Sunday, January 06, 2008

How Domaining Works

Back in 1999, the internet entrepreneur Jake Winebaum and his associates paid $7.5 million for the domain name – a seemingly crazy price for a simple web address. But the company Winebaum built with the name – a business-to-business directory and advertising network - was recently sold for an impressive $345 million, which shows at the very least that paying a lot of money for a web address can sometimes be worthwhile.

In fact, web addresses have turned out to be a windfall for shrewd speculators, as we predicted in the very first cover story of the Industry Standard back in 1997. The world of "domainers," as such speculators are known, is secretive, and the terms of most domain transactions are never known publicly. But a public company called Marchex has revealed that it acquired more than 100,000 addresses from a secretive Chinese-Canadian domainer for an incredible $160 million.

Common sense would suggest that in the age of Google, where search is the starting point for so much web activity, the actual web address would be less and less important. You don't need to know the address to find a site, so why would the specific URL be so important?

The answer to that question is less than inspirational. First, a chunk of web surfers, perhaps 15 per cent, according to one estimate I saw recently, still type a www address into the browser when looking for something even when they don't know the actual address. This is not a good way to find things on the internet, but people still do it.

Secondly, having the actual domain address make a pretty big difference in search engines results, as might be expected. So, if you type New York Doctors into Google, the site appears on page three of the search results – presumably much higher than a generic directory site would appear otherwise.

The address alone is powerful enough that domainers run highly profitable businesses based on putting Google AdSense and other syndicated ads onto pages that people looking for a particular thing might land on by accident. If you type in "" for example, you get a site filled with nothing but paid links to other sites. Presumably, this is not what someone going to that page is looking for, but it's a nice business for the domain owner.

It seems peculiar and unjust that so much money could be made by taking advantage of people’s clumsiness in finding what they are looking for on the web. Sites that exist only to generate pay-per-click revenues from people looking for something else are parasitic by definition; they interfere with the process of finding information, and take money out of the pockets of real information providers. There's no way to know how big a drain this is on the internet economy, but my guess is that it's not trivial.

There isn't any easy remedy in sight. The effort by the internet governing body to reduce scarcity in .com domains by adding suffixes such as .info and .biz has been a flop; few self-respecting businesses will use these addresses. The search engines don't have much incentive to do anything about it, since they get paid for the ads either way. There's no law against taking advantage of naiveté.

I do take some comfort however in the legacy of the domain name sale. Jake Winebaum, whom I have known since he was a Disney executive in the mid-1990s, didn't have any tricky scheme for making money on the name. He just thought it was the logical name for the business-to-business commerce company he wanted to create. was initially part of an incubator called eCompanies, which disintegrated in the dot-com meltdown. But Jake soldiered on. The rise of Google threatened to make his concept irrelevant, but he continued to work and evolve the concept and ultimately made it a profitable business, which sold for a good premium.

It was hard work, good management, creativity and a little luck that made successful, not a lucky bet on a web address. That's a rather more encouraging lesson for .com entrepreneurs.


Jonathan Weber is the founder and editor in chief of NewWest.Net, a regional news service focused on the Rocky Mountain West in the United States. He was previously the co-founder and editor in chief of the Industry Standard

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