if you are looking for IPs right away for customers or if you’re almost out, LACNIC may not be the reader to go. 

Sources for acquiring them

  • Secondary market auction sites – commission fees at 10% and prices tend to be high
  • Brokers like us
  • Self-sourced

So what are your options for acquiring IPs? You’ve got the secondary market, but specifically, where can you go?

So there are auction sites but the challenge with them is – commission fees can be as high as 10 and perhaps that I’m not sure in addition to the bidding process tend to make the IPs very expensive and there are other options out there that are less and not necessarily that their sellers are getting any less but there’s a you know fees being taken by these sites. So another option is to work with an intermediary or a broker such as ourselves and another option is for you to find IPs yourself directly. Maybe you’ve got a data center that you’re working with that doesn’t need all of their IPs or you’ve got a friend who runs a hosting business who also again doesn’t need their IPs and so you can do a transaction directly with them but you do need to go through the process and if you’re not familiar with it, then it’s helpful to have a little bit of help in terms of the purchase agreements and so forth.  

Transfer Process

  • Purchase agreement (optional but more ideal)
    • Transfer and escrow fees
    • Org ID #s, contact details, etc.
  • Setup of escrow – often escrow.com
  • Ticket submission for transfer process
  • Buyer and seller cross reference ticket #s
  • Approval
  • Buyer releases escrow once IPs are showing in their account
  • Funds transfer

So that segment segues me into the actual process itself and although a purchase agreement is not a requirement it’s generally our preference to doing one for disagreement will obviously outline who the buyer and seller are. It’ll outline the arrangement for various fees. There’s the errand transfer fee I mentioned earlier, so who’s paying for that typically – is it going to be the buyer or it’s split 50-50. Also, we’ve always used and I suppose not everyone does but the vast majority that I’ve seen will use some kind of an escrow service. escrow.com is commonly used and there are escrow fees as well. Since both parties benefit from an escrow, it’s typically agreed that the parties will split the escrow fees 50-50.

The org id numbers are going to be on the agreement. So your ARIN org id numbers are your right as well as of course says contact information and this purchase agreement may be asked for by escrow or your escrow agents as well. And then the next step would be to actually set up the escrow. If it’s set up through escrow.com, again, you need to understand how to set that up but that’s one of the things that we would do and once escrow, both groups have got an account with escrow.com if that’s the route that you end up going and then in the transactions set up, then both parties need to agree to the transaction, agree to the terms. Once that’s accepted, the buyer will upload their funds, wire transfer their funds and once those are showing in the account, the next step is to submit a ticket and submit that ticket to ARIN. For the transfer process, the buyer and seller will need to cross-reference their tickets with ARIN. So, ARIN can link those two tickets and realize that the buyer wants to buy and the seller wants to sell and they’re talking about the same block and there’s agreement, then ARIN will go through that approval process, which is pretty straightforward and generally only takes a few days. Once that approval has been done, the block will then show up as being announced and who is for the buyer and at that point, the buyer will need to release the escrow, and those funds then transfer and populate into the seller’s account again through a wire transfer typically although there’s a check option as well.

That’s the process and what I was going to cover…there’s more details certainly here and I’m happy to have any conversation with anybody who has any questions. 

Thank You! And You! And You!

Contact Me (Hartland Ross) @The Host Broker

[email protected]

Dir: 1-604-987-5530 0r 1-888-436-5262

My contact information is here. Welcome to give me a call or reach out. I’m just going to check to see if we have covered all of the questions. Looks like I’ve got all the questions or at least I’ve addressed these points I think. So if there’s no further ado I will end. Oh! There’s a question that’s coming here – So what’s causing the demand? So, I was suggesting that the projects coming online with COVID kind of were the light at the end of the tunnel I suppose and that a lot of the projects that were mothballed or paused for a while are kind of active again. So that’s increasing demand but it’s a bit as I said earlier it’s a bit of a double whammy because there’s demand but then there’s also a lack of supply. So I’m not necessarily sure that there’s more demand than there..oh sorry a lot more demand than there was before or prior to COVID I should say. I mean certainly, there’s been an uptick as a result of sort of opening up a process but how that relates to prior to COVID is hard to say but there’s also a lack of supply. So it’s a bit of both. 

And leasing opportunities. Yeah, I covered uh leasing opportunities as well. There are options I mentioned. Typically leasing prices are in the 30 to 70 cents per IP range. So those are possibilities depending on the term that you’re looking for, the region, the block size, and the use case is IT hosting, is IT mailing, etc. and being able to satisfy those requirements, one of the downsides is of course the leasing and again, I’m not sure when uh you joined here. But I mentioned that you don’t have control, right? You’re essentially renting versus owning and so, you can do it but you’re perpetually going to have to lease them and you’re at the mercy of the leasing prices and you now have a customer base that’s on somebody else’s IPs.

Hopefully, that helps answer your question. Excellent. Well, thanks very much, I appreciate everybody joining today, and as I say I’m very happy to have a conversation one-on-one and with that, I will stop today’s session and very much appreciate your time and have a great rest of your day.

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