The domain-name market is enjoying a great resurgence, writes Dan Skeen.
FOR years, gleeful capitalists have read about moon-shot domain speculation deals, as when Marc Ostrofsky sold the Business.com domain and turned his $US150,000 ($A183,000) investment into a $7.5 million sale. But the domain name market itself has had a phenomenal revival.
Australia is cashing in as well. Last week, jobs.com.au was bought by an obscure internet firm for a reported six-figure sum.
Shaking off some lean years following the dotcom deflation of the late 1990s, it is in the middle of a buying spree that may never be repeated. Like today's crop of web 2.0 success stories, new momentum has come from more sophisticated technology and more profitable opportunities. These same trends have fostered the growth of massive domain name portfolios that some claim have the potential to make Warren Buffet drool.
Dan Warner, chief strategy officer at Brisbane-based Dark Blue Sea Limited, is used to watching multimillion-dollar sales of domains such as Diamond.com and Vodka.com take the headlines. His story of a slow and steady accumulation of domains, bought for less than $7 and sold for thousands, day in and day out for several years, lacks get-rich-quick appeal. Yet this measured approach to domain accumulation has grown a $A5 million initial investment into a company with a market cap of $68 million.
His company holds the world's second-largest portfolio of domain names, with more than 550,000. NameMedia Inc., of Waltham, Massachusetts, has about 725,000. Together, these two companies hold more than 1 per cent of the world's domains.
Mr Warner recalls that just two years ago only 18 or 19 companies had more than 10,000 domains; today he estimates that 50 companies have portfolios of more than that size. "Everyone's been buying like mad," he says.
There certainly has been growth of domain-name portfolios: businesses built entirely around domain names, says Warren Adelman, president and chief executive of the world's largest domain name registrar, GoDaddy.
Last year saw the total number of top-level domain registrations reach 120,000,000, according to VeriSign, an increase of 32 per cent for the year. And the big portfolios are getting bigger. It's a buyers' market in the minds of many who make a living off domain names, which would explain why the pace of buying hasn't yet been matched by sales volume in the domain-name aftermarket.
"People were originally speculating, but over the last few years people are realising that this market is still emerging and is quite undervalued," says Alessandro Sorbello of Brisbane-based Intuitive Domains. "So the tendency is to acquire domain names and not put them on the market but to hold them."
One factor driving this buying spree is the effectiveness of cost-per-click contextual advertising offered by Yahoo! and Google. Before 2003, parked domains relied on generally less-lucrative banner ads. Today's parked pages serve up sponsored links related to the domain name which, when clicked, earn revenue for the domain owner. "There's a whole industry that has arisen from the monetisation of these domain names through the application of content on these pages," Mr Adelman says. According to VeriSign, 23 per cent of all .com and .net domains - almost 15 million sites - consist entirely of a single parked page.
One might think a website with no real content would not attract visitors, but domain speculators are attuned to the notion of direct navigation or "natural search", where an internet user types a URL directly into their browser address bar assuming they will find related content. For example, a fishing enthusiast might go directly to a likely domain name such as Queenslandcharters.com. If the page has nothing but a set of advertiser links to related content, there's a good chance for a click-through. The pay-off is small change for each click but direct navigation added up to $US800 million in 2006 and could reach $1.1 billion this year, says Jordan Rohan, an analyst with RBC Capital Markets.
Another factor encouraging buyers is improvements in the aftermarket buying and selling process. Popular exchanges such as Fabulousdomains.com, GreatDomains.com and Sedo.com list thousands of domains available for sale. Domain name auctions are also a popular method of selling off inventory.
Finally, the automated tools of the trade have improved dramatically. Five years ago Dark Blue Sea created a market intelligence engine designed to find domain-name opportunities based on factors including the frequency of a search phrase in search engines, and bids by search engine advertisers for those terms. While Mr Warner won't divulge any trade secrets, what he describes is a sophisticated software system founded on language recognition. "What we do is much closer to linguistics than it is to some sort of marketing activity," he says. The capacity to mine and manage millions of domain names has been used in some cases for dubious business practices that, like registered trademark domain squatting of old, have tainted the efforts of an industry that has already seen its share of scandalous practices.
One of these is "domain tasting" or "catch-and-release", a practice where the buyer takes advantage of a five-day grace period designed to allow a domain registrant to get a refund if an error (such as a typo in their submission) has been made. Some domain name buyers have leveraged this loophole to purchase millions of domains, monitor their traffic for five days, and then return all but the best few for a full refund. Some have gone further with a practice known as "kiting". They leverage the same five-day grace period, but perpetually release and renew within the five-day window, essentially owning the domains at no cost. For the most part, registries such as VeriSign have worked with registrars to modify their terms and conditions to put an end to kiting.
New entrants to the domain business are finding many ways to make a profit. Mr Warner suggests that natural language tools have picked clean all the best opportunities, but others are more optimistic about their odds for portfolio building.
Mr Sorbello says: "It's still possible to register interesting domain names, but you just have to be a little more creative. We register five to 10 per month in market sectors that people have just overlooked or that have come back into the market."
Also, Mr Adelman says, . a memorable name may be more important for a budding business than one that draws traffic from direct navigation. "We chose GoDaddy not because it told people what we did, but it was certainly something we wanted people to remember, and we felt that GoDaddy would be remembered," he says with a laugh.
Peter Davis, a Boston-area entrepreneur who makes a living selling websites, has found a nice gap between the sale price of some websites and the domain-name aftermarket. "There are instances where I've bought a website that was sold based on current earnings, and you can strip the files off the site and sell the domain for incrementally more than the website was worth itself," he says. He looks for domains in "bottom-feeder" places where people are selling sites.
Perhaps the most value is being derived from those who put in the effort to develop domains. One popular strategy is to acquire several quality domains within a niche category and then develop a portal based on that topic. Done right, it also enables the developer to then sell that site for a vastly greater sum. Shopping.com is an example. The owners took this excellent domain and added non-proprietary technology, affiliate product, and then used search advertising to drive traffic to the site. eBay bought the business and the domain for $US620 million in 2005.
Some investors forgo research and instead invest directly in companies with large portfolios of domain names. In much the same way that a real-estate trust or a mutual fund attracts investors through the value of the underlying holdings, publicly traded companies such as Marchex and Dark Blue Sea rely on the growth potential of their domain-name portfolios as an incentive for investors.
For a Brisbane-based company with 550,000 domains in its portfolio, one might expect a healthy supply of .com.au domains. But Mr Warner says he has none.Mr Sorbello, also based in Brisbane, has none either. "This market is extremely buoyant in many parts of the world, but because the .com.au domain name system has been so stringently regulated . . . that essentially stifles the Australian marketplace," Mr Sorbello says.
The .com.au suffix is managed by .au Domain Administration Ltd (auDA) and governed by different regulations than most top-level domains. To buy domains you must first pass residence restrictions and prove a "close and substantial connection" to the name being registered. Perhaps most prohibitive is a restriction on selling domains in bad faith for speculative purposes - a domain can only be sold if a business is sold with it. Some speculators have worked around this by adding a business registration and selling the domain as an asset of that business, but the need for such workarounds is enough to discourage many domain name companies.
However that policy is up for review. Derek Whitehead, chairman of auDA's 2007 Names Policy Advisory Panel, isn't too concerned about what the domain-name speculators are buying. "For ordinary businesses it's an open question as to whether they're interested in buying and selling domain names," he says.
Not surprisingly, speculators such as Mr Warner are hopeful for a marketplace more characteristic of other regions.
"If domain names were easier to buy, trade, sell and transfer as assets, it would probably free up a lot of domain stock held by speculators that won't give the domains up - but also have no means to extract their value," he says.
Domain-name companies dislike the extensive paperwork associated with .com.au domains. Mr Warner also cites cost as a factor, comparing his wholesale domain registration rate of $US6.25 for .com domains to the $30 or $40 required for a .com.au domain. Another disincentive is the lack of natural traffic, as those who use direct navigation will rarely visit a .com.au suffix.
But don't expect any gold rush on Australian virtual real estate when the results of the policy review are made available (about July). "If there was a decision to create some kind of an aftermarket, it's highly likely that it would be a regulated aftermarket," Mr Whitehead says.
"Certainly some of the rules that apply in the Australian domain space would be extremely likely to continue to apply."
The top domain sales in 2006 (all $US):
1. Diamond.com, $7.5 million - Online diamond and jewellery retailer Ice.com bought the domain from Odimo Inc.
2. Vodka.com, $3 million -
Bought by Roustam Tariko, the billionaire entrepreneur behind Russia's biggest vodka maker Russian Standard Co.
3. Cameras.com, $1.5 million - Sold in a live domain auction to Sig Solares of Parked.com.
4. NAV.no, $717,978 - The Norwegian government bought this domain for its work and welfare administration website.
5. On.com, $635,000 - Moniker/Domain Systems sold the domain, which redirects to a personals site.
Source
www.whataredomains.com
