So what is a domain name really worth ?

The domain as a brand

Take ml.com as an example. Who does it belong to ?. Merrill Lynch. Suppose they did not already own that domain. They would have to pay millions of US$ to acquire it. Start-up brands however do not have to be based on acronyms or simple words - the best known brand derived from an uncommon word is probably Google

Here the domain name is an absolutely integral part of the company brand. The value to the brand owner is incalculable. They would never sell the domain name for the same reason Coca-Cola is never going to sell their trademarks - you would have to buy the whole company instead.

The memorable domain

Sex.com and Business.com have both sold for millions of dollars. The single word domain name accurately describes the focus of the site. There are innumerable slight variations on the name that degrade in value the further away they are in terms of simple comprehension e.g. GoodBusiness.com, MyBusiness.com, Business4Me.com. This market in derivative names is already highly developed and there is little money in it per se. Retail prices for these derivative domains are typically in the US$100-US$2000 range. Many sites specialise in this aftermarket.


The ground-up domain

There are many Web sites that have succeeded despite no intrinsic value in their domain name. CraigsList, for example, gets 10m visitors a month. A memorable domain name is no prerequisite for success, but may help to build a brand. As always, content is king. The Internet is an incredibly efficient market with very low barriers to entry. Success however is not cheap, particularly now that the market for driving traffic to sites through paid-for advertising is rapidly maturing.

Top-level domains

This is the bit that follows the final 'dot' in the domain name i.e. the com in abc.com or the au in the abc.com.au. In general terms a dotcom has more intrinsic value than any other TLD, although this may not be material for sites that have a specific country/language focus e.g. many Chinese sites (.cn).

Third-party advertising

The base valuation of a domain name, like any other asset, is the discounted value of its future revenue streams. Apart from direct income through visitors to the site (people buying the products/services promoted on the site), there is a basic income stream from 3rd-party advertising. Google pioneered paid-for search results through its Adwords program. These are the little advertisements you see on the right-hand side of Google pages when your search has completed. Advertisers pay for showing the ad (impressions) and/or for clicks on the ad (click-throughs). It is natural for companies like Google to look for new ways to show those advertisements both on other Web sites and other Internet media such as email. They will pay a commission (usually around 50%) of revenue from advertisements you agree to display on your Web site. This is their so-called Adsense program.

There are a large number of variations on this line of business. It is simply looking to mediate advertisers and publishers. Payments here have generally moved to results-driven e.g. pay-per-click or pay per subsequent conversion of a lead into a sale. In any event, the Internet advertising market is maturing fast and increasingly threatening traditional media. This provides domain name owners with a basic revenue stream, although the value/focus of the site content obviously determines the value to advertisers. Revenue per domain name ranges from as little as US$50 per month to thousands of US$ per month.

Multilingual domains

The 'English' Internet will change e.g. it will be possible to have domain names in other language characters. This will dilute to a degree the value of domains based upon simple ASCII characters (a-z, 0-9 etc.), but the long-term success of English in both online and offline worlds will continue - not least because languages with many characters are difficult to use on a keyboard. On balance, the emergence of non-English characters in domain names is less of a factor than many people expect.

Cross-cultural issues still apply e.g. a word in English may have a different meaning in another language or there may be a phonetic translation of particular letters/numbers.

Long-term view

Low-value derivative domain names will appreciate slowly if at all. A buyer prepared to compromise with one of these can easily negotiate a purchase in the US$500 - US$10,000 range. The market for more distinctive domain names (short, memorable, single-word etc.) is a different matter. They should appreciate well ahead of inflation for many years to come e.g. for the rest of this century. The reason is simple - scarcity.

Conclusion

The market for domain names is certainly efficient, but still very subjective. If you are focused on a long-term brand then most distinctive domain names are still quite cheap. It all depends upon the value you attach to the domain name as part of your brand. The domain name structure will become more diverse (new TLDs, new languages etc.) but the original dotcom domains will carry a premium - for the rest of time.

A domain name is only worth what someone is prepared to pay for it. Many owners of reasonably distinctive domain names are not business-like. Negotiating with them requires patience and tact - particularly if negotiation is remote via email.