Online Domain Name Game Yields Real Profits for Virtual Brokers


Below is an article that was published in the Boston Globe.  I was interviewed for my views on the domain name sector.

Profits hefty in Web addresses

By Carolyn Y. Johnson, Globe Staff | July 30, 2007

The Web addresses that businesses and people online call home have spawned the equivalent of a real estate boom in the real world with speculators, appraisers, developers, investors, and brokers turning the names typed on navigation bars into hefty profits.

“It is a global, multibillion-dollar industry,” said Peter Lamson, senior vice president and general manager of Waltham-based NameMedia Inc.’s domain name marketplace. “Customers need to find your doorstep. A brick-and-mortar business needs an attractive address, and it’s no different online.”

In the 1990s, speculators registered Internet domain names on the cheap, often hoping to make a lucrative flip selling them to someone else. When the tech bubble burst, many were left with little more than words.

But as money has flooded into Web-based businesses such as MySpace and YouTube and online advertising has grown explosively – rising by nearly a third each year for the past three years – domain names have become a hot investment.

Some industry watchers said that the market could prove volatile over time, and there’s always the potential that a speculator will be left with nothing more than a string of words.

“There’s value there – a few of these companies think they’re worth half a billion because they’ve got all this waterfront property,” said Todd Dagres, general partner and cofounder of Spark Capital, a firm that invests mainly in media, technology, and entertainment businesses. “Right now, the stock’s rising because we’re in a fairly frothy market.”

Backed by venture capital firms Highland Capital and Summit Partners, NameMedia has raised more than $100 million in debt, according to a New York Times story, with the help of Goldman Sachs and owns 750,000 domain names as well as marketplaces where people can buy or sell names. This outfit of “cyber real estate tycoons,” as president Jeffrey Bennett calls it, is just one of three local firms that are playing a leading role in the rush for prime virtual space.

Internet Real Estate Group LLC, with offices amid the boutiques of Newbury Street, takes a luxury developer’s approach to the domain names game. The company turns a select number of “premium” domains – site names that are instantly recognizable, such as jeans.comchocolate.com, or software.com, into full-fledged Internet businesses with content, ads, and products for sale. Taking another tack, Sedo.com LLC, a German company with US headquarters in Kendall Square, handles more than $3 million of transactions every month, acting as a kind of eBay for domain names.

DN Journal, an online publication that follows the industry, has tracked five sales this year that topped $1 million each– including Porn.com andSeniors.com — and 50 for $100,000 or more as of July 22.

“We’re about three years into a major upturn,” said Ron Jackson, editor of DN Journal. “A ton of ad revenue started flowing from traditional media models onto the Web and it’s been unbroken upward momentum.”

While people frequently navigate the net by punching keywords into search engines, an estimated 10 percent of searches occur when people type keywords directly into their address bar. That means a website with a common name, such as WiFi.com, already generates a certain amount of natural traffic, and people who buy a portfolio of names could earn a dividend on their investment just by putting ads up, according to Jeremiah Johnston, chief operating officer at Sedo.com.

Think of domain names “as analogous to buying spectrum in the wireless world or channels on television or buying real estate,” said David Liu, managing director of Jefferies Broadview in Silicon Valley.

Mike “Zappy” Zapolin and Andrew Miller, founders of Internet Real Estate Group, got into the domain business in 1998, buying beer.com for $80,000 from a young man in Colorado, who they said used the website to post photos of inebriated people vomiting. The owner, hoping to buy more beer, posted a banner asking for advertising.

They sold beer.com four months later for $7 million. Now, they believe the businesses they are building will ultimately be worth hundreds of millions.

“In real estate, if you built a building and were offered three times what you paid for it in a week, you’d be thrilled,” Zapolin said.

“A piece of virtual real estate, on the other hand, may cost a thousand or a million, but bring in 50 times greater return. “It’s like buying Madison Avenue 110 years ago.”

Acting as a broker, Sedo takes a different approach from Internet Real Estate Group and NameMedia – listing, but not owning 8 million domain names, and taking a 10 percent commission on each sale.

The company also provides services to help people put content on their domains, so they can earn some revenue when people stumble on the sites and click on ads. Recently, Sedo managed the sale of Vodka.com for $3 million and Chinese.com for $1.1 million.

“We were being told when the company was founded that it was the worst possible timing,” Johnston said. “It turned out to be excellent.”

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