Alt Assets: Name raiders

(March 2006) You use domain names every time you visit a website or google a term to find more information. But do you know what gives value to a name? Do you know how to assess that value? What you don’t know actually spells opportunity.

Just as in financial markets, there are primary and secondary markets for web domains. You think up a word, go to your favourite ISP and check if the name is taken. If not, you buy the domain name for a nominal annual fee. That’s the primary market.

The secondary market is particularly relevant, because that’s largely where the true value is unlocked and where the investment potential is. A large number of domain names are owned but not used. More importantly, several sites with generic or general-purpose names like AssetManagement.com, FinancialProducts.com or FinancialAdvisor.com are basically full of sponsored links.

Those are links that are paid for by firms that want the site traffic. You may have heard the term “pay per click” (PPC) — that’s what it’s all about. Every time you click on a sponsored link the advertiser pays the sponsor (typically Google and Yahoo/Overture), who in turn pays the owner a portion of the click revenue for the web referral. This process is referred to as the monetization of a domain name.

This is where the analytics of the Internet get interesting. To make sense of it, we’ll get help from Alex Tajirian, founder and CEO of DomainMart (www.domainmart.com), a San Francisco-based web consultancy. In fact, Tajirian started the secondary domain name market in 1996, when most North Americans didn’t even know the Internet existed. Since then, he’s researched and published on Internet economics, tracking an important emerging set of investment trends.

The online advertising industry in 2004 represented US$9.6 billion, with clear growth since 2002. And various forecasts point to the industry growing steadily from about US$12.3 billion in 2005 to as much as US$26 billion in 2010. Moreover, online advertising as a percentage of sales is way too low given current online trade and should pick up markedly in this decade.

Tajirian says that the domain name-related PPC business is significant, and it’s growing at a fast clip. It’s currently a US$1 billion revenue business — it was practically non-existent four years ago. It’s rapidly supplanting website ads as revenue drivers. And because they’re in for a significant share of PPC revenue, domain name owners can profit handsomely from the Internet’s narrow-casting properties.

That’s because a good, specialized web site — those that focus on such narrow themes as, say, mesothelioma attorney or structured settlements — may hold links that generate up to US$100 per click. That gives a sense of how valuable leads can be (think of them as cash flow generators), even on the Internet, and how valuable portfolios of domain names can become.

But Tajirian uses the tools of information economics to show that there are some issues with the PPC model. First, the owner of the site may want to generate revenues off her own site, as she receives a percentage of ad revenue every time a click occurs (this is a moral hazard). Second, competitors of the link sponsor may want to overwhelm the advertiser through clicking, as sponsorship payment occurs even though it’s the competition linking in (that’s self-selection).