NEW YORK (CNNfn) - When a high-profile Internet venture capital fund made World Wide Web history by paying a stunning $7.5 million for the domain name "business.com" last month, more than a few Net watchers considered the deal absurd.|
But others argued that a cool million - or seven - is a small price to pay for establishing an instantly recognizable presence on the Internet.
"You have to think of domain names as keywords. (To make an impact on the market), corporations need to own as many of those keywords as possible,” said Chris Maroney, co-CEO of Afternic, a New York-based online auctioneer of domain names. eCompanies "may have spent $7.5 million for business.com, but it can cost as much as much as $50 million to $100 million to build a brand online.”
Maroney predicts the domain-name market is set to explode, as a growing number of e-commerce companies snap up Web real estate in the hopes of wooing much-needed customers with instantly recognizable brands.
And that‘s a trend many investors are betting on.
The playing field
Domain-name speculation is nothing new. The first wave of these investors involved so-called "cyber squatters” -- individuals who bought up Web domains that were somehow related to existing commercial properties, such as McDonalds.com, in the hopes they might someday be bought out by deep-pocketed corporations.
But this strategy ultimately backfired. Tired of being "extorted” by Web savvy speculators, corporate America successfully lobbied Congress to pass legislation protecting their trademark rights online. The Trademark and Cyberprivacy Act makes it illegal for individuals to buy domains for the sole purpose of resale and profit.
The law - which has yet to be tested in the courts -- has forced those hoping to profit from domain name sales to rethink their strategy. Instead of focusing on established brands, many investors are now hoping to land the next business.com - generic domains that are easy to remember and can be quickly converted into a brand.
Simplicity - most experts agree - is what makes a domain a good bet.
"You really want something that’s short and original,” said Amy Looper, creative consultant for marketing firm Luminant Worldwide Corp. "The best domain names are easy to spell and have a sort of ‘top-of-the-mind’ awareness.”
Some of the more impressive sales in recent months include recording.com, which sold for $300,000, E-Privacy.com, which garnered more than $35,000, and grocery.com, which went for $10,000. The owner of worldwide.com was reportedly offered a whopping $3.5 million for her domain, which she declined.
And dot-com status doesn’t hurt either.
"Obviously, dot-com is Park Avenue,” said Maroney. "But as other top-level names become more branded, they will become more valuable as well.”
Maroney and his co-CEO Jon Whelan expect the next big rush for domain names to focus on simple Spanish words and common words in other languages as new character sets become available. The demand for country domains, such as Moldova’s .md and Tuvalu’s .tv, is also expected to grow, as professionals in the medical and television industries respectively seek out new ways to brand themselves online. And as new top-level domains get approved, the frenzy for certain domains may increase as established businesses try to snap up every alternative to their existing dot-com brand: McDonalds.store, McDonalds.biz, McDonalds.food, etc.
Until just a few years ago, if you wanted to get in on the domain-name game, you had to go to the official database of registered names, find out who owned the site you wanted and get in touch with that person independently.
With a large number of domain names already locked in, this process could get quite arduous - both for companies legitimately trying to register viable domains for their businesses and for speculators hoping to land a windfall.
Since then, a variety of domain-name brokers, including the successful Greatdomains.com and Bestdomains.com, have sprung up. And most recently, the innovative Afternic was formed, an eBay-like auctioneer that provides an online platform for buyers and sellers of domain names.
These companies have greatly simplified the process by listing the various categories of available domains and giving both buyers and sellers a better sense of what certain domains might be worth.
Afternic, in particular, has taken a unique approach to appraisals, allowing users to post their estimations of what certain domains are worth on the Afternic site. As domains get sold, other users can compare estimates with the actual sale price and get a good sense of who has got the most accurate valuation model.
And, users of these sites are a diverse crowd.
In some cases, the sellers involve Web savvy speculators hoping to profit from domains they secured years ago. But in an overwhelming number of cases, sellers are legitimate business owners whose companies just didn’t pan out.
"Some people really had a plan to build something up, but they just didn’t have the resources to make it truly successful,” said Jeff Tinsley, chief executive of Greatdomains.com. "And at some point, they just realized the domain name might be more valuable (than the business itself.)”
The buy side is dominated primarily by businesses that, in many cases, are considering extending their offerings and are attempting to secure any related domain names in advance. Speculators obviously also come into play.
Domain trading not risk-proof
But betting on domain names can involve risks for both businesses and individuals.
On the business front, even the best of domain names can’t guarantee commercial success.
"It’s a double-edged sword,” said Looper. "Customers are anticipating a certain emotional response when they go to a specific site. And if they get there and it’s not what they expect, it can be more damaging and it can cost a lot more money to rebuild the brand.”
And investors who think they are safe to speculate as long as they stick to completely generic domains may have another thing coming.
"There’s really no such thing as a truly generic name,” said Michael Froomkin, a professor of law at the University of Miami who tracks cyberspace issues. "The word ‘car’ might appear to be one of the most generic words out there, but it has been trademarked five or six times.”
Hypothetically, Car Clothing, Car Picture Frames and Car Paper Products might all have a trademark claim to cars.com and could argue they have been infringed if some other entity snaps it up first. (Ironically, that Web site is run by Carter-Wallace Inc., a New York-based marketer of health care products that has nothing whatsoever to do with the automotive industry.)
Another risk investors face is the "good faith” clause of the trademark act, which forbids individuals from holding on to a domain for the sole purpose of profiting from its sale.
"If you are just speculating and not actually using these sites, you could get into potential trouble,” said Froomkin. But, the professor concedes, "we just don’t know how the courts will take it.”