DNJ Newsletter

They will give you the specifics, but first let's set the stage. Just about everyone now recognizes that billions of advertising dollars have started to migrate from traditional media like newspapers, radio and TV to the web. In just the first half of 2005, nearly $4 billion was spent on Internet advertising and that number is rising rapidly. With that fact fueling the fire, the past year brought higher domain prices as corporate buyers and venture capitalists moved into the space in a big way for the first time, taking competition for top quality domains to a new level.

Exploding domain values caught the attention of mainstream media outlets like the Wall Street Journal and Business 2.0 who published articles that have triggered an unprecedented wave of new interest in domains. Thriving trade shows like the T.R.A.F.F.I.C. conferences and Domain Roundtable provided venues for domain owners, investors, developers and support companies to meet face to face and do deals that have propelled the industry to heights no one could have imagined just 15 months ago when such grand scale events did not exist.

Many of the top companies in this field have a hand in multiple sectors, giving their leaders a broad industry view that make them the perfect point men for this report. We will start with that group's assessment of the industry at large, then call on VIP's in the various sectors to get the inside story on what is happening in every corner of the industry.

"Industry wide, the portfolio sale was more common than ever before. The acquisition trends being set by such companies as Marchex, Highland Capital, Walnut Ventures, Internet REIT and the like are now carrying over to smaller portfolio buyers and sellers."

Cahn pointed to Marchex's $164 million acquisition of the UltimateSearch/Name Development portfolio that was finalized in February and the Highland Capital purchase of a majority interest in BuyDomains.com as 2005's most significant events in the domain sales arena, along with several 6 and 7 figure individual domain transactions (some publicly reported and some not). Moniker handled the domain transfers in the Marchex deal marking the first time a block of more than 80,000 names changed ownership at once.

Cahn said, "As predicted, several registrars attempted to roll up the market in 2005. Baker Capital acquired Dotster, which then acquired several other registrars including DotRegistrar. We acquired 8 registrars and several other organizations such as Enom and Momentous flooded the market with more than 200 ICANN accreditations to capitalize on the expired domain and back order market. This has created a great deal of customer confusion and frustration with respect to customer support, lack of consolidation, different management platforms, etc." 

"On a positive note, overall new domain registrations continued to grow close to 20% over last year," Cahn noted. "This was partly due to many registrars registering tens of thousands of domain names to test for traffic, then deleting those that did not perform within the 5 day grace period so they were not charged for the registrations. This behavior was frowned on in the past by Verisign (the central .com/.net registry) but ironically is ignored  by Verisign today because the increased registrations are creating more revenue and profit for the registry than ever before...imagine that!" 

While .com prices were rising last year, Cahn also noticed the market was broadening. "The continued increase in sales and appreciation in value of other TLD's and ccTLD's shows a growing and maturing market in my opinion. 2005 sales activities are also an indication of domains really being treated like assets instead of commodities. This will more than likely result in lending institutions, banks, and other financial facilities beginning to treat domains like assets based on how they are performing in monetization and resale values."

"The drop game also became so competitive in 2005 that it became far less lucrative with many domainers paying over 10 to 20 years revenue to win the auctions," Warner noted. "The “catch and release” miners soaked up most of the fringe traffic by registering hundreds of thousands of domains daily only to drop most of them within the five day non-penalty period if they didn’t have traffic. Even this brutish form of registration has largely dried up like a Japanese fishery."

"However, as the market has tightened up and the generic domains have become almost impossible to find it has left more opportunity behind," Warner said. "Supply and demand has come into play and it has forced the market to look towards buying whole domain portfolios or to heavily compete in the aftermarket for individual or groups of domains. This has caused domain sale prices to rise sharply. Prices have climbed beyond those reached during the .com boom and will continue to rise. Expect that domain prices in 2006 may double again as the ad revenue continues to build from traffic and more efficient sales methods are employed."

Warner said that well financed investors quietly spent tens of millions of dollars on domains behind closed doors in 2005. However he said there was a downside too. "After the Marchex transaction some of the worst portfolios on the market flooded the merchant banks and advisors to be put up for sale," Warner said. "All of them claimed to have similar portfolios to the Ultimate Search deal. They demanded 8 times revenue for portfolios full of trademark, typo and illicit domains. This had some positive and negative effects. It forced the merchant banks and financial advisors to learn about the domain channel and start asking questions. It also made them realize they had no real understanding about the domain space.  Once the merchant banks figured out they needed more information to correctly value these portfolios the consolidation movement was put on hold until they could be brought up to speed."

Warned added, "The market has changed. In the early internet boom domains were largely valued on brand, then traffic was the core consideration, and now valuation tends to be a combined value of brand and traffic. Domains now are often sold at retail prices for emotional buyers and wholesale prices based solely on traffic and revenue statistics. If someone asks you what the traffic statistics are on a domain today you know they are a wholesale buyer looking for a wholesale price. My tip is to buy wholesale and sell retail."

Looking ahead, Warner said, "In 2006 the stage has been set. The merchant banks now understand the domain market a great deal more, but the problem of valuation and segregation still remains. In order for consolidation transactions to go forward the investors need more information about the portfolios. That’s why domain analytics will become a hot topic this year. Revenue multiples are not enough, this year buyers want to know metrics and what the predicted future of the domains they will be buying have. Revenue today may be gone tomorrow."  

"It was exciting to see a significant increase in the amount of publicity in the mainstream media, attention from Sandhill Road and Wall Street, in the form of venture capitalists and increased analyst coverage that brought further legitimacy to our industry," O'Donnell said.

"Although the industry is still in it's relative infancy, I do think that we are entering another stage in the maturation process. This is attributable to a number of factors, including the entrepreneurial spirit and endeavor of domainers that has forced traditional business to take notice, the efforts of industry leaders to bring participants together to discuss the business at a global level with events such as T.R.A.F.F.I.C. and a number of high profile, high dollar deals by publicly traded companies such as ourselves and Marchex"

"At InterSearch, 2005 proved to be a pivotal year for us and we enter 2006 extremely bullish on the growth of the space. InterSearch is a holding company of a number of subsidiaries primarily focused on technology and specifically internet search. Of those companies, most of them actively participate in a core channel of the domain industry. We own a venture fund dedicated to buying domains, operate ParkingDots, which  is a rapidly growing Yahoo! sponsored domain parking program and manage our own portfolio of domains, which includes Look.com which we have under development," O'Donnell noted.

"As a participant in several sectors of the industry we are very optimistic assuming that the industry as a whole continually keeps the advertiser in mind. In terms of overarching trends in the categories that we participate in, we see decreased margins, but overall revenue growth in the parking business, significantly increased yield from domain portfolios and continued stabilization and rationalization of domain prices with more transparency and subsequent liquidity."

"Drilling down a little further into each of those channels, as an owner/operator with a burgeoning business in the parking channel we see several trends and innovations taking place, all of which are good for domainers. A combination of more dynamic pages, relevant results and improved optimization technology is improving user experience and subsequently yield from the page." "We are seeing the parking business becoming more of a commodity as more and more players join the space. Those players are all ultimately controlled and governed by one of the top two PPC providers (Google and Yahoo!), providing uniform operating rules and the competition keeps pace with one another in terms of technology levels, hence the margin compression and commoditization. We operate from a unique position as a financier and buyer of domains who operates a top tier parking program.  Subsequently, we embrace this trend and will be differentiating our parking program in 2006 by moving towards a more transparent no-haggle pricing model and releasing a variety of exciting domain leasing programs," O'Donnell said.

"For domain owners large and small we see unlimited opportunities. Parking is one alternative for domainers and their portfolios, but for higher value domains, the path to building a brand and a broader business model is eminently feasible and has been proven out by innovative domain owners large and small with differing backgrounds and resources at their disposal. We are developing several domains within our portfolio that have brand potential and seeing the possibilities first hand ourselves."

"My optimism is cautioned by the increasing levels of click-fraud and the industry’s need to address this problem. Google has already added a CPA component to their PPC product and while there are certain things in the implementation that I disagree with, I applaud the overall message that it sends to our community and the direction that it takes the channel. It is paramount that we protect the advertiser. By doing that, we will all protect our own businesses and ensure continued growth for the foreseeable future," O'Donnell concluded.

Sedo.com CEO Matthew Bentley echoed O'Donnell's emphasis on the importance of making sure that the interests of those who pay the bills for everyone - Internet advertisers - are protected. "2005 was the year that domainers recognized that it's not just the quantity of traffic that counts, but the quality. Although we still hear people price domains using a multiplier method, for example, "five times earnings" or "ten times earnings," in 2006 we're going to see savvy buyers increasingly asking "a multiple of what?!" "As advertiser awareness of direct navigation continues to rise, value will be concentrated in domains that offer an attractive advertising platform, namely category-owning, commercially-oriented generic domains - at the expense of domains where most businesses would not want to see their advertisements, like typos and potential TM domains," Bentley said.

Matthew Bentley CEO, Sedo.com

"Whereas the former may begin to fetch multiples of 20-30 years revenue or even higher, those holding domains less suitable as advertising platforms will see their sales values shrink to 2-3 years revenue, or less, as more and more domain professionals wake up to the reality that it's time for the domain industry to focus on traffic quality."

"All three of the major domain parking platforms, including Sedo, have in the past year introduced new initiatives to reward quality traffic and tighter controls on less quality traffic. At the moment there may still be smaller parking players willing to step in and service the junk traffic, but where the leaders go, the industry will follow. Eventually the time will run out for those going after the short-term buck, and we'll be left with a more mature, sustainable industry," Bentley said.

As for his own company, Bentley couldn't have been happier about developments over the past year. "How was 2005 as a year for Sedo? In a word, breathtaking! We nearly doubled the number of domains in our database, adding 1,750,000 new domains for sale. Sedo welcomed just under 100,000 new members to our global domainer community, and closed approximately $25 million worth of domain sales, including some stunners like website.com for $750,000, annuity.com for $600,000, and recycling.com for $300,000," Bentley said.

When we asked Bentley what he saw in the crystal ball for 2006 he told us, "One of the premises that Sedo was founded upon is that businesses will always need a great domain name for their website. This is still true and will likely remain so for many years to come, providing an underlying basis to domain values regardless of what happens on the monetization side of things."

"I sleep better at night knowing that Sedo has a booming marketplace as well as a leading parking service. Similarly, domain owners would be wise to build a diverse portfolio that includes plenty of brandable and resalable domains in addition to traffic domains, even though it may seem right now like traffic domain holders are having all the fun. Yes, that might even mean making some more speculative investments among the less-saturated TLDs like .info, .biz and the major ccTLDs (such as .us, .co.uk, and .de). Domainers are investors now, and portfolio diversification is an essential part of any investment strategy," Bentley said.

Continue to Page 2 - Individual Sectors

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