This past weekend, I spent a lot of time researching the domain park strategies employed by many companies, including but not limited to publicly traded Marchex, Google, Yahoo! Marchex was the company founded by Go2Net’s founder Russ Horowitz, who made a lot of money following the InfoSpace merger.
Anyway, a company asked me to explore options for a portfolio of domains it had. Not being a domain name aggregator, it did not know what to do. All to say, I got to know the market quite a bit. Today, I passed by GoDaddy and saw a list of URLs being auctioned, as well as a domain name aftermarket for expired and unwanted domains.
The Real Estate of the Web
Historically, people have seen domain names - or URLs - as the Web’s real estate. That is misleading because - forgive me for stating the obvious but - real estate’s value in the offline world is largely driven by its surroundings. Online, ’tis a non-linear world, so it is not the location per se, but rather, the letters or numbers that make up the domain name.
Subjective Value: The concept of Relevance Association
I realized that due to this reality, the value of domain names are both subjective and objective. In other words, clearly softdrinks.com is valuable to Coca Cola, Schweppes or PepsiCo but nearly useless to Citicorp; conversely, Invest.com is of great interest to Citigroup but not so the soft drink companies.
Wearing the analyst hat, I coined this phenomena “relevance association” value. It’s not the best term, but you get the idea. In hindsight, I could have simply called it Subjective Value.
Objective Value: The concept of income
Up to a few years ago, the value of a domain name was speculative and was a function largely (read only) of this subjective value, or relevance association value. But as the search engine advertising exploded, demand for real estate online soared with it. Google’s contextual ads took a cue from Sprinks, who had built an early lead in the space. Of course, Google bought and shut down Sprinks, and it became the leader in Contextual Advertising. Google’s mass market startegy with contextual advertising paved the way for Kontera, Kanoodle, Quigo and others.
As the model developed further, many companies with paid search results decided to open up their inventory and extend the real estate to domain parked url’s.
Cybersquatting vs. Domain Parking: Legal Risk
The original domain parkers were people who would register names like TomCruise.com or CocaCola.com, hoping to one day force the namesakes to sign big checks for the URLs. Of course, many of these incidents went to court, and the Courts sided with the corporations and celebrities.
With time, people realized that the risk of domain parking these names was considerable. We’ll call this risk legal. As a result, people began to buy up softdrinks.com instead of cocacola.com.
Lack of Liquidity: Financial Risk
The other risk component was financial: even if someone would buy URLs such as softdrinks.com (which does not violate any trademark laws), they would carry financial risk in the sense that they would only monetize their domain name if someone wanted to buy it. And, as the market burst, so did demand for URLs. Never again will we see a $7.5 million price tag for a Business.com. Of course, never say never.
What’s Value of Domain Name?
As the price of registering domains fell to $5-10 (on 1and1.com for the former, and GoDaddy.com on the latter), more and more people scooped up domain names, knowing that even a 4, 5, or 6-digit sale would justify buying up all of those domain names.
The Capital Gain Component
Like purchasing stock in high growth companies, the value proposition of the company / domain name lies in the capital gain: what you sell the asset less what you bought the asset for.
The Income Component
But with the booming paid search ads market, the relative lack of real estate and the overall giddiness and desire for companies like Google and Yahoo! to justify their stock prices… suddenly, these companies were willing to put their ads on domain parked URLs in addition to sites with actual content.
Suddenly, one need not wait for that proverbial home run (the capital gain component) to recoup their investment and monetize their real estate. Suddenly, they could generate an income.
It was a sign of the times: the high growth business of the Web was becoming a utility business and paying out a dividend. Well sort of…
To calculate what the dividend or income component of the domain name is, we can use many tools, widely available. But first, some assumptions and disclaimers.
Type-in Traffic
Before we move ahead, it is important to note that while searching is the second most common function online after email, many sites are not found via search engines, via a link in an email, via a link on a site, but rather, through type in traffic (this is why default search engines in a browser and operating system are so important, but that’s a separate issue, one I examined here).
It should also be noted that type-in traffic can go into a URL that exists or does not exist. These, if the URL is a good one, such as Queen.com, and there is no site up yet, it is most likely that the domain is parked and there are text ads.
Such is the case with Queen.com. But, no matter how great the URL, if the domain has no real content, then search engines penalize it and disregard the website in the organic results of the search engine.
[If you want an example, click here and you see that despite owning Queen.com, the site does not appear anywhere on the first results page.]
By organic, we mean the actual results in the core, generated by pure algorithm, and not the paid results that are generated by the database of advertisers who bid on the relevant keywords…
What this suggests is that unless a web operator has any content on a site, then the Income Value of a URL is equal to the Value of Type-in traffic, because the site will not get any search traffic. Of course, if there is content, the value of search goes up, but from the perspective of domain name portfolio holders, rarely do they have any content, they rely on type-in traffic and pay per click text ads.
So, what’s the value of a domain name:
1. We do not try to estimate the Subjective Value, or Relevance Association Value. This changes depending on the prospective buyer and does not affect the recurring income component of the value.
2. We assume that there is a linear relationship between the proportion between a) revenue from type in traffic and b) traffic from type-in traffic.
According to an article in the December 2005 issue of Business 2.0, type in traffic accounts for 15% of Yahoo!’s business. The same article quotes Marchex pegging the proportion of type-in traffic at 10% of the overall search business in the world. Both are considerable market makers so we will assume that either estimate is right, but given Yahoo!’s role as the #2 search engine (behind Google) and its Overture subsidiary being the #2 paid search player with 80% distribution online, I can safely bet that the number could be closer to 15% than 10% for the simple reason than Yahoo! is a better proxy of the overall market. Either way, for this basic analysis, we can use the median, 12.5%.
Value of domain name = Income or Objective Value + Capital Gain or Subjective Value
Objective or Income Value = # of times a keyword is queried in a given month x Revenue Per Click (or CPC for the advertiser) x Click-Through Rate (CTR) x Type in traffic % x Revenue Share Arrangement with PPC text ads provider
Where to get:
1) # of times a keyword is queried in a given month, use Overture (now Yahoo! search marketing’s keyword estimator):
http://inventory.overture.com/d/searchinventory/suggestion/
2) Revenue Per Click (or CPC for the advertiser)
http://www.overture.com
Search for a given word, and then click on View Advertisers’ Bid on the upper-right corner.
3) Type-in Traffic = Use 10% or 15%
4) Revenue Share Agreement Split = Low end is 50%, high end is 100%
5) The CTR ranges quite a bit. Many people realize what’s a real site and what is a domain parked URL with text ads. Click through on the top organic result can be anywhere from 25 to 75%, the top paid result can be anywhere from 1 to 25%, of course, for the sake of our analysis, assuming a domain parked site with paid ads, what is a reasonable click through rate? I’ll say 10%…
Mind you, Google paid Ask Jeeves 110% according to its SEC filing to go public, the rationale could have been to avoid Ask Jeeves working with Yahoo!, Google wanting to increase market share and revenues, and Google’s system being so automated that it does not really hurt margins and 10% “loss” is seen as a simple sales expense.
And there you have it. Of course, if you own a .org URL, you should not estimate that type-in traffic is 10-15%, since my guess is that 99.9% of type in traffic goes to a .com domain name.
For purposes of illustration, I see on GoDaddy that healthstate.com is for sale for $80.
Using our system, we see that health state in its pure form is search 418 times a month. We also see that there is a CPC of $0.28.
So, the income value of the domain name is
= 418 x 0.28 x 50% revenue share x 12.5% media estimate of type in traffic x 0.10 CTR
= $0.73
At a cost of $80, the investment will be recouped in 110 months! You better be a helluva salesman and find someone who puts a big subjective value on the URL…
[Technically, it’s more than that, since over 110 months, or roughly just over 9 years, you also have to pay for 10 years’ worth of renewals for the domain name… but this analysis helps you determine quickly how “in or out of the money” the Domain name is]
If you would like to see the full report, email me at ash @ mojosupreme . com with no spaces.
[Disclaimer: of the companies mentioned I own shares in Infospace and Yahoo!, but that does not mean that you should too].
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