In addition to technical SEO posts, I want to spice up my contribution to SEOmoz with a few posts that are a bit more business-oriented. In my position running a business, I spend a lot of time thinking about business models, and before this, I used to be a management consultant (no, really) where I was paid to make complicated Excel models of businesses.
So, for this week's business thinking, I wanted to spend some time on domains.
Domains are funny things. Are they intellectual property (see Sarah's post on domain tasting), valuable investments, technical devices to prevent people having to remember your IP address, or political playthings (does anyone think the new TLDs are a good idea apart from the benefit of allowing new character sets - maybe that's one for another post?)?
Of course they are all of these things.
But the element that has been intriguing me recently is the real-world property analogy. Owning a domain name is much like owning land. On top of that land you can build something valuable (or something you want to use yourself), you can sell the land on to someone else (with or without construction), and it has an address. Of course, this applies more to generic domains (meaning not just something like chocolate.com but also non-product-specific generics such as ooh.com - see below), but it does apply to company-specific domains as well - they just aren't as valuable.
Just as with real estate, there are brokers, security services (OK, that's stretching it a bit), developers, public health rules (stretching that one a bit too!), etc.
Continuing this analogy further, there are a few obvious services that are available with real-world property that appear to me not to be available with domain names.
Now, I realise that I have slightly mixed metaphors here - is the domain name the land or the building (or a combination of both), for example? But I think it is still a useful way of thinking.
Renting your domain
The first business structure I thought of that doesn't seem to be widely used is the renting of domain names.
Now, arguably all domain names are rented from registrars. That isn't really a rent, though, in my mind (I'm sure an economist can help with definitions). It is more like a tax to pay for domain name servers, infrastructure, etc., even though it isn't paid to the government.
Assuming you continue to pay your registrar, then it seems to me (at least in a non-legal sense) that you effectively own your domain. For the sake of my analogy it holds - when you want a desirable domain name, you have to buy it. But why not rent?
If you own or run a consumer / retail business, do you own your shop? Unlikely, I suspect. It's far more likely that you rent / lease the space. Why is this not common practice with domain names? I know (off the record) of a small number of high-profile web-based businesses that don't own their domain name outright, though they don't want to go on the record, and if there are many similar businesses, I don't know about them. Is it widespread and I just haven't come across it because it's a bit secretive?
The way I would see this working is most likely something along the lines of:
- Wealthy investor owns the 'property' (i.e., the domain name)
- Entrepreneur wishes to start a web-based business and agrees to a lease
- Investor gains rental income, entrepreneur gains ability to use what would otherwise be a very expensive domain with a manageable cash outflow to cover
The biggest obvious pitfalls that springs to mind is the difficulty of moving once you have launched, and hence the need for security. For this reason, I would expect to see long-term leases and / or options to buy built into the contracts.
Mortgages for domains
Domain names can be expensive. Generic domains are often bought and sold for millions of dollars.
Like property, they are high in value / cost and there are many people who would have uses for them.
What we tend to see is that expensive generic domains are bought either to go into private portfolios or by large corporations - either of whom often fund from cash. The missing link for an efficient market appears to be a capital investment structure that enables the guy with a good idea to buy an expensive domain name. How many real-world properties are bought unleveraged? Can't be that many.
I would have thought that there should be parties willing to take domain names as security for loans much like mortgages for property - fail to keep up with repayments and your domain name is repossessed. This would appear to me to be an attractive business model - as long as your fund managers understand domain name valuation. And you guarantee yourself either healthy cashflow or a stockpile of great generic domains...
So with a bit more digging, I have found that this does actually exist - albeit on a relatively small scale compared to the big banks' mortgage funds. A client, Pat Reeves, spoke to me about his experiences - he has bought premium domain names for his business selling sofas as well as his new venture ooh.com (nothing to see there yet!), which he bought via Rick Latona.
Pat pointed out that he is aware that there are people who will lend against domains, though they structure it more like short-term cash advances rather than mortgages. He also said:
We have seen the value of building our business on the back of premium domain names. It costs more to get going, but the branding benefits are huge (and in the case of sofa.com, the generic .com does us no harm at all in the search engines).
Domain name funds
One business I actually toyed with setting up is a domain name fund. There are plenty of real property funds (even our royal family are getting into the game), but domains seem like a perfect asset class for an investment fund.
'Domainers' is the general term for individuals who invest in domains (and I'm going to coin 'domain monkeys' for those like evilgreenmonkey who just buy every domain that crosses their minds!). There is quite a lot of information out there about the premium end (see YTD sales), but note that a lot of sales happen in private and are not recorded. It is quite clear to me that the market for generic .com domains would be a nice one to be invested in (although note that (a) I can't provide investment advice, and (b) there will be a high correlation between returns from that and demand for SEO services, so it wouldn't do much for our diversification). Diversification is for wusses. As the sage of Omaha apparently says:
Wide diversification is only required when investors do not understand what they are doing.
I think that there would be a market for people like me who would love to own a fraction of the domain name 'chocolate.com', for example, but could never afford to buy it.
My thinking went something along the lines of:
- gather a few thousand people who want to put a few thousand / tens of thousand into such a fund
- buy some mid-range generic .coms
- wait for the market to rise / rent the domains out (see 'wealthy investor' renting domain names out above)
- sell them (either to the tenants or on the open market)
(oh, and for you old slashdot fans):
- ???
- profit
An alternative would be:
- hawk the concept around some wealthy investors (individuals and companies and family offices)
- gather a few tens of millions of dollars
- buy some higher-range generic .coms
- ???
- profit
I think the legal costs of getting going could be pretty harsh (maybe Sarah can help with that question) and I have (mainly) been persuaded that this is a crazy idea, and that it would be hard to generate the returns that the fund or its investors would need in such an immature market, but I still lie awake thinking about it sometimes.
So if you want to invest in (or manage) such a fund, drop me a line ;)
[Update:]
I know there are very few new ideas in the world, but it was really useful for me that Kelvin from sitevisibility pointed me at Self Made Minds, who are writing about a lot of this stuff - particularly domain leasing. I have subscribed. Thanks for the tip!
Just a legal note related to this - the analogy to land is actually a little more accurate than you might think.
In reality, in most jurisdictions (especially common law ones like the US, Canada, UK, etc) the government ultimately owns all the land. In the (very) old days, in some places this wasn't the case, which meant that since there was no owner, the first person to claim the land got it. There were also issue about whether or not the law applied to land you owned absolutely.
This meant that if you died and had no heirs, the first person walking onto your land could claim it. After a rash of "sudden and unexplained deaths" of people with no heirs resulting in the wealthy neighbour grabbing the land minutes afterwards due to "good fortune" the government stepped in. This was the beginning of the law that said if you die and have no heirs, the government owns your land. There was a reason for it, and it wasn't a land grab.
I believe it was around this time that the idea of the government ultimately owning all land (what's called allodial title title) and then people owning an "estate in fee simple" came into being, which was an improvement over the older "feud" system where you only owned land as long as your lord said you could. Fee simple says you pretty much own it, except for the small sliver of ownership that the state retains (which often also includes mineral rights, etc).
There is another type of fee simple estate, a "fee simple defeasible" which is a fee simple estate with conditions. An example would be land given/sold for the purposes of building a place of worship, but not for any other purpose.
So to continue the analogy:
Alloidal title: ICANN - Ultimate owner.
Estate Fee Simple: Domain Stakeholders/Registration Authorities
Fee Simple Defeasable: domain owners, who can lose their ownership due to trademark violations, improper usage, etc.
This was probably an overly legal-twisted post, but there you go. I have noticed that the rules seem pretty consistent if you look at it this way. Hmmm...
Ian
Wow. +1 informative. Thank you.
I really enjoyed this post. It's something I have been thinking alot about lately...get the generic .com for 10k, or the .org for 1.5k, or the $10 one for...10 dollars.
The domain market is so flipping interesting. As you said, a domain name is very similar to RL real estate...you can build a sweet house on a beach front lot (develop/market a 1,000,000 dollar website), or you can just let the lot sit on the property and let it serve as a parking like(like parking in domaining)...etc.
As far as renting the property for your store, and renting the domain name for your website, I think you make a good point that they seem very similar. But if your lease gets too expesive in RL you can probably just move to a nearby neighborhood, and your customers will re-adjust.
But if the lease or rent on your website got too high, the cost of changing domain names could be huge...all that link equity you build up would be gone...and you can't just ask the owner of the domain to 301 to your new address...cuz then he doesn't have his domain any more.
If you had to rent another property for your business in RL, it would likely cost a fair amount b/c you have to move all your stuff, and set up your new place just how you like it. Likewise, moving a website can be a pain in the ass...but you can still do alot of copying of your DBs, and webpages so it is probably easier in RL.
That got long fast...I might have to make a Umoz post : Domain Names are Not Quite Real Estate
Yeah - I thought about going into the reasons why domain names are *not* like real estate, but I thought I was getting a little convoluted already ;)
I think that Monty from Moniker stated at a conference that one lender was offering loans/mortgages for domain names based on independent valuations. I'm guessing that the current economic crisis in America has put a stop to that though.
Entreprenuers have always hated domainers for buying up all the good domains and doing jack with them. I'm starting to get into buying them up as well though, mostly based off of exact match domains for a certain search term.
When I worked at a gaming company, the in-house domainer was getting serious revenue for the company from typos, type-in traffic and domain guessing.
My 2 cents on domain names. First of all if you look at the data, the actual domain name is not important if your product is good enough. Ex:
That said, if I had the oppurtunity/funds to buy a generic domain name (cars.com for example) I would not even hesitate to buy it. Domain names IMHO are a ridiculously over hyped and over speculated industry. The data shows that the name is not mission critical but many people don't realize this. As a result it can also be extremely profitable.
Totally agree. There is a lot of money to be made in domaining. I helped broker a deal recently between one of my clients and a big wig west coast domainer (owns over a million domains). This client paid >$4000 for this domain and its a .com tld. He owns .net on this domain but people email to .com, so for him it just made sense to buy it. He's on a payment plan.
Branding is as important if not more important in some instances that the actual domain name in my opinion.
There are a few stocks (e.g. Marchex, Dark Blue Sea) where the principal assets are domain portfolios.
Good point, Todd. That would give you a lot of the benefits of investing in a domain fund with all the regulatory stuff already wrapped up for you...
All great ideas started out as crazy ideas in the beginning :)
Could be quite an adventure. It would be hard to generate the returns, but I think a little creative thinking could bypass that as a problem.
Great article on the domain aftermarket industry. Some thought inspiring comments especially the fund portion.
Now it is time to turn our attention to the new gTLD market that ICANN has just created. It is going to be very interesting to see how that industry evolves and becomes incorporated into the domaining marketplace.
We own and operate a pretty decent portfolio of generic domains, most registered in the mid 90s. We've employed a couple of the strategies mentioned here to monetize those domains. We have one set of domains dropped into an LLC and tied up by a mortgage. We borrowed 250k for operating growth without having to give up any control of the underlying domains themselves.
We've also done long term leasing/licensing agreements on generic domains. For example, we have a domain that was appraised by moniker at around 100k, currently leased out at about 6k/month. We wouldn't sell and they get a domain to operate at a cash flow hit that they can easily manage. Basically its the cost of an extra CSR. Even discounting to a 7x multiple, getting a 1000 per month is like getting an 85k price for the domain. and its forever.
The most complicated component was getting the lawyers to properly paper the deal to let us keep absolute control of the domain while guaranteeing the licensee that we could never yank it out from under their feet.
I have been thinking of this for a while as well, theres lots of opportunities in foreign domain markets too.
If you set it up give me a ding. [email protected]
While renting domains to people seems like a great business proposition, I would hope that a would-be business owners see the fatal flaw in doing this. Their entire business and branding would be in the hands of a capitalist who at any time could decide to change the rules. I could not ever in good conscience advise someone to rent a domain.
On a seprate note, I do have a decent domain portfolio is anyone is looking for a good dot-com. I mean if someone is going to rent a domain, they might as well rent from me.
Will,
Good article - and an apt analogy, one I use all the time. There is a form of domain rental at play today, very common in the industry. When a blogger posts their blog on sites like Wordpress.com or Blogger.com and when small businesses use EBay or Amazon as a distribution channel, they are effectively renting another domain for their own benefit. Again, it stretches the analogy a bit, but makes it easier to explain to folks unfamiliar with the world of domains.
Keep up the good work.
I have a domain question that I was hoping was addressed in this post but was not. Perhaps you or someone else can point me in the right direction. I have a domain name from a previous business that is no longer operational. It is fairly generic and I have had different offers to sell it but none high enough to be interesting to me.
I have the old domain pointed to my current company primary domain. Since the old domain has been around since 1997 it was fairly well indexed at one time so we still get traffic coming from it. I am not doing anything special to take try and advantage of that variable traffic but we do occasionally get customers that came from it. My question is will google frown on this as the name of the old domain has little to do with where it currently points to, or is the traffic just too insignificant to even be noticed. Should I be doing something else with this or not? Thanks for any ideas.
Good question . . . there's probably not a definitive answer as to whether [Google] frowns on this type of off-topic redirection, but you are definitely not maintaining the value of the domain, as it no longer has any relevance to the originally intended business. If it doesn’t relate to the new business, that traffic is probably not converting well either, so your best bet would be to take off the redirect and re-establish the original purpose/authority/PR, etc. and hope for a good buyer.
The value given to a particular domain by Google has to be a major consideration here. One thing that makes it such a crazy market is that the value Google places on something today is almost guaranteed to change tomorrow (up or down), with their next algorithm tweak.
At this moment in time, with all of the weight that is being given to exact match domains, the market should be fairly strong . . . a sellers market, if you will. But with the Google monopoly playing such a large role in valuation, it’s an even more volatile market than real estate.
Either way, I’m pretty sure I will continue to be a monkey, because you never know when one buyer might decide that a domain I registered is a must have. I/we, as SEO’s can all use Google to give some of our properties additional value in the interim.
Actually, that's the thing, generic domains (which are often the most valuable) don't depend on Google, they get loads of type in traffic. Now, if you build a site on them and develop them to where google ranks it, that obviously ads to the value but then you're selling more than just the domain.
"[Type-in traffic are those] users who type the information they're looking for directly into the address bar of the Web browser instead of using a search engine to scour the Web. Industry analysts estimate that roughly 15 percent of all Web traffic originates this way." - Washington Post
That's 85% that don't type in, and google is a large chunk of that 85%, so I would saythat we should all consider what weight Google may be able to place on a non-generic domain.
Only 15%? That's a huge chunk to be based on just one element of success... in this case, type in traffic. Imagine that someone told you in a brick and mortar business, "Rent this specific shop and the additional volume of traffic walking and driving by will take care of 15% of your gross income requirements right there."
In truth, that happens. In traditional real estate planning for retail businesses, we count feet and cars passing by a specific location in order to determine it's street/retail value. Will's post reminds us how similarly we do that with online real estate.
However, as Tim Staines points out, the fact that the algorithms are currently happy with and blessing generic domain names doesn't mean they will tomorrow. Just as "real" real estate values can go down if foot and vehicle traffic are diverted/reduced for any number of reasons, internet real estate values are not assured in the short or long term.
As a matter of fact, the very fact that the system is being 'gamed' with general profit-making based on the purchase, rental and sale of domain names going far beyond today's activity in that sector would, almost assuredly, mean the engines would consider altering their algorithms in response. The question is, will they?
It's a pretty speculative game already. Will's idea of ratcheting up the dollars, formalizing the funding process and creating a rental, leasing, and sales process that is more mature than what exists today is not without merit. I'm just pretty sure I don't have the financial stomach for it anymore. I'm sure Rand will understand ;)
I didn't say "Only 15%" I was just using the 15% estimate to illustrate that 85% doesn't come from type-in traffic. Wasn't trying to discount the value of type-in traffic . . . just disputing that generic domains are "often the most valuable" when 85% of the time (which I would consider more often than 15% of the time) users aren't typing in.
P.S. Totally agree with Danny Dover's 2 cents (see below)!
That is a good idea. I guess I have just been lazy to just redirect it. I can see making a mini site that is a landing page with links over to our primary product for the anyone looking for that with info on selling the domain if the price is right as I don't see us using it again for itself.
Will, is it really good timing to start a domain fund? You have an awful lot of competition run by people with five and 10 years of experience in the domain industry. Does it play to your personal strengths?
I think there are better ways for web developers and seo experts to get involved in the domain industry. Better to use your expertise to come up with something new, some sort of hybrid project.
You may find my domain commandments post interesting.
I don't think I'm going to do any more with this idea than daydream. I think it could work, but all the things you say are true (particularly about me sticking to my knitting). The comment at the end was mainly in jest...