What's in a (domain) name? Some serious cash.
Candy.com is not a particularly attractive site; experienced Web surfers would probably move on to a different page after first glance. The site is not backed by any major confectionery companies; in fact, it doesn't even sell desserts.
The only thing going for Candy.com is its wonderfully generic Web address – one so simple that it was appraised last week for about $2 million. Rick Schwartz, the entrepreneur who owns the site, says he's holding out for more.
While America's housing market slumps, sales of domain names, the real estate of the Internet, climbed 60 percent last year. More than 100 reported domain sales exceeded the $100,000 mark in 2007 – up from 70 the year before. And last May, an adult-themed domain sold for $9.5 million.
This fourth consecutive year of growth shows few signs of slowing, as venture capital and new investors invade the scene.
The surge of new money into the domain market signals a broader acceptance of what many Web entrepreneurs have thought for years: Web companies come and go – but as long as there's an Internet, there will be value in generic domain names.
The philosophy is built on the idea of "direct navigation." Most people rely on Internet search engines such as Google or Yahoo to connect them to what they're looking for online. But about 15 percent of Web surfers – often new users – type terms directly into the address bar and add ".com" to the end, says Ron Jackson, editor and publisher of DN Journal, which covers the domain market. So, if these users are shopping for candy, they'll probably head to Mr. Schwartz's Candy.com.
"There's inherent value in those generic names," says Mr. Jackson. "There's a certain number of people coming to your site every day, people that you didn't advertise to. They simply wandered right to you."
Candy.com attracts 1,500 visitors a day, says Schwartz, and 99 percent arrive via "direct navigation." The actual site is little more than a rudimentary layout of milk-chocolate brown and bubble-gum pink with some automated ads thrown in, but he earns tens of thousands of dollars a year from those pay-per-click advertisements.
Slowly, investors are starting to catch on. And the purchase of domains by private investment groups is changing the market.
The early dotcom rush
In the mid-1990s, "lone rangers" lassoed many of the great generic Web addresses and ruled the secondhand market for years, says Jackson. Small companies, often built around one guy, would amass thousands of domains. They were a seclusive bunch, happy to hoard domain names quietly and sell only when the price was right.
Most of the venture capital at the time went to Web companies. But when the dotcom bubble burst in 2001, websites that were once valued at millions of dollars became worthless. Yet Web addresses retained much of their value.
"Beachfront property is still beachfront property, regardless of what house or store sits on top of it," says Rob Sequin, who entered the market in 1999 and now owns about 1,500 Web addresses. "And the beauty of domains is that you don't need to paint them, or maintain them, or pay taxes on them."
By 2003, Web address sales once again broke $1 million. Mr. Sequin says that's the first year he could consider domain trading to be a full-time job.
This time, major investors started paying attention.
Online advertising company Marchex kicked off the trend in November 2004, when it paid $164 million for a portfolio of more than 100,000 generic domain names.The sale was a surprise to many, says Jackson. But most outside investors were still skeptical.
Domain buyers aren't purchasing a business or a loyal audience. They're often buying empty lots. This puzzled many venture capitalists, he says.
Online property can be developed into successful businesses, but this takes money, time, and talent. For example, an Internet firm bought the vacant business.com domain for $7.5 million in 1999. After years of branding and site development, the now-successful portal was sold last August for $350 million.
Domain ownership turns corporate
The mind-set toward domain names has shifted, says Jackson. Several venture capitalists now consider domain names to be appreciating commodities, much like stocks and real estate.
"This went right over the heads of Wall Street and investors," he says. "They finally learned in the last year or two."
Recent examples of this trend include:
•The Internet Real Estate Investment Trust in Houston, has gobbled up more than 400,000 domains since launching in 2005. The list includes Bands.com, CreditReports.com, and Shows.com. Its multimillion-dollar portfolio is backed by investment firms such as Maveron, cofounded by Starbucks chairman Howard Schultz; and Perot Investment, started by former presidential candidate and billionaire H. Ross Perot.
•Last fall, NameMedia in Waltham, Mass., filed papers to go public on the NASDAQ stock exchange and raise $172 million in its initial public offering.
•At last month's DomainFest conference and auction in Hollywood, Calif., organizers reported that about one-third of the 700 attendees said that it was their first such event. The auction brokered $3.1 million in domain sales.
•A niche auction designed to sell online dating and social-networking domains will likely bring in several hundred thousand dollars when bidding closes on Feb. 7, according to Monte Cahn, founder of Moniker, which ran the event.
•Along with the genre-specific auctions, Moniker holds three general domain events a year, which Mr. Cahn says rake in between $10 million and $15 million each. As a whole, Moniker domain sales doubled over the last year. In January, the company itself was bought by Oversee.net, a large domain-services firm.
Overall returns on these massive investments remains slow. Sales are growing in both price and volume, but Jackson says most portfolios only sell 1 to 2 percent of their domains a year.
Schwartz says he has only sold six or eight of his 6,000 domain names since 1997. It cost him about $50,000 to maintain his sites. "But those I do sell more than make up for the rest," he says.
Last month, CNN bought iReport.com from him for $750,000.
While the well of original ".com" domains dries up, Cahn says there are plenty of international names yet to be tapped. The German domain market has soared, with the country extension ".de" surpassing ".net" and ".org" to become the second-most-popular address suffix.
"Right now there are 145 million domain names," Cahn says. "By 2010, just two years later, it's going to be 240 million, with many of the new names coming from China, Latin America, and some African countries."
