Direct Navigation

Evaluating the Market

As domain names have become a strategic asset to all brand owners, understanding their valuation is key to developing a domain name strategy. At their most objective level, domain names are valued based on the amount of traffic and revenue they generate. Generic names and names incorporating trademarks or popular brands are often the most highly trafficked, while expired domains that have already become strongly ingrained in the minds of a particular audience can also attract large numbers of Internet users. The value of a domain name may also be based on its similarity to a commonly typed name. Therefore, misspellings, transposed characters and other variations of popular Web sites can also garner significant traffic. For example, myspce.com, a typo of myspace.com, attracts an estimated 3 million visits per year.

Monetization frequently takes place on third-party Web sites that are owned by individuals who do not necessarily have a business or personal connection to the site’s domain name. Instead, these individuals register the name in order to profit off of its market value, which could be derived from traffic-to-click conversion or sale of an appreciated asset. Individuals that accumulate domain names as a profession are referred to as domainers, and these individuals often amass large portfolios of domain names in order to increase profitability. In many cases, domainers sell their domain portfolios to traffic aggregators who end up owning large numbers of domain names, which leads to a marketplace that includes individuals and well-financed businesses. Individuals or companies that serve PPC advertisements on domain names maintain large portfolios in order to obtain high profit margins. Domain monetization is meant to be profitable on a large scale, with the incremental fees paid to each individual site pooling together to create sizeable returns. It is important to note that while the terms “domaining” and “cybersquatting” are often used interchangeably, these practices are defined differently. In FairWinds’ view, “domainers” tend to avoid trademark infringement, whereas “cybersquatters” tend to focus on brand infringing domains.

Among the largest and most profitable companies in the traffic aggregation space are NameMedia, Demand Media, Oversee.net, iREIT and Marchex. NameMedia owns an estimated 725,000 Web sites⁸ and Marchex spent $164 million on a single domain portfolio in 2004.⁹ All of these companies are hoping to capture some of the dollars in sales that Direct Navigation generates each year; according to RBC Capital in New York, Direct Navigation generated $650 million in sales in 2006.¹⁰ While the exact percentage of users who practice Direct Navigation is still debated, it is certain that the revenue potential of capitalizing on Direct Navigation is significant.

Traffic aggregators typically acquire names either through domain auctions or through domain name speculation, which is the purchase of domain portfolios from individuals with the intent of reselling or monetizing them. The main targets of domain name speculation in the domain community are generic words and geographic locations combined with product and service category terms. These names gain their value through their high type-in traffic and for the dominant position they would have in any field due to their descriptive nature. Professionals in this space also look to the news and current events to predict which terms will experience increased searches and traffic.

Domain auctions such as the T.R.A.F.F.I.C. conference¹¹ and DomainFest attract the major players in the domain business. Many of these individuals are willing to spend thousands, and in some cases millions, of dollars to acquire names with proven or perceived value. Also in attendance at these conferences are traffic aggregation companies and occasionally buyers with legitimate business interests in a particular name. Domain name industry personalities such as Rick Schwartz, Kevin Ham and Frank Schilling have built careers around trading in domain names—Rick Schwartz is the CEO and co-founder of the World Association of Domain Name Developers and hosts the T.R.A.F.F.I.C conference. Many domain industry players purchased large numbers of domain names for reasonable prices as the Internet bubble burst. They then monetized the traffic to these pages and eventually sold some of these names for record-breaking amounts with the help of domain auctions and through private sales.

Domainers, aggregators and cybersquatters utilize specific methods and tools in order to more accurately determine the most profitable domain name investments for their businesses. Unlike many domainers and aggregators, cybersquatters purposefully infringe upon trademarks and brand name recognition to identify names with high value. Typically, these groups of domain profiteers research names that are about to expire to determine the amount of traffic they are receiving. There are multiple tools available to help monitor deleting domain names and traffic tools to indicate likely traffic to the site. Yahoo! Overture is one such tool that is useful in gauging the popularity of a name. Overture and similar tools are designed to search for free domain names in various root Internet zones and provide metrics for how often Web users search for certain terms.¹² Traffic monitoring tools that provide ranking information and keyword identifiers help determine the appeal of a domain and which keywords should be placed on a Web site or advertisement supported by the domain.

Other available tools include trademark registries and “typo” generators that can be found on Web sites such as domaintools.com. Trademark registries can be used to determine what words and phrases have trademarks associated with them, while “typo” generators identify possible typographical errors that users may make including switched characters, duplicate letters, missing characters and keyboard proximity errors.¹³ Domain speculators also use search engines to determine which search terms are most popular, and then translate these terms into domain names. Generally, words or terms receiving one million page results are considered to be a sound investment.¹⁴ All of these tools could be used for legitimate purposes, but opportunists have found ways to take advantage of each one to make the highest profit possible.

After determining their value, names are acquired through numerous methods including drop-catching, tasting, kiting and open registration. Drop-catching refers to a process that takes advantage of the three-month redemption period after a gTLD expires. During this window, a name is analyzed to determine where it is in the redemption period and if it is still receiving traffic. If the name is still receiving sufficient traffic, the speculator will attempt to “catch” or register the name as soon as it is dropped.¹⁵ While drop-catching is technically allowed, it paves the way for unscrupulous activities such as domain name tasting and domain name kiting.

Domain name tasting and kiting are typically viewed as ways to exploit the 5-day add/drop grace period that is mandated by the Internet Corporation for Assigned Names and Numbers (ICANN) to test-drive a domain name. This provision is aimed at protecting registrars from instances when a registrant mistakenly registers a name he or she does not wish to keep or pay for or when credit card companies refuse payment to the registrar due to being notified of a lost or stolen credit card (a credit card charge back). It also allows registrars to test the operability of their systems. Domain name tasting is a tactic used by some cybersquatters and domainers whereby participants leverage ICANN’s 5-day add/drop grace period to judge the profitability of a domain name. If a Web site does not generate enough click fees to cover the annual cost, the registrant will cancel the registration before the fifth day at virtually no cost. Domain name kiting is a similar practice whereby participants leverage the grace period to keep names at no cost by perpetually adding and dropping them. Because of this virtually costless way to keep a domain, the name can generate minimal revenue and still remain profitable to the owner. ICANN recently approved a policy aimed at curbing this abuse, but it is still too early for FairWinds to ascertain whether it will have any measurable impact.

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