values

This page considers the valuation and pricing of domain names.

It covers -

• introduction - some questions about domain name valuation
• irrational exuberance? - the rise and decline of the domain name valuation sector
• how much are they worth? - disagreement about the basis of valuation
• squatting - speculation, extortion and the impact of the UDRP and ACPA
• selling smoke - are valuation services for real?
• domain valuation methodologies - different mechanisms for valuing a domain name
• the dot naming business - services that help you choose "the perfect name"

A supplementary note examines claims that many dot-com names changed hands for million dollar prices and considers commodification of names through name-based lending and securities.

     introduction  

How much is a domain name worth? There is no consensus about the nature of worth, about methodologies for determining the price of individual names, and about implications.

Some people have claimed that names have an intrinsic worth. Others, more persuasively, argue that value is subjective, based on changing perceptions.

Some have argued for what is characterised as a "free market". Others have commented that the absence of restrictions may favour intermediaries such as registrars but encourages cybersquatting and broader speculation in domain names.

     irrational exuberance 

During the dotcom boom of the 1990s some domain name holders or valuation services asserted that particular names had an intrinsic value of several million dollars, independent of any investment in development of a site, establishment of e-commerce fulfilment infrastructure or other tangibles.

The value of traditional brands is not inherent. It is instead created by promotion and performance in the market (eg quality control and after-sales service). Enthusiasts for the inherent value of domain names claimed that names had a different value: they were addresses for "real estate" in cyberspace. Some were thus of innate value because the particular location could be easily found among the millions of other addresses or possessed qualities (eg "funkiness") attractive to web surfers.

Acceptance of those assertions is evident in reports of figures that particular domain names have changed hands for millions of dollars. We have discussed those reports in a separate note.

It resulted in explosive growth of domain name valuation services. We counted 172 services at the height of the 1990s dot-com boom (although most have now ceased operation).

It attracted media coverage that echoed wider community awareness of the value of intangibles, such as reports in 1997 that the Coca-Cola trademark - embodying around 100 years of promotion - was worth US$6 billion. (In 2001 marketing specialist Interbrand valued Coke as the world's "most valued brand" - worth US$68.9 billion at a time when the group's market capitalisation was US$117.2 billion.)

Media coverage fed opportunism by vendors of 'pre-registered domains' (some of which registered hundreds of thousands of dot-com names), professional domain name speculators and individuals having a punt by acquiring a handful of names. As of June 1999 for example 43% of all four letter dotcom domains were registered by entities that held ten or more names and that supposedly all but 1,760 words in Websters American Dictionary had been registered as dotcoms.

It was echoed in the auction of 'generic' names within the 'com' 2LD of dot-au. Those names had previously been unavailable but, as highlighted in our profile of Australian domain administrator auDA, were released in 2002.

Prices paid in that auction ranged from a few hundred dollars to several thousand, with attempts by some name holders to on-sell them for over $130,00 and disappointment when other supposed 'power' names attracted no interest and accordingly were subsequently released on a first come, first served basis.

There had been similar disappointment over the value of 'pre-registered' dot-com names following evaporation of the 1990s dot-com bubble.

One entrepreneur bravely marketed his collection as "Domain names = web real estate: rock solid", spruiking that -

The inventory of domain names alone is conservatively valued at over $150,000. This web site network is normally priced at $67,00, a great value. If you act now before November 29th, you can walk away with the entire network and all of the domain names for only $9,995, that's 85% off the normal price. I must be in love, or just losing my mind. Grab this before I come to my senses.

     how much are they worth?

There are four schools of thought about the intrinsic value of a domain name -

• all names have exactly the same value, ie the price charged by the domain registry plus the registrar/reseller's fee and any associated tax or compliance costs
• some names have an intrinsic value that is greater than that of other names, can be readily identified and could/should be commodified
• there are no fundamental differences in the intrinsic value of names; they are valuable because through effective promotion or other activity they can embody a new/existing brand such as Amazon.com, Nike or Microsoft
• a domain name is worth exactly what a buyer is willing to pay for it, no more and no less

One reason for caution is that, strictly speaking, domain name holders (registrants) do not own the name and do not have perpetual rights in that name. Instead they have a licence to use that address for a finite period - generally for two years. At the end of that time they are first in line to renew that 'lease' of the name. In principle, like trademark holders, they can renew the domain registration indefinitely.

Another is that search patterns are evolving, with many consumers - experienced and otherwise - relying on search engines, links and offline pointers (eg URLS on the back of cabs, on television or in newspapers) rather than intuiting an address.

     squatting

As we have highlighted in a discussion of ICANN's UDRP, auDA's auDRP and the US ACPA, some people recognised that although domain names might not have an innate value - just a mnemonic for a string of digits in cyberspace - they are made valuable through association with an offline brand or other entity.

Businesses and other organisations are concerned not to dilute their trademarks or otherwise lose control of their brands. They've accordingly sought protection under domain name dispute procedures and legislation such as the US AntiCybersquatting Protection Act against use of domain names that echo their offline names.

There are no authoritative global figures on the number of companies that have simply bought out speculators or blatant squatters; figures for the global value of such transactions similarly are not available.

     selling smoke 

Domain name valuation is one of the murkier parts of the domain name industry and the business of valuing intangibles. There are no international accounting standards. Much information is contentious, valuation methodologies are often not publicly available and there have been no large-scale attempts to map values by seeking an assessment of a particular name's worth from a large number of valuation service providers. The immaturity of the market is one reason why there are few substantial independent studies of prices and valuations.

One source of particular value is Domain Names: a Practical Guide (London: Tolley 2002) by Simon Halberstam, Joanne Brook & Jonathan Turner.

There is a broader treatment in Valuation of Intellectual Property & Intangible Assets (New York: Wiley 2000) by Gordon Smith & Russell Parr. They suggest that key issues in valuing domain names are -

1. Is the value of a domain name intrinsic to a parent trademark, and therefore imbedded in the trademark value, or does the domain name produce purely incremental value?

2. What are the most effective, sustainable, supportable and defensible methods to value domain names?

3. When domain names exist without any underlying trademarks, does their value increase, and if so, why and how?

4. Given fluctuations in the domain name market, how frequently should a domain name be valued: semi-annually, annually, every two years?

5. What is the effect of similar or confusing domain name registrations, in terms of dilution of value of the core trademark or brand, and in terms of the reduced value of the domain name?

It appears that most valuers rely on -

• databases of the figures at which 'similar' names changed hands. Those databases are based on media reports, vendor/acquirer statements and figures from specialist domain name auction services such as Afternic.com. They're essentially restricted to the dot-com gTLD; many appear insufficiently large for statistical validity and may be out of date.
• automated or manual methodologies, generally based on consideration of the number of characters in the name, its 'musicality', the particular industry and idiosyncratic prescriptions about suffixes, plurals, hyphenation and so forth.

Fees range from US$25 for fully automated submission (with a valuation figure and cursory report by email) to several thousand dollars for a detailed customised report that includes a discussion of the methodology and comparable values.

One valuer says

We know how you feel. Why spend a small fortune just to have your domain names appraised? At Submerged Ideas, we are dedicated to keeping our expert appraisals fair and affordable. Just $1.99 per name plus a $5 processing fee per order (max of 30 names). We know that's the best deal on the Internet, so go ahead, shop it around.

     valuation methodologies

It is uncertain whether some valuers do much more than consult the tea-leaves, despite claims of matrices, artificial intelligence and integration with large scale databases.

In identifying key attributes most methodologies emphasise the 'memorability' of names, usually characterised as the number of characters and ease of pronuciation, and intuitive searching by users.

Length reflects academic research such as George Miller's 1956 paper The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information which suggested an inherent limit to how many numbers most people can comfortably handle. It also reflects more anecdotal reports in marketing literature about successful and unsuccessful branding.

One pundit accordingly advises

How long is the domain name? Generally, the shorter the better when it comes to domain names - as long as this shortness doesn't come through throwing away words or letters, or substituting numbers for letters. GoForIt.com is a nice little domain name, with some value. Go4It.com is worth less than that. GoFrIt.com is essentially worthless.

We wonder what the valuer would have said about 'amazon' (longer and much less intuitive than books.com), 'google', 'altavista' or 'yahoo'. We note that some of the more thoughtful studies of offline branding suggest that a "strange" name such as xylopax, xerox, claritin or mogadon may indeed be more memorable than standard names.

Another criticises the "chronic obsession with one-word domains" -

Every one-word domain, the theory goes, is worth a lot, just because it is, well, a one-word domain. This theory is locked into the vacuum of thinking which pays no attention to commercial interest. There is no commercial interest, for example, in the word "yet." But it is a single word. So what. There is no commercial association. When you hear the word "yet," what type of commerce do you immediately think of? ... There is no inherent value in one-word domains. There is inherent value in keywords with commercial associations, eg music.com, autos.com, travel.com, etc.

That inherent value has led some registrars and specialists to build domain name portfolios.

One enthusiast proclaimed in 2006 that

names in demand tend to be short words — especially those that have anything to do with poker, real estate, hotels and 'pod'. It's all about iPod and podcasts

Some valuers have proposed the 'Six S Model':

Size - is the name short enough to remember? does it fit on a business card?
Sense - does it make sense (if meant to identify particular goods/services) and "speak the nature of business"
Sound - does it "sound good" (aka 'musicality) or have particular associations
Spelling - is it spelt correctly
Search - does it feature or echo desirable search terms
Scope - and "have the scope for business"

or the MULE model -

M - market type (professional services versus youth/design demographics that favour funky names such as fatbrain or bluesskyfrog versus consumers inyent on finding vendors of cars, homes, phones, perfumes and health products)
U - usefulness ("Will people buy - Catchy, Clever, Concise")
L - length (Letters/Words/Numbers)
E - ease (How it sounds/Does it flow)

Other dictates that we have encountered include problematical instructions that in choosing a name you should -

• "begin your domain name with a number" so as to "be placed ahead of your competition in directories"
• consider the scape for branding the domain name: is it memorable, is it too similar to an existing brand or name ("Strong branding requires distinction; how can there be a clear distinction in the minds of potential clients if the domains are essentially confusingly similar?")
• avoid mispellings - "If there are any misspellings in the domain name, you can knock 99% or more off the price of most domain names"
• leverage mispellings - ie engage in typosquatting by attracting traffic from three-thumbed typists
• begin your domain name with 'about' - "an information oriented word with high alphabetical priority"
• avoid suffixes and prefixes - "prefixes or suffixes can REALLY hurt the value of a domain name. For example, add an "e" or "i" or "my" in front of the domain, or a "site" behind it and you've just destroyed most of its value"
• conversely, embrace suffixes and prefixes (eg e-Bay)
• include words that frequently appear on search engines/directories
• avoid/embrace plurals - "BuyTicket.com is most likely worth less than BuyTickets.com, but Chat.com is most likely worth more than Chats.com"
• use hyphens, as "longer domain names may actually be more valuable with hyphens"
• avoid hyphenation the way vampires avoid garlic - "hyphens help to preserve clarity, but generally they reduce the value of a domain name. Sports-Cars.com will most likely sell for less, even much less than SportsCars.com."
• avoid multiple-word names
• use multiple-word names - "common two-word expressions are worth more (sometimes MUCH more) than rare one-word expressions. And common three-word expressions can be worth more than rare one-word expressions ... SportsCars.com is worth more than Semantics.com. FreeEmailAddress.com is worth more than Superiority.com"
• "use a generic (aka 'pre-branded') domain name"
• seek a three-letter .com acronym domains (eg abc.com) - supposedly the "gold standard of international business" but unlikely to be available

and the very helpful "use popular search words in your domain name for Higher Search Engine Rank!"

One valuation service launched in 2006 offers a "fool proof" appraisal based simply on the number of times a site appears in the major search engines by the number of letters in the domain name.

     the dot-naming business

Particular branding concerns are highlighted in the Marketing guide elsewhere on this site, which highlights works such as David Aaker's Brand Equity & Advertising (Hillsdale: Lawrence Erlbaum 1993).

It includes a page on domain naming - theory and practice - and the name-generation business, nicely captured in a wry 1999 Salon article.

A sense of the number of domain names registered - and smaller number in active use - is provided in the Net Metrics & Statistics & guide.





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