The Hidden Wealth in Domain Names

How to draw the advertising industry into the secondary market for domain names is preoccupying the domain name industry this year. Domain industry convocations have been grappling with the issue, seeing it as providing an opportunity for the secondary market to scale up and achieve sustained profitability and liquidity.

The most recent major conference was the Domain Roundtable Conference, hosted in Seattle by Name Intelligence Aug. 13-15. The Seattle conference highlighted the importance of the issue, and presented contrasting perspectives on why traditional advertising firms have largely stayed away from secondary markets for domain names.

Investing in Domain Names

Conference participants expressed agreement on the legal impediments that are seen as discouraging investment in domain names. Frank Schilling, a domain investor and panelist at the Seattle conference,advocates changes in intellectual property laws in the United States to provide increased security of title for registrants of domain names.

Schilling is alarmed at the prospect of trademark owners automatically assuming that they have the rights to every domain name that comes close to a variation or permutation of a registered trademark, regardless of whether a trademark and domain name are being used for related purposes.

“What is needed is reform of U.S. trademark laws that is fair to both sides,” said domainer Gene Heu, speaking outside the auction session on the last day of the event. “Advertising agencies and their clients will be afraid to invest in domain names if they fear that another party will come after them.”

Fairness for both sides was a theme echoed by Michael Zaugg of RevenueDirect, which provides parking services for domainers seeking to monetize their traffic with advertisements targeted specifically to individual domain names.

“In defense of trademark holders, they should not have to register thousands of typos and variations of their brands in order to have some protection, but yet the globalization of commerce has made it hard tofind new domains that are not similar to those in use elsewhere,” Zaugg said.

“The Internet has done what madmen and conquerors have tried to do throughout time: unify the world,” said Heu. The unification of global commerce on the Web has forced all businesses and brand owners tocompete on the same global platform for brand identity through domain names, Heu explained. Competition is fiercest for dot-com domains, which carry the most authority and prestige for branding purposes.

Domainers in Seattle suggested that new trademark rules could be accompanied by a domain name amnesty, whereby domain owners would be able to offer domain names to trademark holders in exchange for reimbursement of accumulated registration costs. Opportunities for trademark owners and domain owners to enter into non-adversarial discussions are seen as lacking from current dispute resolutionsystems.

Another suggestion was for the Internet Corporation for Assigned Names and Numbers (ICANN) to attach trademark rights information to domainnames at the time of registration. Domain names being considered for registration could be flagged for potential trademark violations, thereby discouraging registrations that violate existing trademarkrights. If a registrant decided to proceed, they would be provided with due notice of existing trademark restrictions governing the use of a domain name.

Do Advertising Firms Understand Domains?

The question of whether the advertising industry understands domain names did not elicit uniform responses at the conference. Speaking at the back of the auction hall on Aug. 15 after Rebate.com and Rebates.com had been sold together for US$1 million, Sahar Sarid outlined the “yes” position. Sarid is an Israeli-born domain investor and cofounder of the Recall Media Group.

Will old-media advertising firms become involved in the secondary market for domain names in the near future? No, Sarid answered.

“It’s a conflict of interest,” Sarid said. Why? “Because it works,” he replied, explaining that the Internet is not good for old-media advertising agencies because it can make them look bad and cause their clients to fire them.

Sarid sees little or no accountability in ad spending on traditional media. As he described it, clients are encouraged to spend large amounts of money on television and print ads, without being able toaccurately gauge the results — either in terms of calculating the number of new clients or the amount of revenue generated by individual advertisements.

The purchase of domain names to attract customers through direct search and the purchase of advertising on domain-name landing pages allows advertisers to track incoming clients and revenue, Sarid pointed out, leading him to refer to those online methods as ROI, or return-on-investment, advertising.

ROI advertising is not restricted to direct search or domain-specific advertising, he said, but can extend to online advertising in general. Ad industry people are brighter than domain investors, Sarid said. Fewdomain investors know how to run a business, he said, only how to manage domain names.

Advertising Agencies Seen as Too Cautious

When will the ad industry and their clients wake up to the value of domains? When asked that question at 1:30 a.m. on the conference’s first night, conference chair Jay Westerdal responded: “They’re goingto wake up when it’s too late.”

He added: “They are not going to know the value of those names until they are all locked up.” Most of those interviewed at the conference confirmed his views.

Describing the position of technology firms, advertising agencies and investors who have already staked out a position in the domain industry, Yossi Goldlust of the online ad agency LookSmart said: “We have Internet jujitsu, we have first mover advantage.”

On the question of when traditional advertising agencies would enter the domain name industry on a major scale, Goldlust said that they are not going to do it right away. He said that traditional ad agencieswill need two to three years of experience in the domain industry first, experience that he says those agencies currently lack.

“The ad industry feels it is being pushed into a marriage [with the domain name industry], when it only wants to date a little,” Goldlust said, speaking shortly after 2 a.m. on the first night of theconference. “Advertisers need to be educated on the value of domains and direct search traffic,” he added.

“The domain industry has not found a way to translate its value proposition into terms that traditional advertisers can understand,” said Goldlust. “We are in a ‘Who’s on first, What’s on second, I Don’tKnow’s on third’ conversation now.”

The gap between the domain industry and traditional advertisers is aggravated by two factors, according to Goldlust:

1. Lack of experience of domainers in traditional advertising.
2. The maturity of the traditional advertising industry and the fact that it is losing market share for total advertising dollars. This encourages risk-averse behavior.

“Contrary to how they like to position themselves, they are not open minded to new concepts and business opportunities,” Goldlust said. “It’s almost like a Greek tragedy.”

He predicts that in 18 to 24 months the mainstream advertising industry will begin to establish asignificant presence in the secondary market for domain names.

What is needed to bring the industries closer together? “Talk,” Goldlust said. “Each side needs to learn each other’s language. Each side needs to talk to each other.”

Market Action Shifting Towards Registrars

Will the domain name industry and domain valuations stand still over the next two years? No, Sarid said, pointing to the new Domain Distribution Network (DDN) service being launched globally by theAustralian company Fabulous.

The DDN allows domain name registrars to list domains available in the secondary market alongside query results for new domain name registration requests. The DDN enables registrars to quickly verify,sell and transfer ownership of domains in the secondary market, rather than merely referring buyers to legacy marketplaces such as Afternic and Sedo.

Sarid and Shilling suggest that the DDN could consolidate the primary and secondary domain markets into the hands of registrars, increase the number and speed of transactions in the secondary market and raise the asset value of domains that have preexisting commercial viability — although not necessarily any traffic.

Auctions for premium domains will continue to serve as the centerpiece of upcoming domain industry conferences. Westerdal’s plans for the next Domain Roundtable include lowering the starting bids for domains being auctioned and better tools for the auctioneer to instantly coordinate bids received from the conference floor with those received online.

The next Domain Roundtable is scheduled to be held April 18-20, 2008, in San Francisco. Westerdal’s formula for the conference is: Domains + Ads + Web 2.0 = San Francisco 2008.