What's in a domain name? Serious money
Xavier Buck planned to spend $100,000 last week to bid for domain names, those parcels of virtual Internet real estate, at a live auction in Los Angeles.
He blew past his limit in less than an hour.
By the time the three-hour auction had ended, Buck, 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," Buck said, as he sat in the ballroom of the Renaissance Hotel with a business partner who wore a matching gray suit. "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 industry's fundamental assertion - that Web names 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.
Buck and other domainers profit when unsavvy Internet users type those names into their Web browsers and then 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 at those Web addresses.
Domainers have generally had a negative reputation. Domain-name trading takes little of the actual effort needed to build businesses on the Web, instead relying on clicks from people who are too unsophisticated or too lazy to use a search engine. In its early years, the industry was dominated by offshore players and secretive, if not illegal, tactics.
But increasingly, there is serious money at stake. Last year, 106 domain names sold for more than $100,000, including porn.com, which went for nearly $9.5 million. In 2006, only 70 domain names sold for more than six figures. Millions of generic domain names, pointing to sites with little more than automated Google or Yahoo text ads, brought in untold more millions of dollars.
As a result, over the past few months, private equity and venture capital firms have poured money into the largest companies in the industry. 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 Morse Jr., a partner at Oak Hill Capital Partners, which invested in both companies and is backed by the oil-rich Bass 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, Massachusetts, that has another 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 Broadview, one of the firms underwriting the offering.
The domainers have their own trade group in Washington, albeit with only one full-time employee. They also have 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.
Schilling traveled from his home on Grand Cayman Island to speak at a conference called DomainFest last week, sponsored by Oversee.net, on his private Gulfstream IV jet, with a leisurely stop in Las Vegas.
But like other veterans, Schilling does not appear to be completely enthused with the industry'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 might 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 past 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 tainted tactic is known as domain hijacking. Nefarious domainers try to trick registrars into transferring ownership of a company's domain name to them, or use identity-theft techniques to obtain a company's passwords to its domain-name accounts. Then they typically resell the domain quickly online.
Fear of domain hijacking strikes at the heart of many companies. 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."
As the industry matures, some small players worry they might get trampled. Don Bowman, a former auto liquidator from Columbus, Ohio, now runs a domain-buying business with his sister.
Bowman said the larger companies were developing sophisticated software to buy desirable domain names as soon as they became 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."