As the brick-and-mortar commercial real estate market suffers through a crisis of historic proportions, the marketplace for Internet real estate has experienced a serious downturn of its own. While many companies, mainstream and adult, continue to bet their futures on a vigorous online economy that both supports and improves offline industries, the ways in which actual domains are being bought, sold, and utilized in the service of that vision continue to evolve, with many stakeholders trying to have a say in the establishment of ground rules, and a few already setting the rules.
With more interest than ever on the Internet as a crucial player in the resurrection of our economy, AVN Online asked several leading participants in the domain marketplace to weigh-in on the general state of the sector, the factors that continue to impede growth and prosperity, and any friendly conjecture about its future. Interestingly, there was almost complete consensus regarding both the state of the market and its ultimate potential.
Regarding how the aftermarket for domains works, all of our respondents concurred that the process for both adult and mainstream domains was basically the same, with only a few differences.
"The domain aftermarket consists of five major channels," said Rick Latona of RickLatona.com, DigiPawn.com, and the community site ccTLDs.com. "Sales happen either through brokerage houses, auction companies, websites that list names for sale (Sedo.com), drops (Namejet.com), and, finally, individual direct retail sales. It is the same for both adult and mainstream."
"The domain aftermarket consists of expiring domains, auctions, and marketplaces such as Sedo and Afternic," added Evan Horowitz, who operates HuntingMoon.com and PDDW.com, "plus forums such as Namepros and DNForum. Adult domains are relegated to the adults-only sections on these sites and are a part of the fabric of the aftermarket, notwithstanding the restrictions with regards to listing them."
"Yes," said Monte Cahn, founder and president of Moniker and SnapNames.com. "Both adult names and mainstream names are offered at the same places in vast inventories. The goal of the aftermarket, especially ours, is to match buyers and sellers and/or desired brand names with people and companies that desire those brands."
Richard Cohen, president of National A-1 Advertising, Catnip.com, and DDC.com Domain Development Company, agreed that the adult and general domain markets are the same, but added, "Adult domains are no longer as desirable as the non-adult. Very few sell for decent money. For the most part, unless the traffic and income warrants the sales price, there are few buyers for adult domains. Most sellers for the top adult domains want far too much money for them."
"I'd say most of the domains don't have any sites or content associated with them," added Gregory Dumas, president of GEC Media, Inc. "The auction market has exploded and is quite lucrative, with companies charging as much as 15 percent of the gross sales price, which is exorbitant in my opinion. There are also many aftermarket sites, such as Snapnames, Pool, and BuyDomains.com, which also list domains for sale. Since the business of grabbing and tasting expired domains is being eliminated, I'd expect the amount of names listed for sale to drop somewhat. Also, people like to list their domains for sale just to see if they can get any offers. Adult domains have dropped more than any other category due to Google (and, to a lesser degree, Yahoo) tightening down on the ability to send them traffic via domain parking services."
There also was agreement that the economic recession has impacted the domain marketplace for the worse.
"The decline is most evident in the slowdown of categorical trading of three-letter dot coms (LLLs), four-letter dot coms (LLLLs), and other types of names that had very steady resale values for years," Horowitz said. "End-user sales are still thriving, most visibly with the recent sale of Toys.com to Toys-R-Us for $5.1 million. The lower overhead of running an online venture is more attractive to end-users who will develop businesses, rather than hording names. Geographical domains and ccTLDs appear to see a continued rise in value."
According to Cahn, while the overall domain market is down 20 to 30 percent compared to a 50 percent downward trend in other asset transactions such as real estate, decent names retain value in both up and down markets and can actually be more liquid than physical real estate when outside components such as lending, interest rates, financing, and credit checks are factored in.
"Premium names are still moving to qualified end users," he said. "Names relative to the current conditions also are moving. We recently sold FinancialAid.com for $800,000, and names around debt consolidation, tax relief, foreclosures, etc., are looking solid in the down market because the domains are very relevant to the current market conditions."
He added that while most domain names are purchased in on-time cash transactions, there have been an increasing number of creative financing and multiple payment options not seen in recent years. Also, because international markets are sometimes affected differently than the U.S. market, and funding and exchange rates can actually make large names more attractive purchases when the exchange rates work in favor of either the buyer or seller, his company has been doing more domain transactions in euros and British pounds.
According to Richard Cohen, while the recession is a definite factor, most domains are parked and the revenue from most parking services is down about 40 percent. "This is due to the lower payouts that Google and Yahoo pay for the traffic," he explained.
"It's important to note there was also a bit of a domain bubble," added Latona. "Savvy investors are just buying better names now."
For Dumas, the greatest impact on adult domains has been caused by Google slowly modifying its PPC programs so that buyers of traffic can carefully choose their traffic sources. "Most adult domain portfolios have dropped more than 50 percent in gross revenue since June 2007, when these changes began to be implemented," he said, adding, "Google and Yahoo have also become more aggressive with knowing the sources of their traffic, thus they've terminated many domains from the program if they deem them to be offensive; many times they simply don't give any reasons, but simply terminate and then tell the client."
Deviating slightly from Horowitz, Dumas believes that the various generic, sponsored, and country code top-level domains are worth significantly less than their .com counterparts, a result, he says, of search engines and consumer behavior. He believes that single word, descriptive, and even some short three- or four-letter domains will continue to retain significant value, as their long-term value is commonly recognized.
Top-tier premium domains continue to command significant process and attention, but our respondents were quite mixed in their assessments of the number and quality of those transactions.
"There are a ton of high-profile sales already this year," Horowitz said. "DNJournal.com reports weekly sales listings, and the year has been off to a ferocious start with seven-figure and six-figure sales. We have been buying and flipping Tube domains. The days of buying ‘quad premium LLLLs' and flipping them are over, at least for the time being. I never understood that end of the business, since many times the ‘quad-premium' names made no sense. We have started being more aggressive courting end users, so hopefully there will be more flipping to keep up with our consistent buying."
"I would say that there are not as many large domain sales," Cahn weighed in. "However, the creative financing and domain financing options are helping keep the market stable. Like I said, our escrow service has seen many more domain purchases using payment plans than ever before. We are doing deals with 3- to 60-month payment plans, depending on the size of the transaction and willingness of the sellers, many of which are owner-financing the transactions through our escrow service."
Cohen says simply that premium domains are in another category altogether. "They are not usually purchased for their traffic or income but for their development potential," he added. "However, prices for all domains are down because there are fewer buyers or speculators who want to buy higher-priced domains and do little to nothing with them. Developing a good domain is like starting any business. It takes capital, staff, and the knowledge of what to do."
Cohen says that as a top buyer for premium domains, National A-1 Advertising has "unlimited funds" with which to purchase top-drawer, reasonably priced domains, but added, "The reason there are very few large sales is because most sellers expect far too much for their domains."
Latona sees the same downturn, adding, "While large deals are definitely fewer and farther between, a few happen here and there, but not as often as a year ago. The $1,000 to $10,000 price point, however, remains as strong as ever."
"Many people are simply holding on to their domains and riding out the market," added Dumas. "Others are using any available cash to accumulate domains, since the market is down. The ‘flip' market is definitely down, as many bought based on values from prior to June 2007, and are stuck with the domains. It's a very similar situation to the consumer real estate market in the U.S."
While everyone was somewhat optimistic about the future of the domain marketplace, especially the dot-com space, there also was complete agreement regarding the planned rollout of new gTLDs by ICANN next year in that it would add little to the marketplace, and could be problematic.
"I am actually not looking forward to the gTLDs," Cahn said. "Although we stand to profit from the chaos, I believe that true market supply-and-demand economics do not justify releasing a bunch more extensions at this time. Current established sTLDs and gTLDs are still not considered successful - extensions like .biz, .aero, .museum, .travel, .jobs, .name, .pro, and even .info are considered by many to be failures. Imagine 200 more like them, along with all the auditing, bureaucracy, application, and approval processes, technical debt required by registries, and registrars to support each new extension."
"There will be new opportunities created by gTLDs, but I am not looking forward to their release, if they are released," Horowitz said. "With more TLDs comes the possibility of confusion in the marketplace, though it is very likely that the luster of dot-com also will grow."
"We have no interest in the new adult TLDs," says Cohen. "Dot-com will always be number one, and we stick with the best."
For his part, Dumas predicts there will be many more gTLDs in the market over the next decade, and sees no lasting harm with their addition. "ICANN can make a lot of money from both the submissions and the approved gTLDs, and it doesn't seem to hurt the market. My opinion is that all these new gTLDs only cause dot-com to become more valuable, as it's considered the primary [top-level] domain."
"I'm not a fan of new gTLDs," said Latona. "The growth right now is really in ccTLDs. In fact, I just launched a forum to promote them at, ironically, ccTLDs.com; ironic because ccTLDs.com is a gTLD."
Finally, we asked our respondents what they thought the domain marketplace would look like in one to five years. As expected, answers were across the board.
"It's hard to say what will happen in one to five years with any business," said Cohen, "but we believe domain buyers will become much more selective and therefore there could be fewer sales. One issue we have is that the domain auctions do little to no advertising to major companies who might want to purchase domains. Most of the sales are to other domainers. One day a large auction house will get involved and this will change."
"Moving forward, the mobile industry will influence what's hot for domainers," claimed Horowitz. "Mobile short codes with a matching domain of five letters, for example, should cause demand to rise for five letter domains. Another trend is money that traditionally was invested in the money markets/stock markets being transitioned into domains. Bond traders and stock brokers are more apt to invest in domains than stocks these days. HuntingMoon just sold a $20,000 package to a former stock analyst, and he is moving into a new space, in part to grow and in part to get away from the past. The domain market will continue to explode as the world has really assimilated the Internet now and it is here to stay."
Cahn agrees that mobile will be a driving factor. "People carry four times the number of mobile devices than desktop," he said, "most of which are now Web enabled. In addition, there are two million new users on the Web every three weeks, and Third World countries are installing broadband and making access available to their populations at little or no cost. With both younger and older populations also growing in Internet usage, the market is growing vertically, horizontally, and globally.
"Add to that, when unemployment rises, entrepreneurship rises, and there are many more online business started and domains that have to be used for all of them. So, in five years, I think we will continue to see growth and even more aftermarket transactions ... purely due to online population needs and a more mature domain market serving those users over time. My long term outlook is very positive."
While optimistic about the future, Dumas urges caution in the face of a marketplace increasingly vulnerable to government intervention. Ironically, his warning is about the United States and not a foreign government.
"One thing that's becoming quite important is the protection of domain assets," Dumas told AVN Online. "Since domains are considered real property, if you are hosting a domain at a U.S.-based registrar, your domain is subject to U.S. government action. Ultimately, ICANN has the final say to determine if a domain should be seized from an owner. However, considering the fact that states like Kentucky have actively seized domains, and other states such as New York are enacting legislation to make it easier to seize domains, the value of protecting your domains by having it at a registrar outside the United States has become much more important. Even if the entire company structure is outside the U.S., if your domain is parked at a U.S.-based registrar, you are considered to be doing business in the U.S., and subject to local, state, and federal jurisdiction."
This article originally appeared in the May 2009 issue of AVN Online. To subscribe, visit AVNMediaNetwork.com/subscribe
