Article: Coins in the New Realm

It’s interesting to see more and more people realizing the value of domain names. I’ve been building my portfolio for about 10 years and each year revenue grows, with little effort. It’s the real estate of the virtual world.

February 1, 2008
New York Times
Coins in the New Realm
By BRAD STONE

HOLLYWOOD — Xavier Buck planned to spend $100,000 to bid for domain names, those parcels of virtual Internet real estate, at a live auction here last week.

He blew past his limit in less than an hour.

By the time the three-hour auction had ended, Mr. Buck, the chief executive of the Luxembourg-based company EuroDNS, had spent $150,000 for 15 appealingly generic names, including 7th.com, chaptereleven.com, microfinancing.com and computersystems.com.

“These names will pay for themselves within two years,” Mr. Buck said, as he sat in the ballroom of the Renaissance Hotel with a business partner who wore an identical gray suit and shirt with the company logo. “The world is only now beginning to discover how important it is to have these assets.”

For the first time, people outside the traditionally insular and sometimes underground world of domainers, as they call themselves, might agree with him.

The practitioners’ fundamental assertion — that names of Web sites can be valuable, cash-generating assets just like stocks, bonds or property — appears to be gaining a broader acceptance that veteran domainers are not accustomed to and may not be totally comfortable with.

Mr. Buck and other domainers profit when inexperienced Internet users type those names into their Web browsers, and once on the site click on related advertisements. In the longer term, they hope to resell their domain names for large profits to companies that want to build real businesses with those Web addresses.

Domainers have generally had a negative reputation. Domain-name trading takes little of the actual effort needed to build a business on the Web, instead relying on clicks from people who simply guess at a site’s name or are too lazy to use a search engine. In its early years, the field was dominated by offshore players and secretive, if not illegal, tactics.

But increasingly, there is serious money at stake. Last year, 106 domain names drew more than $100,000 each, and one, porn.com, went for nearly $9.5 million. In 2006, only 70 domain names sold for more than six figures each. Millions of generic domain names, pointing to sites with little more than automated Google or Yahoo text ads, brought in untold millions of dollars.

As a result, over the last few months, private equity and venture capital firms have poured money into the largest companies in the field. Last year, Demand Media and Oversee.net, two companies based in Los Angeles that own hundreds of thousands of domain names each and offer hosting and advertising services to other domainers, raised nearly $400 million from investors.

“We think this is definitely a legitimate industry and a legitimate business,” said Robert L. Morse Jr., a partner at Oak Hill Capital Partners, which invested in Oversee.net and is backed by the Bass oil family of Texas. “As with many early-stage markets, it is going through a transformation to professionalism.”

Investors are so confident in the growth of online advertising — and the ability of domainers to capitalize on that trend — that they plan to soon start selling shares of domain-name companies to the public, even in today’s volatile market. Last September, NameMedia, a company based in Waltham, Mass., which has a huge portfolio of generic domain names, filed to go public on the Nasdaq stock market.

“This industry could probably be an oasis, in the grand scheme of things, relative to the rest of the economy,” said David Liu, managing director at Jefferies & Company, one of the firms underwriting the offering.

The domainers now have their own trade group in Washington — albeit with only one full-time employee. They also have specialized financiers who will lend money and accept domain names as collateral.

“The industry was very secretive for a long time,” said Frank Schilling, an industry pioneer who hit it big with bare-bones Web destinations like drugproblem.com and diamondweddingrings.com. “When you make millions at home in your underwear, you are not telling a soul about it,” he said.

Mr. Schilling traveled from his home on Grand Cayman Island to speak at last week’s DomainFest conference, sponsored by Oversee.net, on his private Gulfstream IV jet, with a leisurely stop in Las Vegas.

But like other veterans, Mr. Schilling does not appear to be completely enthusiastic about the business’s new direction. “These shows let everyone know how good it is, and now the sniff is out,” he said. “The wildcatting days are over. I’d be lying if I said I didn’t miss them.”

The industry’s transition to respect and professionalism may not be entirely complete. One strategy that has cast a stigma over the industry is called typo-squatting — registering domain names with variations and misspellings of major brand names, in the hopes that Web users will inadvertently stumble upon the sites. It has not gone away.

In the last few months, Yahoo, Dell, BMW and Microsoft have all sued small domain registrars and domainers, asserting that they are profiting from thousands of names similar to their trademarks. The cases are pending.

Another questionable tactic is known as domain tasting. Domainers register Web addresses in bulk and, during a five-day trial period, test how ads do on those sites. They then let go of the unprofitable ones and get a full refund. Google and an organization called Icann, the nonprofit group that oversees the domain name system, have recently announced plans to combat the practice.

Domain hijacking is another strategy. Susan Kawaguchi, global domain name manager at eBay, said during a DomainFest session on domain strategies for corporations that her company spent a lot of time “trying to make sure someone doesn’t steal ebay.com.”

Mr. Morse of Oak Hill Capital said the business was “in its teenage years.” He added: “It is mature in many ways, but there are pockets of it that are still juvenile.”

A two-year-old specialty finance company called Domain Capital, based in Fort Lee, N.J., is betting that the practice’s tarnished reputation will not stop domain names from appreciating. The firm expects to lend around $20 million this year to domainers, accepting their choicest generic domain names as collateral.

Robert Alfano, the company’s co-founder, says he spends much of his time talking to Wall Street banks about backing his business model. Persuading traditional investors to view domain names as an asset is not easy, he said. “But the industry is growing up and all the negative connotations have sifted out.”

As the business matures, some of the smaller players worry they might get trampled. Don Bowman, a former auto liquidator from Columbus, Ohio, runs a domain-buying business with his sister, choosing names that might be culturally or politically relevant, like obamahillary.com and bloombergrice.com.

Mr. Bowman said the larger companies were developing sophisticated software to buy desirable domain names as soon as they become available, leaving little operations like his in the dust.

“Big changes are coming, and for the little guy it’s getting challenging,” he said. “The bigger companies can do things, and I can’t. We just have to work harder.”

Correction: February 6, 2008

An article in Business Day on Friday about the business of buying and selling Internet domain names described incorrectly the investments of one private equity firm that has backed companies in the field. The firm, Oak Hill Capital Partners, invested in one such company, Oversee.net, but it did not invest in another, Demand Media. (A similarly named company, Oak Investment Partners, invested in Demand Media.)

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