We’re going to change the format a bit this month and devote this entire newsletter to a single topic rather the 3-4 subjects we usually spotlight. I want to use the extra space to talk about something that has been the focus of considerable debate this year. That is, with respect to the current domain market boom – what stage of the game are we at now? 

At the most recent T.R.A.F.F.I.C. and Domain Roundtable conferences we heard speakers say we're still in just the first inning, but at the same conferences we  heard some financial analysts say they believed the market was at its peak now and that resale prices may never be better than they are today. 

Time to hold them or fold them?

Your own take on the issue will almost certainly be influenced by whether you want to buy domains or want to sell them. If you are a buyer you want people to believe the market isn’t likely to go a lot higher, so they will be more linclined to sell to you now. If you are a seller (or someone standing pat for now) you want people to see more price appreciation ahead so your properties will be valued higher. While there is obvious self interest involved for both sides, I think most proponents for each line of thought sincerely believe in their own market outlooks. 

As a result, even though the market has seen some consolidation, we now seem to be reaching a stalemate in the marketplace. While some large portfolio deals have been done, most of the major domain owners are not selling at prices currently being offered and most buyers are not raising their bids enough to break the logjam.

Both sides are waiting for the other to blink and as this standoff goes on I am seeing some people in each camp re-examining their current beliefs. The PPC market usually slumps in the summer but, with the flood of advertising dollars migrating to the web, pay-per-click income has not wilted with the return of hot weather this year. Oddly, this boom has even some of the beneficiaries wondering if it could be too good to last. Are things destined for a fall or could it get better than this – maybe even a lot better?  I have seen a lot of evidence that indicates to me that the best is yet to come (and I'll show you some of the data in a moment). At the same time I can’t help remembering the tech stock boom and how there seemed to be nothing on the horizon that could derail it. Like many of you, I watched spectacular gains pile up in my stock portfolio, only to see them evaporate just as quickly. At T.R.A.F.F.I.C. and Domain Roundtable, the financial guys reminded domainers of the risk factors and noted that the thing that upsets the apple cart is usually something unforeseen.

Having gone through the last tech bust, I try to be much more aware of potential pitfalls with domain investments. In the end you have to accept that no one can see the future with certainty, not even the brilliant people on opposite sides of today’s negotiating tables, so you can only examine the evidence at hand and place your bets on what you think tomorrow is most likely to bring. 

Keep in mind that it is not an "all or nothing" proposition. Most people have learned from the previous domain/tech bust to diversify their assets, so I am not talking about putting all of your eggs in one basket - but about those eggs (and how many of them) you might want to put in the domain basket. Most domain investors I know, after examining all of the investment options out there, come back believing that domains are currently the best investment for the lion’s share of their assets. I am in that camp as well and some amazing developments in recent months have reinforced my belief in domains (even though I’ve learned the hard way that nothing is a sure thing). 

Follow the Money

Today’s domain boom is being fueled primarily by the advertising dollars spent on traffic provided by domain owners. A July report from JupiterResearch predicted that online ad spending will soar to $25.9 billion by 2011. Approximately $12 billion was spent online last year according to figures from the Interactive Advertising Bureau. The report predicts continued gains for search marketing which surpassed display advertising last year with 41% of overall spending (display ads took 34% of the pie). JupiterResearch predicts online ad spending will jump 21% this year. Others expect an even higher growth rate for 2006. Universal McCann forecasts a 25% rise while research firm eMarketer says the number will be over 33%. 

Research also shows that young people are abandoning TV for the web and advertisers have no choice but to follow those eyeballs with their wallets. As someone who grew up with TV (and worked in the TV industry for many years) it has been stunning for me to see that medium, once thought to be invincible, being displaced by the web. 

As I am writing this (on August 5th) ABC-TV has just announced the results from a test conducted in May and June in which full-length episodes of such popular shows as Lost, Desperate Housewives and Commander in Chief were made available as free downloads at ABC.com. The network says more young viewers watched the shows via the web than  during the programs' first runs on over the air TV! The implications of this for network TV are enormous. The test was so successful, ABC said they would re-launch the web download operation as a free advertiser-supported full-time service this fall. ABC said the average age of web viewers was 29, compared to an average age of 46 for those who watched on the traditional network, still another indicator that the upcoming generation will fuel spectacular advertisement spending growth on the web. 

Multiple Paths to the Mountain Top

As important as increased ad spending is, it is not the only revenue stream domain owners can tap into. With a web presence becoming indispensable for all businesses, the value of domain names as easy to remember business identifiers is constantly being enhanced (even if those names have no existing traffic). In addition, with millions of new businesses coming online each year, we are seeing increasing spillover from the .com space to other extensions where strong keywords, terms and acronyms are less expensive to acquire. Country codes in particular have enjoyed a real boom this year. That is opening still more opportunities for domain investors.