Welcome:
Login
|
Sign Up
|
About CircleID
Follow:
|
|
|
|
||
|
||
Co-authored by Zak Muscovitch and Nat Cohen.
The Secondary Market in domain names plays a critical role in Internet commerce yet is often misunderstood. This article will attempt to clear up some of the myths that frequently arise when discussing the Secondary Market.
Domain name investors are but one group participating in the thriving domain name Secondary Market, in which already registered domain names move from one owner to another. After twenty-five years of rapid growth of the commercial Internet, the most desirable domain names are already registered and therefore are not available to be registered directly from a registrar in the domain name “primary market.” It may be possible, instead, to acquire them on the Secondary Market from the current owner. Individuals, businesses and professional domain investors, therefore, all turn to the Secondary Market when looking to buy or sell desirable domain names that have already been registered.
Individual ‘everyday’ registrants may offer to sell domain names in the Secondary Market that they registered but no longer need. GoDaddy recently launched a “listing wizard” to help its customers list their surplus domain names for sale. This resulted in over 350,000 new aftermarket listings in just three months, primarily from customers who are not domain investors. As reported in DNW.com, GoDaddy stated that “Lots of people who don’t consider themselves domain investors own unused domains they’d be willing to sell. By making it easy for them to list these domain names, GoDaddy is unlocking inventory and making it easier for other people to acquire these domains”.1
Businesses often seek to acquire domain names for use as memorable and intuitive brands for new business initiatives. If the desired domain name is already owned, it is potentially obtainable via the Secondary Market. The following are notable Secondary Market transactions, yet none involved domain name investors:
An open and freely functioning Secondary Market is critical for maintaining the vitality of the Internet economy. Without the secondary market, Facebook would not own FB.com, Twitter would not own Twitter.com, Tesla would not own Tesla.com, and Major League Baseball would not own MLB.com—and none of these transactions involved domain investors. The Secondary Market provides a means of repurposing domain names from lower value uses to higher value uses. Without the secondary market, the DNS would stagnate.
The Secondary Market is a robust industry in its own right with various areas of specialization and numerous participating companies, including:
While domain investors by necessity focus on the Secondary Market, they are only one group participating in a critical and active global marketplace which has numerous other active participants ranging from individuals to the largest public companies.
Domain investors provide liquidity to the illiquid domain name Secondary Market. Domain investors help ensure that there are ready buyers when domain name owners wish to sell their domain names. Domain investors also help ensure that there is a readily available supply of appealing domain names when companies are in the market to acquire a domain name.
A well-functioning Secondary Market connects buyers and sellers. Unlike the stock market, for example, each domain name is unique, and there may not immediately be a buyer who is interested in a particular name at the very same time that a particular seller is interested in selling. For example, when a pizza parlor named Zaw went out of business and wanted to sell its domain name, Zaw.com because it no longer required it, there was no immediate buyer ready, willing, and able to purchase it. Instead, a domain name investor was ready with an attractive offer to purchase it immediately, thereby creating liquidity in an otherwise notoriously illiquid market.
Similarly, when Yahoo wanted to sell Contests.com since it no longer had a business purpose for it, it was a domain name investor which offered Yahoo the highest price at auction, USD $380,000. A bankruptcy trustee who was mandated to sell CBA.com sold the domain name to a domain name investor, thereby benefiting from the immediate liquidity that domain name investors can provide in contrast to holding and waiting indefinitely, for an “end user” to come around to purchasing it. These are all cases where domain name investors created a market where none may have existed otherwise, thereby enabling a timely sale of a domain name that was attractive to the seller.
When a domain name investor purchases a domain name at a price that is necessarily satisfactory to a seller, the domain name investor is essentially ‘stepping into the shoes’ of the seller, by providing the seller with immediate cash and taking on all the risk of the transaction. The domain name investor is making an investment with no guarantee that the investment will earn an attractive return—or any return. The domain name investor may have to wait many years for a motivated buyer to appear, the domain name investor may have overpaid and be forced to sell the domain name for a loss, or the domain name investor may never find anyone interested in acquiring the domain name. Accordingly, domain name investors are really “proxies” for sellers; they step into the shoes of the seller and try to make a sale that the seller otherwise would have had to accomplish itself.
Domain name investors can be compared to antique dealers as they build up an inventory of items that were no longer of use to the previous owners to be made available to new owners who can give them a new home. If you want to buy a certain kind of antique dresser, you are certainly free to scour the countryside, bazaars, estate sales, and local auctions, tracking down leads in the hope of finding the right one and acquiring it. Many people instead find it easier and more efficient to walk into a well-stocked antique shop and choose from amongst a curated collection of available dressers and walk out with one the same day.
Many people think that buying and selling domain names for a profit is easy, with the sellers having all of the advantages. The reality is that making a living in domain name investing is extraordinarily challenging, requires skill and diligence, and is risky, with relatively few able to succeed.
Domain name investors’ main skill is identifying under-utilized domain names that may be available for sale. For example, a domain name investor might identify a small local company using a scarce and valuable three-letter acronym that would benefit more from selling the domain name than using it and where a larger company might be able to make better use of it. Or, for example, a domain name investor might identify a single-word dictionary term domain name that is only being used for forwarding but which has far greater potential as an appealing stand-alone brand identity.
Identifying such instances of underutilized domain names where the domain owner is willing to sell at a price that makes sense to the domain name investor is a laborious and time-consuming process. Even when such a domain name is identified, purchase negotiations may drag out for months before a mutually acceptable purchase price is agreed upon or may even fall through altogether despite a concerted effort to reach an agreement. Even after a price is agreed upon, it can take months to conclude the purchase. Approval may need to be obtained from other partners in the business that owns the domain name. A plan to transition away from long-standing email addresses may need to be adopted. The domain name investor will attempt to do due diligence to ensure that the purported seller is the lawful owner of the domain name, the purchase agreement will need to be drafted, reviewed and revised, and the mechanics of the domain name transfer will need to be completed.
The domain name investor has to accurately value the domain name, offering enough of her own money to make it attractive to the seller without taking on excessive risk by overpaying. The domain name investor then ties up her cash indefinitely while she waits or looks for a prospective purchaser who sees sufficient value in the domain name to purchase it from the domain investor at a profit. If the domain name investor is successful, she will have identified and freed up a domain name that can be repurposed to a higher value use than that put to it by the original owner.
All the parties involved benefit from the efforts of the domain name investor. The original owner would rather have the cash paid by the domain name investor than the domain name itself. The new owner obtains a desirable domain name at an attractive price that he can immediately make use of that was otherwise tied up and perhaps unavailable. The domain name investor has been compensated for her efforts in making this happen.
There is the common misconception that most domain name investors are “fat cats” with huge portfolios raking in the big bucks. The reality is that most domain name investors have small portfolios to which they have committed a large share of their modest available cash. For most people, domain investing is a part-time job or a side hustle as it does not generate enough income on its own to replace the domain name investor’s main job. Increasingly, domain name investors are located internationally in developing countries and enjoy the prospect of making more than they otherwise would from working in a low-paying menial job. Registering a few domain names for $10 each and selling a few of them for $100 each can be a life-changing alternative to grueling manual labor.
With the pandemic, many people around the world have lost their livelihood and domain name investing offers an opportunity to earn income while working from home. Even so, the domain name investor must put in long hours and risk their capital in the hopes of making a profit.
Domain name investors are constrained by the discipline of the market. In order to earn a return on their investment, they must be willing to sell at prices that buyers find attractive. Based on experience and with knowledge of thousands of transactions, domain investors have a sense of the relative quality of different domain names, how the “right” buyer will value the benefits, and what an attractive price will be. Nevertheless, buyers always have a selection of domain names to choose from and will pick the one that delivers the best value. If a domain name investor asks too high a price, the domain name will not sell. Every sale requires a satisfied buyer on the other side who believes she is obtaining more value from the domain name than the price paid.
A domain name will deliver different benefits to every potential buyer. What might seem expensive to a buyer with a small vision for a domain name may be considered a bargain to a buyer who has a big vision for how to use the domain name. For example, 1800Diapers.com in support of its ambitious growth strategy invested $600,000 to acquire and rebrand as Diapers.com12. Similarly, the founder of DoorBot decided to invest $1 million to acquire Ring.com which he said was “one of the best investments I’ve ever made”13.
Both of these companies had a big vision for their new domain names and were able to harness them for a national and international audience, thereby making the purchase price attractive, while a smaller business or start-up would likely find these prices “exorbitant” or “unrealistic”. Some smaller or nascent enterprises are frustrated by the seemingly high asking prices for the most attractive domain names. These valuable domain names are simply out of reach given the limited size and vision of such companies but well within reach of the right-sized companies with larger visions. It is comparable to real estate where a small shop owner may be desirous of a storefront on Fifth Avenue in New York City but will have to satisfy itself with a far more modest retail presence until it can afford premium retail space in the most desirable neighborhood.
While high dollar transactions receive the most attention, more often than not, it is the small sales where domain name investors flip a domain name for a few hundred or a few thousand dollars that forms the mainstay of domain name investing for most domain investors. Most domain names are not that valuable, so sales will only occur if a domain investor prices the domain name realistically—and for most domain names, that means in the low thousands of dollars or less.
Industry data shows that the vast majority of transactions in .com domain names occur in the range of USD $1,000 to USD $5,000 range. This is depicted in the below chart prepared by Bob Hawkes using data from NameBio.com and Dofo.com14:
It is ultimately the market that sets the price of a domain name. No transaction occurs without a willing buyer and a willing seller. Despite whatever big vision a domain name investor may ascribe to a particular domain name, a buyer will have to see the value in it for itself or will pass and move along to other more attractive options.
It is true that most if not all rare single-word dictionary terms and acronyms are long gone, as one could easily expect after 25 years of the commercial Internet. And it is also true that domain name investors were early pioneers in seeing the value in such domain names and investing in them, often for decades. To purchase a rare single word dictionary term or acronym, you will undoubtedly have to go to the Secondary Market as they are rarely, if ever, available for sale directly from a registrar as an unregistered domain name in the primary market.
Nevertheless, as we saw with many of the aforementioned examples and thousands of others, domain names frequently change hands from business to business. Domain name investors likely hold only 10% of all registered .com domain names.15 Indeed, most desirable domain names are already in use by businesses.
Where desirable domain names are owned by domain name investors, it is often because the domain name investor purchased the domain name from a prior owner. In these cases, the domain name investor has stepped into the shoes of the former owner, thereby changing nothing about the availability of the domain name, as it would have been owned regardless.
Not all prospective domain name purchasers can afford or need the most valuable premium real estate on the Internet. There are other options. If you don’t limit yourself to domain names based on dictionary words or other common business terms, you can be creative with a made-up word and find plenty of available options. For example, Spotify.com, DoorDash.com, Zynga.com, Pinterest.com and DuckDuckGo.com are all very successful companies that launched on apparently hand-registered domain names paying nothing more than the registration fee.
Moreover, the entire ICANN new gTLD program was premised on creating new and additional options by creating thousands of new domain name extensions. If you are willing to use one of these new suffixes, you can often buy them for much less than the .com equivalent.
It is magical thinking to believe that if a domain name investor wasn’t the owner of a desirable domain name that it would necessarily be available awaiting registration directly from a registrar. Domain name investors tend to invest in domain names that they think would have the widest attraction and the most utility, and these domain names therefore, would naturally be desirable to many people. If a domain name investor didn’t happen to own a dictionary word or common acronym domain name for example, certainly it would have been snapped up by someone else. These domain names wouldn’t just sit unregistered, and surely no matter whoever owned them, would naturally want to realize the market price if they wanted to sell at all.
Raising registration fees would have minimal impact on availability of most domain names owned by domain name investors. Raising registration fees would likely result in freeing up only the most marginal domain names. No domain name investor is going to let go of a valuable domain name just because the registration fee or renewal fee increases. Any domain names that would be released by domain name investors as a result of increased fees would be the lowest quality and most marginal domain names that they own. These marginal domain names would not be that much more desirable than other similar domain names that sit unregistered and available even without a registration fee increase. Moreover, if registration fees were to be increased, to the extent possible, domain investors would correspondingly increase their asking prices to pass along their higher costs to buyers.
Raising registration fees on .com domain names, in contrast, would have an immediate impact on the estimated 90% of domain name registrants who are not professional domain name investors. Domain registrants would see their costs increase without receiving any corresponding benefit. For example, if registration/renewal prices on .com domain names were increased by USD $20 per year, this would impose a multi-billion dollar annual burden on the estimated 90% of registrants who are not .com domain investors (137 million .com domain names x additional $20 per year ~ $2.75 billion per year)16. This multi-billion-dollar burden imposed on the global public would be directed to a single corporation that is already reaping excessive windfall profits from its exclusive contract to operate the .com registry.
Increasing registration/renewal fees with the aim of freeing up domain names by encouraging domain name investors to shrink the size of their portfolios is a “Cut off your nose to spite your face” solution that would only create a windfall for registries. Moreover, such “rent” increases tend to disadvantage those with the fewest means, such as those in emerging economies.
Domain name investors invest in domain names that have an inherent value and are suitable for many different uses, and that are not of interest to only a single company. Cybersquatters, on the other hand, register domain names seeking to profit from the goodwill associated with the trademark rights of a particular company. For example, a domain name investor would be interested in a domain name like banking.com because it is an inherently valuable and attractive name for anyone who wanted to build a business related to banking. In contrast, a cybersquatter would register, for example, a typo of Citibank, such as Citibanl.com or an infringing domain name such as CitiBanking.com, in an attempt to trade off of the trademark owner’s goodwill and misdirected users.
A cybersquatted domain name has no enduring market value because it can be seized or shut down by its rightful owner through the Uniform Domain Name Dispute Resolution Policy (UDRP), Uniform Rapid Suspension (URS) policy, Anti-Cybersquatting Protection Act (ACPA) or other national laws and policies. A bona fide investment quality domain name, in contrast to a cybersquatted domain name, is not exclusively associated with any one company and can lawfully be owned and used by a number of different companies due to its inherent meaning or other positive qualities of the domain name.
Cybersquatting is abhorred by professional domain name investors because it trades on the goodwill that belongs to the trademark owner and harms the reputation of the domain name industry.
A “use it or lose it” system of domain name registrations is impractical and impossible to implement. There are many legitimate uses of a domain name besides publishing a website that may not be evident to an observer. Some are used to host email. Some are used for file storage. Some are used for private-access networks. Some are held for a future project. For instance, the domain name You.com was owned for decades without being developed by the founder of Salesforce.com only to be recently put to use for a search engine that will compete with Google17.
Many domain names are used to redirect web traffic to a main website, such as Speed.com, which redirects to FoxSports.com or Chomp.com, which redirects to Apple.com. If a redirect qualifies as use, then meeting the threshold of use would be trivially easy. Yet if a redirect does not qualify as use, an acquiring business would be deprived of its right to redirect traffic from the website of an acquired business, for example.
Some businesses acquire domain names as valuable digital assets with no use immediately in mind, but with the recognition that they could be usefully deployed for a future, not yet conceived project. To put such non-use off-limits would be like prohibiting a developer from owning undeveloped land. MicroStrategy has owned numerous high-value domain names for decades without developing them, yet it eventually chose to develop Alarm.com internally before it was spun off as a stand-alone company.18
These numerous use cases demonstrate just how meaningless any domain name registration system premised on “use” would be. Yet an equal problem is who would police and determine whether “use” occurred or was “sufficient.” This would entail some sort of international tribunal with the power to take away valuable assets from an owner, presumably at great expense and with complex rules and due process. It is impossible to conceive of any practical or credible means of adjudicating what would qualify as the use of a domain name.
Finally, even if “use” were meaningfully defined and a near ‘impossible to conceive’ system of fair adjudication was established, perhaps the greatest fault with the notion of ‘use it or lose it’ is that once a domain name is taken away for non-use, who would get the domain name? This would require an equally impossible and inconceivable system for distributing domain names to the supposed “most worthy” or “deserving,” however that was measured. Fortunately, the most-straightforward, least problematic, and most efficient way of allocating scarce domain names is precisely the one we already have - first come, first served, and a competitive free market.
The Secondary Market is a crucial feature of the domain name ecosystem, which encompasses far more parties than domain name investors alone, who play an important but relatively modest part in it. Domain name investors help the Secondary Market to function better for the benefit of sellers, buyers and Internet users by providing liquidity and assisting in moving underutilized domain names to their highest and best use. A competitive free market is the best system we have for allocating scarce resources such as domain names. Prices for domain names are established in the Secondary Market, not by domain name investors alone, but rather when buyers and sellers come to a meeting of the minds as to the relative value of a domain name. Domain name investors deal in desirable domain names that would be registered by someone, whether a domain name investor or someone else, and invariably whoever owns a domain name would only part with it if a satisfactory sale price was obtained. Ultimately, domain name investors are proxies for sellers by stepping into the shoes of the seller, staking his or her own capital, and taking the risk and responsibility of reselling a domain name on the open market to a party who may have a more valuable use for it than the previous owner.
In short, a thriving Secondary Market helps ensure that the DNS remains a vibrant engine for powering the Internet economy and helps ensure that domain names are put to their best and highest use. Domain investors act as middlemen providing liquidity and helping facilitate transactions in the Secondary Market.
This article was adapted from an online presentation by Nat Cohen and Zak Muscovitch, made to NARALO on December 14, 2020 which is viewable here commencing at the 10:00 minute mark: https://bit.ly/37nGo2u.
Sponsored byWhoisXML API
Sponsored byRadix
Sponsored byVerisign
Sponsored byDNIB.com
Sponsored byCSC
Sponsored byVerisign
Sponsored byIPv4.Global
A World-Renowned Source for Internet Developments. Serving Since 2002.
Every domain name registrant is an investor. A registrant is making an investment in the particular domain name chosen, an investment in the TLD chosen, the TLD registry operator, and the registrar with whom the registrant chooses to do business. The registrant is often building a business to support the registrant’s family, and often, many other families. In RFC 1591 Jon Postel made it clear that TLDs were global public resources, not property of a TLD registry operator to be bought and sold at auction to the highest bidder, that idea is a corruption invented by ICANN. As I have told many others, if you invest (register a domain name) that is “owned” by one of ICANN’s new gTLD registry operators, you are going to get what you deserve.
I disagree with the article’s contention that domainers who are in developing countries benefit. It is bad accounting. A domainer in such a country is already squarely middle class. The article ignores the other side of the coin. It is hard for a startup in that country to afford a good domain. They are priced out by buyers in developed countries.
https://wesboudville.medium.com/do-domainers-help-developing-countries-7c064aab1960
Hi Wes, Thanks for your comment. I agree that in developing countries it isn't illiterate farmers who are getting into domain investing. They are usually young people who are well educated, know English and are familiar with computers. Yet it is beyond doubt that they often find in domain investing a path to a better way of life. They typically put in many hours doing the hard work of matching companies with desirable low-cost domain names that the companies are not otherwise aware of, offering in effect outsourced online branding services. We know of these young people because they are actively engaged in the domain investment community. I also agree that it is often hard for startups in developing countries to afford a good domain name. Indeed it is often hard for startups and even mid-size companies in developed countries to afford a premium domain name. That is because larger companies usually determine the value for the best domain names which price out most other companies. As the article states, domain investors, like every other participant in a competitive market, are subject to the discipline of the market and cannot control prices. The reason why a startup in a developing country cannot often afford a good domain name is similar to the reason why most Americans cannot afford to buy a house in San Francisco. Further, as John Poole mentioned in his comment, there are tens of thousands of low cost domain names that expire each day and become available for re-registration such that there is no shortage of low-cost domain names available to start-ups all over the world that were first registered many years ago. Further, the new gTLD program and local country code domain names provide a nearly inexhaustible source of low cost domain names. But premium domain names (which as you note are often in the .com TLD) will be richly valued due to the value that buyers assign to them, not due to the actions of domain investors. Regards, Nat
Wes, I will let the authors defend their article, however, your thesis that startups in developing countries cannot afford a good .COM domain name is wrong as I explained in my comments to another article on circleid.com. The secondary market referred to by the authors, while important, comprises but a small segment of the overall market for “good .COM domain names.” For most inexperienced registrants, a primary market .COM registration via a trustworthy registrar is often best, and can cost less than $10.00. Unlike most other gTLDs, the .COM market is growing, thriving, and churning (over 90,000 drops daily available for re-registration). Just be sure to do the necessary due diligence and avoid trademark infringement!
John, did you read my Medium article? When I spoke of "good .com domains", I was not referring to just any .com domain. I was speaking precisely. I was referring to the regular lists of top (ie most expensive) domains (.com or otherwise) bought in the last month, or other recent period of time. You can easily find these online. First, most of those domains are .com. Typically 80% or more. More importantly, where are the owners? While privacy considerations might prevent us knowing the identities of the owners from the Registrars, once a domain is stuck on a website, we can read the webpages to see where the firm is located. This is a simple test that can be done of the top domains lists of, say, 1 or 3 years ago, to see where the owners are. This shows that the most expensive domains are bought by firms in developed countries. Startups in developing countries are priced out. The original article is blatant in ignoring this. A domainer is not an "inexperienced registrant". Whether the domainer is in a developing or developed country, she is looking to buy domains that have big resale value. Domainers would not describe themselves as "inexperienced".
Wes, you have arbitrarily defined "good .COM domain names" as ONLY expensive .COM domain names. "Good .COM domain names" are priced from less than $10 (primary market registration fee) up to $30 million or more (on the secondary market), my point being that price is not the sole determinant of quality for a particular end user, such as a startup. As Warren Buffett said, "price is what you pay, value is what you get." Most startups will do what the founders of Google did (they obtained google.com for just the registration fee). I never said a "domainer is an inexperienced registrant." What I said was "Developing Country Startups CAN Afford Good .COM Domain Names." If you read my previous comments I linked to, you would understand that.