The New Economics of Domain Investing

November 24, 2011 by  Filed under: Domain 

Many people compare Internet domain names to real estate where location is everything. In many ways that analogy is accurate. The .com top-level domain (TLD) extension is by far the de facto standard for domain names and the most likely to receive type-in traffic. A good example of this is that people looking for the web site for Microsoft’s Zune MP3 player often type zune.com directly in the address bar of their browser, rather than performing a search engine search for zune. Unfortunately for Microsoft, when they first launched the Zune they did not own zune.com, but rather zune.net.

The fact is that no one would ever type zune.net into their browser unless they already knew that was the URL. And someone searching for a cellphone would be more likely to type cellphones.com into a web browser’s address bar and would rarely, if ever, type something like cellphones.cc. That simple fact means that even though there are nearly 300 domain extensions, the real estate analogy only really holds true for the .com space.

Real estate-style investing has been the traditional source of income for domain investors. Brand names, typos of brand names, and generic sites such as cellphones.com all receive large amounts of traffic and generate significant revenues over their owners. However, trademark laws and anti-phishing laws have significantly affected typo revenues and domain tasting has allowed for massive acquisition of just about every available traffic-generating generic term in the .com space.

There is still good money to be made in .com domains, but don’t expect to jump into this space for nothing more than a domain registration fee. Chances are you will pay premium prices for a .com domain that generates income.

But the fact that all the good .com domains are taken has introduced a new economic opportunity for investors: scarcity. Scarcity is simply the fact that since demand far exceeds the availability means that prices will go up. Even if no one will ever make money from a particular domain name, it might still have value due to its scarcity. We saw this recently when all possible 4-letter .com domains were registered, the retail value of those domains went well over $100 each. So while a domain such as xjgu.com has little value as an Internet destination and questionable value as a brand, the name itself has good value due to its scarcity.

The same holds true for generic terms in just about every domain extension. Someone may never type something like buy.jp into their web browser, but such a domain could potentially be worth hundreds of thousands of dollars. If you can find a domain with high branding potential, such as buy.it or buy.us, that further increases the value. Scarcity , domain investments could be better compared to stamp collecting or investing in rare books rather than real estate.

So where has scarcity driven the domain market? Common words, very short domains, and high-value acronyms are mostly gone in all top-level domains. Although many consider numbers and hyphens to decrease the value of a domain, but with a domain four characters or less in length scarcity means all characters have some value.

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