Internet Land Grab: Part II

Talking about the domain name industry today is really talking about the Internet land grab, and in many ways it paralleled the expansion of the US. Pioneers went out and laid claim to settled a large chunk of the land. When economic forces, such as the discovery of gold in California occurred, that brought with it increased interest in buying and selling of the land. Today, much of the cities in this metaphor have been laid but they are ripe for businesses to come in and service the now large local populations. In Part 1, focused on the history of domain names, the equivalent of the US being established, i.e. how domains came to be and the organizations that control their distribution. In Part 2, we focus more on the expansion process, which revolves around the business of owning domains.

In 1996, many people registered domains in order to try and build a business around that domain as opposed to Internet real estate speculators that registered domains as an underlying asset for a business. When it comes to owning domains, a classic debate exists – do you build a “real” site on the page or do nothing, with nothing often being a parked domain page. This debate has no clear winner, but what sets this time in domaining apart from those even as recently as three years ago is that proven options exist for both. These proven options revolve around generating cash flow from the asset and the ability to sell off some or all of one’s domain names.

Think of domains as shares in companies or acres of land. Some shares have a greater value than others, similarly some land is worth more per acre. Certain land owners might have vast amounts of acreage whereas others might have smaller amounts. A large number of people own shares, and many people own real estate, but that doesn’t make them traders or the next Donald Trump. The same applies for the domain space. When speaking about domainers, we focus on the individuals and companies that don’t just have a handful of names, they have vast collection of names from the hundreds to the hundreds of thousands. These are the domainers, the people who live and die by the changes that impact the domain space.

Let’s say you had an interest in the space and wanted to build your own portfolio and become a domainer. How could you do it? There are four common ways.

• Natural registration – there might have been only one register in 1993, but today, there are hundreds. The likelihood of finding a definite high value name is low. You might find a name you like for your business, but not necessarily one that could sell in the aftermarket. Success via natural registration has become a science that only a handful of companies can do in scale.
• Dropped named catching (organic) – one of the most common ways that grew their portfolio (up until 2004) was by grabbing names that an owner of a domain did not renew. More than once, a domainer would grab a name that an owner had intended to renew but for a variety of good reasons did or could not. This is one area where domainers left a bad taste in some people’s mouths as they often picked up names people wanted to keep. Many domainers were often unsympathetic and would return the name only if purchased (at a substantial mark-up). ICANN, along with the registrars have since attempted to make sure such stories become fewer and fewer.
• Dropped name catching (auction) – companies and registrars soon recognized the value of the dropped, i.e. expired, names, and set up a system to profit from it. The organic method of drop name catching had the winner, that is the one who caught the name (I picture a big game of hungry hippo) simply paying the normal registration fee. Not any more. Now, instead of releasing names into the open market, the registration (often in conjunction with a technology provider) auctions them off to interested parties after the name has gone through a fairly lengthy process to ensure the previous owner didn’t want to keep it. As with any auction system, this one tends to commonly lead to people paying too much. Those with a lot of profits from earlier times, though, tend not to care and use it as a chance to own the market of certain / good names.
• Private purchase – the final method and one used by those flush with cash looking to create and/or grow their portfolio of names under ownership is simply to strike a deal with domain name owners to provide liquidity for the existing name / portfolio owner. Arguably the best piece that discusses domain name valuation comes from John DeMayo, a friend and the person that first introduced me to the domain name space when I worked with him years ago. There are some points in his piece where a familiarity with the domain industry will help, e.g. knowing that TM refers to a name that infringes upon another company’s trademark.

The four ways of growing one’s own portfolio, can be further understood by trying to group the domain name industry into distinct phases. Here is such a stab:

• Initial land grab – this is the time from 1993 to even as late as 1998 where forward thinking individuals and companies purchased names that they felt would have high future value (long before any revenue model or method for establishing domain value existed).
• Cybersquatting – given that no model for establishing a domain’s value existed and no real business model for those not looking to build properties did either, it in many ways makes sense that many of the names registered would be those that map to a name that had some existing intrinsic value, i.e. brand names and other trademarks. As a result, people would often register the trademark itself or a variant of it. Legislation has since made this illegal and ICANN has created a process by which trademark holders can seek to have potentially infringing names transferred to them.
• Traffic monetization –Traffic monetization can also be called parked domain pages, and of the evolution of the domain industry, that people can make money off users that visit a site simply by placing ads, tends to both capture attention and stir debate the most. Parked domain pages are really no different than the coming soon pages registrars would often put on names where users had done nothing after purchasing. Underlying the whole parked domain trend (making money with parked domains) is that the behavior driving people to enter domain names into browsers mirrors that of search behavior. When a person types in nutrition.com, not knowing what might be there, they are really performing a search query. This made paid search and domain pages a natural fit. Companies such as my employer’s Domain Sponsor developed to connect paid search to domain traffic. When done right, the traffic works well for the advertiser and can make money for the domain owner – lots of it sometimes, as the Wall Street Journal pointed out a few days ago in their article that mentioned flashgames.com and its $150k per year ad revenue earnings of its natural traffic. Instead of cybersquatting, legitimate and value adding domain traffic has become known as direct navigation.
• Build/Park/Sell service provider growth – as traffic monetization became established, many companies started to form that focus on helping domain name owners make money off their asset. While some have a hard time believing that paid search ads should appear on domain sites, let alone a non-developed name should earn money, from a broader perspective, the practice is no different than land owners allowing billboards to be placed on their property. Purists might prefer no signs, as a whole, billboard advertising is very accepted and ad companies facilitate advertisers being placed on those signs. Much as Clear Channel, known mostly for radio, has an outdoor division, so too do Google and Yahoo have portions of their company that exist to extend their advertisers to this source of traffic. Again, when done well, it can add value and help the driver / surfer find what they need.
• Consolidation – as companies enter and compete to help domain name owners make money off their existing asset, a new breed of company has come, in many ways thanks to the efforts of monetization firms like Domain Sponsor. This new breed are those whose origins come from outside the domain industry and often from outside the Internet advertising space. These are companies who, having been convinced that domain names have value outside of pure resale, have come into to roll-up portfolios of domains into one large group of names that can be taken public or even purchased by a Clear Channel. While stories of an individual domain making $150k per year are impressive, the same with a large portfolio owner able to make $10+ million per year with high margins, these companies have come in, armed with private equity war chests in the hundreds of millions of dollars. Take former Intermix CEO Richard Rosenblatt, whose newest venture involved purchasing a portfolio of domains and a registrar thanks to the backing of a major equity partner. At least four such players currently exist, each having raised well over one-hundred million dollars. They are on a crash course to buy up as much as possible, and their entry not only marks a new point in the domain business, but one that will shape the way the industry moves forward to date.

With individuals being set for life simply by paying their eight bucks per year, it’s hard not to become enthralled with this still elusive industry. And, while lengthy, this piece merely scratches the surface. At the very least, though, it should provide a solid framework for future articles on this topic, one that will look more closely at the players and strategies driving the domain market today.

Related reading:

Future of direct navigation –
http://www.jayweintraub.com/2005/11/trends_report_t.html

Internet real estate –
http://www.jayweintraub.com/2005/08/trends_report_i.html

Build versus Park debate –
http://www.dnjournal.com/cover/2006/april.htm

Top sales of domain names –
http://www.dnjournal.com/domainsales.htm