Trends Report – Internet Real Estate
The housing market isn’t the only hot real estate segment…internet real estate is also reaching its peak. Like a marketing company that has figured out how to convert low value PPC keywords or an affiliate that has figured out how to create SEO pages to drive actions, there are some areas of making money online that people would prefer kept secret. The first people to discover the immense profitability of buying email names via opt-in check boxes certainly didn’t want others knowing from which sources they bought and at what price. Similarly, those who figured out ActiveX installs for toolbars were in no rush for others to learn the business model and replicate development and distribution. Yet, in less than a year of existence, both industries started showing signs of the saturation that was to follow.
Email and adware both proliferated because each took advantage of a lack of competition, low barriers to entry, and depressed pricing to build volume. As carried out by a majority of the players, each was a short-term revenue play and not intended to lead to a long-term business model. The exceptions are companies such as Datran for email and Claria for adware, both of whom exist stronger today than before and have not abandoned their respective modes of marketing. The same can be said of others, and given the mess many helped create, we can understand why.
As opposed to email which took off in mid-to-late 2000 and adware which spiked in late 2003 / early 2004, the internet real estate market began as far back as 1994 and has remained under the mainstream radar for the past decade. Major acquisitions such as Marchex’s $164 million dollar acquisition of Name Development in February arguably began the string of events, which has ultimately started shedding some light on the secretive space of Internet real estate.
Do a little digging, and you’ll discover that what Marchex bought was not technology but traffic. They bought traffic in the form of domain names, several hundred thousand to be exact. When most people think of domain names, they rarely think in terms of a single entity owning 1000 let along 100,000 names. At the end of the day, similar to land, there exist a finite number, and those early on realized the parallel. Certain market factors can increase the value names, just as celebrities choosing to buy in Jackson Hole, Wyoming artificially increased the value of land there. Unlike Jackson Hole, which prior to celebrities and major development, would have seemed an unlikely place to buy, some land and domain names, such as beach front property in Southern California and debtconsolidation.com is a no-brainer for maintaining or increasing in value. This is why, similar to offline real estate, online real estate involves speculation. The common thread between both is current and future value. With respect to online, that value can be in the form of existing traffic or potential future brand value. Speculators might pick up names that have expired, which was the case with Marchex’s hardware-update.com, or own generic names such as godsend.com that other companies, in this case, a movie studio, purchase for development.
Direct navigation, the industry that has developed to describe the Internet real estate business, refers to users executing a search not in a search engine but within the URL. Users are guessing at an address in hopes of finding relevant content. While it has existed longer than email and adware, until this year it was viewed largely as a fringe industry despite its being responsible for as many as 10% of all searches and more than $500 million dollars in annual ad revenues, with an informal market cap of at least ten times that amount. One off sales of high value, generic names such as Website.com, WallStreet.com, and Business.com take place fairly regularly, but this year marks the first time that many multi-million dollar portfolio consolidation events have occurred, and with increasing frequency.
These consolidation events have taken place due to a confluence of events – the continued interest and growth interest in Internet advertising, the often high profit margins at companies that own large amounts of internet real estate, and the perception that direct navigation represents one of the last bastions of organic traffic. That the outside world views traffic ownership as being a key lever to long-term success only adds the fuel to the fire and explains why the timing seemed right for not just big, but well-known, money to start investing in the space. The challenge faced by direct navigation is that when people think of parked domain pages, which in many cases is what Internet real estate owners display on their names, users often think of annoying pops, unknown content, or what is in general a non-value adding surfing experience. These, however, are surmountable challenges.
Besides well-known investors, higher profile individuals are starting to take the plunge into the space. That award-winning agency Carat Interactive’s VP of search marketing just “jumped ship” to join direct navigation firm BuyDomains as VP of marketing, shows the lure and potential of the space. That companies such as BuyDomains, owners of more than 400,000 domain names can begin to position themselves as direct navigation firms and not domain “squatters” tells the real paradigm shift occurring in the industry. And, it’s an industry that will see several other firms along with BuyDomains begin the process of organizing and re-branding an industry, not to mention creating a more value adding service to users.
On the whole, the emergence of direct navigation represents one of the most exciting and biggest developments in Internet advertising to date. That Internet real estate, i.e. domain names, had value was never in doubt. How that value would manifest itself into an industry has taken almost 10 years to realize. The space was incredibly lucky that it did not experience the same setbacks seen in email and adware, two other originally high growth, high profit industries. Like email and adware, the direct navigation space has long had a profit driven motive, not a consumer driven one, something that could have easily crippled the industry’s future. But, thanks almost exclusively to investor interest and a big dose of luck that kept it out of the purview of the world at-large, the industry is showing signs of a gold rush, instead of previously, where all it shared with the Wild West was the “wild” part. The domain speculation side of the business might be tapped, but don’t worry, there is still a lot of money to be made as the industry emerges.
