DNJ Newsletter

"It is our strong belief at Internet Real Estate Group that we are still in the earliest innings of the domain name space and the positive trends of the past year, while encouraging, are nothing more than the beginning of a very long term validation of appreciating values. We view the most significant events of 2005 as follows:

Andrew Miller (left) and Mike Zapolin
Internet Real Estate Group

• The “no longer a coincidence” acquisition of several companies built on category prime generic domain name brands; advertising.com to AOL, rent.com and shopping.com to Ebay. 

• The recognition, prime time exposure, and brand platform commitments by major companies such as Johnson and Johnson to generic domain names such as baby.com.

• The significant growth of many companies built on category generic domain names, companies such as shop.com, drugstore.com, cars.com, and binoculars.com to name just a handful of what is amounting to hundreds.

As we at Internet Real Estate Group LLC build on our momentum from 2005 and continue to make major acquisitions such as software.com, and continue to build our portfolio of, and develop, prime category generic domain names into category portals and profitable website businesses, we expect to be play a major role in enhancing asset values for all of us in the industry who are developing top level generic domain names."

While all of the industry experts we surveyed see more good times in 2006, Miller and Zapolin always have a back up plan in place. "There are two hazards we are always on the look out for at Internet Real Estate Group. Anything as new as the Internet is and domain names are, which we see as in the womb or second inning, will experience peaks and valleys. We survived the so-called bubble and used that period to acquire domain name assets largely because we expected valleys. We didn’t view it as a bubble as much as we did a down period before a bigger, better peak. And, there will be new valleys, hopefully not as deep, followed by higher peaks." 

"We believe that our assets, prime generic domain names, are going to continue to appreciate for many years, decades and centuries. The key is to be able to weather the valleys and use those times as a positive. Our strategy of operating lean and mean and developing our top level domain names into businesses that take a longer term look at value than PPC directories is critical to our vision and allows us to avoid major hazards and pitfalls."

"With prices always escalating (which we believe will continue, through peaks and valleys, for many many years) and inexperienced players coming into the space, it creates even more of a challenge to create significant asset value and cash flow. Companies need to evaluate to what level they are capable of developing a domain name once they acquire it. By creating brands, hybrid sites that are not just PPC driven, but capable of doing meaningful sales, attracting sponsors and accelerating value beyond the general market we protect ourselves from overpaying and having to sit heavy in equity." 

"We further are protected by surrounding our business with the best minds in the domain and Internet space and this allows us to quickly evaluate pricing and development possibilities prior to getting into a competitive bidding situation. We are excited about 2006 and beyond and believe we have a portfolio of the marquee  properties and are well positioned to add to the portfolio in 2006," Miller and Zapolin concluded.

Of course, many domain owners have portfolios that are so large it is impossible to develop all of their properties. Pay per click services remain their primary outlet for monetizing their assets. Every major PPC company currently relies on either Google or Yahoo to provide the advertising links they display on their parking pages. Since the riches flow from those two giants, we went back to Dan Warner, who has dealt extensively with both, for the latest information on the Internet powerhouses so many domain owners rely on.

"In 2005 Google made staggering progress towards directly linking the value of a domain portfolio’s traffic and what the portfolio actually earned with their Smart Pricing index," Warner said. "This produced much greater revenue for quality domains that used their system and penalized other domains which produced poor quality traffic. This in turn forced a lot of domain owners with poor quality traffic to follow the revenue and they subsequently ended up parking their domains with Yahoo! Search."

"This eventuated because at the time the Yahoo systems had much poorer quality control and therefore paid greater revenue for poor traffic. Since then, Yahoo! Search has made some significant inroads into technical development during 2005. Their technical platform that was severely lacking in 2004 was given a boost by dedicating large amounts of money and human resources to their floundering system. I’m happy to now endorse the Yahoo! systems as being considerably better than what they were in the previous year and their system holds a lot of future promise."

"Yahoo! also dedicated themselves in 2005 to building a much more robust system for trademark infringement protection than what Google now has and they remain committed to cleaning up their traffic. They also made an honest effort at implementing a more controlled GEO IP solution that prevents foreign traffic from being pushed to North American advertisers via distributed XML feeds by their affiliates, a significant problem they faced in 2004," Warner said.

"In 2006 I expect Yahoo! will catch up and match Google on a technical basis barring that Google doesn’t also increase their diligence to domain research and solutions. Yahoo! has made a sincere commitment to development that should be supported by the community. However, I still believe the Google system is significantly more developed today and will be a challenge to catch. Yahoo will have to continue to improve their GEO IP solution and eliminate the remaining holes in affiliate XML feeds that still send foreign traffic to USA advertisers. Google now will also be faced with the challenge, for a change, of catching up with Yahoo! on development related to trademark identification."

Howard Hoffman PPCIncome.com

The PPC space is so important that Palo Alto, California domain investor Howard Hoffman (an M.I.T. graduate and professional engineer) developed a site at PPCIncome.com to track performance in the pay per click industry. Hoffman told us, "Higher overall payouts (as measured by revenue per 1000 unique visitors) would have to be the most significant development in this space, as this has raised current income for domainers and the value of domains. "This has been especially true of the most targetted traffic. Google started their program of paying more or less to their search partners based on the quality of the traffic sent. "Quality", in this case, is based on how well the traffic converts into sales for the advertisers. This has caused their search partners to start paying more or less to domainers for their traffic. This will help reduce click fraud, as fraudulent clicks produce no sales."

"Another interesting development was the rise and fall of GoldKey.com, a parking service that attempted Search Engine Optimization (SEO) on a massive scale.  While it worked for a couple of months, the two major search engines changed their listing algorithms and sent the millions of automatically generated extra pages packing. GoldKey continues as a significant parking service, but the amount of traffic that they monetize and revenue generated is down sharply from their peak in the early summer.  If nothing else, GoldKey showed many domainers the value of Search Engine Optimization when it comes time to develop domains," Hoffman said.

"The other most significant development has been all of the new companies providing domain parking services.  In addition to GoldKey, Traffic Valet, Dotzup, Parking Dots, Traffic Club, Enom, Parking Site and Name Drive all came onto the scene in 2005.  In spite of all of the new players, many of the existing players, DomainSponsor, Fabulous, Sedo and TrafficZ had major upgrades to their services during the year.  This was responsible for much of the higher payouts, bringing us full circle and back to the number 1 development in the space (higher payouts). Competition is really driving the industry in very healthy ways for all participants," Hoffman added.

Asked for his 2006 forecast, Hoffman said, "There will always be the potential for some negative unknowns in the domain traffic monetization (parking) business, however, the future for 2006 looks very bright. Most of the traffic will continue to be generated by domains owned by a relatively small number of domain owners, as the existing owners continue to reinvest much of their profits in expanding their portfolios. Eventually, there will be a shakeout and a reduction in the number of parking services, but we are still in a time where there is room for innovation.  Therefore, I do not expect consolidation or a shakeout to start as early as 2006. I do see room for major improvements in the parking pages generated and expect the pages to look more interesting and to generate more revenue," Hoffman concluded.

Indeed, there has been a long standing debate in the PPC industry as to whether or not parking pages are more effective if they feature very simple link-filled layouts or more closely resemble graphic and content rich website pages.

Leading domain attorney Ari Goldberger, who also operates PPC company SmartName.com, seconds Kubba's comments. "Our industry faces significant risks in 2006 from click fraud which we should all work hard to prevent. Trademark infringing domains also present the risk of giving a black eye to our business and their use for PPC should be avoided," Goldberger said.

"We witnessed a big increase in domain name disputes in 2005 as the increased value of domains justified the associated legal costs," Goldberger said. "There were also more attempted reverse domain name hijackings and domain thefts. Domain owners need to make protection of their domains a primary part of their business strategy, being careful to avoid collisions with parties that own trademarks identical or confusingly similar to their domains. That means being careful to avoid PPC links for products sold by such trademark owners or their competitors. In 2006, as ecommerce continues to grow internationally, there will be more and more disputes of all kinds involving domain names - the real estate and storefronts of the Internet."

Paul Stahura CEO, Enom.com

As millions of businesses worldwide come to realize the value of hanging out their shingle on the web, domain registrations continue to hit new heights. Paul Stahura, the CEO of registration giant eNom.com, told us "eNom’s business has grown remarkably over the past year. We added so many employees that we are starting to spill over into other floors of our main building. In 2005 our revenues nearly doubled and profits continued to be healthy, increasing faster than revenue. We grew to the 3rd largest registrar in terms of domains under management by adding over 1.2 million domains in the past year." "The domain name marketplace has seen big changes over the past year. Recent consolidations, leveraged buyouts and acquisitions among some of the larger players have put all of the large registrars on notice that big things are happening and I think some of us are re-evaluating our strategies. I’ve seen a dramatic increase in interest among equity and other investors in the domain name industry."

Looking to 2006, Stahura said, "I see significant growth in the Internet advertising (PPC) business, where we have recently been focusing a lot of energy. My crystal ball is hazy on the future for the drop game, but probably there will be an increase in “transfer fulfillment”.  Obviously, CLS (Verisign's proposed Central Listing Service) will be a big factor in that as well. I have high hopes for new TLD’s such as .eu in Europe, and I believe that .mobi will have significant potential in the mobile device market. We are also constantly investing heavily in building the kind of scalable and flexible technology platform that can accommodate the growth potential of existing and new TLD’s around the world and value added services."

"Global companies are looking to further build their brand in America and what better way to do that than use .us to target the market?", Zouzas asked. "Most countries recognize country codes before other extensions including .com, so in this sense it is a natural. Within the US it is also working it's way up the ladder. I think the year's biggest highlight for .us was Yahoo! buying del.icio.us. The integration of del.icio.us within the Yahoo! brand starts bringing .us directly into the American households."

Other highlights Zouzas cited included Time Magazine picking del.icio.us as the #1 blog on the web and SheetMusicDirect.us as one of the top ten music sites. He also liked Volvo's national TV ads for VolvoCars.us and landing America Magazine as a sponsor for his own America.us site.

Zouzas added, "there was also the purchase of more than $100,000 worth of .us food domains by one company and a huge increase in the number of .us pages indexed by Google, which grew from 20 million a year ago to 90 million today. Some new sites are also attracting a huge amount of traffic. ImageShack.us scores over 24,000 with the extension in Overture and FamilyWatchdog.us is over 40,000!"

With investors finding something to like in all corners of the domain business, the competition for good expiring domains has given companies operating in that sector a huge boost. SnapNames.com Vice President Mason Cole told us, "SnapNames fared extremely well in 2005. Our company works with registrars to bring premium names to market in a stable and predictable way and gives buyers unprecedented access to high-quality domains. There will probably be more good times in 2006. There always will be changing conditions and disputes, but those are part of any business. Domain names are unique and valuable assets, so the development of services and opportunities around those assets should continue to expand."

Taryn Naidu, the President at Pool.com, thinks the interest in expiring domains will get another boost from an unexpected source - new companies entering the PPC space to challenge today's twin giants. "The stealth antics of the online advertising industry has reached its pinnacle. Google and Yahoo! have pretty much owned this space, but now others want a piece of the pie," Naidu said. "MSN, AskJeeves and Looksmart are just a few of the major players we'll see make a high-profile bid for market share."

"New competition coupled with increased "behind the scenes" media coverage, have armed consumers with the knowledge and know how to broker better deals. Advertising costs will decrease while the value of domains will steadily increase," Naidu added. That seeming anomaly could occur because competition would force PPC providers to give domain owners a larger share of the pie at the same time advertisers benefit from lower rates from new outlets seeking their business. 

Roger Collins President, Afternic.com

The major aftermarket sales venues like Sedo.com and Afternic.com are also reaping major rewards from the domain market boom. Afternic President Roger Collins told us, "Our business at least doubled in almost every category: domain sales, parking revenue, number of members, and listings. I have to give most of the credit to our registrar partners. We have been working on the same strategy for three years: partnering with registrars." "Even our $1 million Fish.com sale (the highest reported cash sale of 2005) resulted from working with a registrar partner. We added eNom in 2005 and look forward to launching another top 10 registrar partnership this quarter. These partners bring us the best retail/end-user buyers, and our sellers understand the value of this marketing network. We now have over 1.4 million listings from sellers serious enough to maintain their paid memberships," Collins said.

"For 2006, we are planning for increased Internet advertising to drive growth in the domain name aftermarket, just as it did in 2005. Parking services seemed to multiply in 2005 and we don’t see a need for one more. Therefore, we plan to continue relaying the service of our industry-leading parking providers, Fabulous and Domain Sponsor, to our members and enhancing their earnings by adding aftermarket affiliate revenue," Colllins added.

Continue to Page 3 - Additional Observations & A Visionary's View

Return to Page 1 (Industry Overview)

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