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November 05, 2013

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The State of the Industry January 2007: 15 Domain Experts Ponder What Happened in 2006 and Predict What’s Coming Next

Every January we kick off the New Year with a survey of domain industry leaders who are perfectly positioned to identify the most important events and trends of the past year and to forecast what we are likely to see in the year ahead. If you don’t put much stock in predictions, you might want to revisit our January 2005 and January 2006 State of the Industry reports to see just how remarkably accurate our panel of experts have been.

We again called on key executives from leading companies involved in domain monetization (PPC), aftermarket sales, finance, domain registration and development, as well as domain attorneys, top portfolio owners and trade show organizers (who bring all of these people together for periodic summit meetings).

Our panel of experts gaze into their
crystal balls and forecast what is 
on the road ahead for domains
.

Many of the experts on last year’s panel predicted the wave of industry consolidation we saw in 2006 that resulted in new owners taking over leading registrars (most notably eNom and BulkRegister), a top aftermarket sales venue (Afternic), PPC companies like GoldKey and dozens of domain portfolios. The consensus among this year’s panel is that consolidation will remain the most powerful force in the domain business in the months ahead.

Bob Martin
CEO, iREIT

iREIT CEO Bob Martin told us “I think that the most significant trend in the industry is the maturity and consolidation of the domain name industry. There are now four entities with over $100 million in capitalization actively engaged in consolidating the space (iREIT, Demand Media, Name Media and Marchex). These companies are bringing a new level of scrutiny to the industry with audits, formalized portfolio evaluations, media attention and monetization enhancements.” 

“We believe that the industry that today includes over 13,000 participants and is dominated by “random traffic” PPC monetization will evolve into a more concentrated industry whose participants will have made substantial investments in technology and developed primarily vertically-focused portfolios that combine a variety of monetization activities (CPA, CPM, pay-per-call and PPC) to remain competitive," Martin said.

“iREIT fared exceptionally well during 2006. We completed over 65 acquisitions throughout the year, recruited a top-tier management team, and completed a sizable number of technical and monetization development milestones.” 

Marchex Inc., the public company that permanently changed the face of the domain industry with their $164 million purchase of the Ultimate Search portfolio, spent much of 2006 adding value to their properties. General Manager Andy Smith told us, “the value of generic, commercially relevant domains continues to increase and the industry continues to evolve as there are multiple parties looking for ways to increase the value of their assets, particularly through product innovations, such as our focus on using technology to build Web sites with high consumer utility.” 

Smith cited Beijing.com, Remodeling.com, NewYorkDining.com and LasVegasVacations.com as examples of what Marchex is doing with their domains. 

“While the past couple of years have been defined largely by acquisitions, we think the more interesting things to watch in ’07 will revolve around the development of the Web sites themselves,” Smith said. "A lot of speculation and possibilities are being discussed or promised, so we again will be interested to watch how and when various entities will go about more fully developing their own proprietary Web sites, in a way that increases their ability to maximize revenue and profitability.”

Marchex General Manager Andy Smith (right) 
speaking with iREIT's Marc Ostrofsky 

The company that bought both eNom and BulkRegister was Demand Media. Investors have poured $220 million into that company’s war chest and Demand Media will use it to keep adding assets and strengthen their position in the battle for supremacy among the domain conglomerates. Demand Media President and COO Paul Stahura (who was eNom’s CEO when the company was acquired by Demand) said the fierce competition assures “more of the same for 2007 – acquisitions of companies, individual names, and portfolios of names.” 

Paul Stahura
President & COO, Demand Media

In the registrar space, late 2006 witnessed large companies like Google and Microsoft partnering with registrars such as eNom to provide name registration services to their users. Stahura said more large companies will do this. Having global internet leaders like them exposing millions of potential new customers to the benefits of owning a domain name should add fuel to the already hot registration and secondary sales markets. 

“We will also see even more clearly the intersection of the domain name space and the media space,” Stahura said. “Take .tv for example.  With the explosion of video content on the Internet, I think we will see the .tv top level domain grow the most compared to other TLDs.” Of course, Stahura now has a special interest in .tv since registry owner Verisign turned management of that extension over to eNom in the final quarter of 2006. 

However, Stahura isn’t alone in predicting better things for .tv. Those who were at the T.R.A.F.F.I.C. East conference in Hollywood, Florida in October will remember keynote speaker Tom Gardner of the Motley Fool predicting .tv would be the sleeper hit of 2007 (a pronouncement greeted with stunned disbelief by his audience, but one that now seems prescient to some). 

Demand Media is typical of the new domain industry giants that have a hand in multiple pies. “The power and influence within our industry will further and further be concentrated amongst a select few,” CEO Ammar Kubba of popular PPC company TrafficZ.com told us. “As a whole, the increased attention from the financial community bodes well for the future of the domain industry, however the tremendous influx of money also brings with it an influx of inexperienced players that find themselves struggling to grasp the intricate complexities of our space. As we've seen this past year, just because you have a lot of money, it does not mean that you know how to monetize domains,” Kubba said.  

“The advantage that money does bring these new players is the luxury of time to learn without the fiscal pressures faced by those who are not financially backed,” he added. “Companies like TrafficZ are being contacted on a weekly basis by equity firms and strategic partners looking to buy our knowledge, experience and relationships to either better manage their own portfolio investments or to simply break into the space.” 

“The past year also brought the longest string of sustained portfolio consolidations in our industry's short history and this trend will continue into 2007, although probably at a slower rate due to the reduced inventory of remaining quality portfolios. Additionally, the overall valuations (and expectations of valuations) of domain portfolios seem to have somewhat leveled off in 2006.  Whereas individual domain prices have been consistently and steadily rising, whole portfolio valuations are leveling off. I believe that this is primarily a function of the more sophisticated investors bringing money into the space, employing more traditional financial analysis models and valuation methods. Sellers may not necessarily be getting the multiples that they had been dreaming of, but they are getting liquidity,” Kubba said.

Ammar Kubba
COO, TrafficZ.com

Oversee.net (operators of PPC leader DomainSponsor.com) is one of the major companies that got involved in purchasing portfolios in 2006. Their Director of Business Development, Ron Sheridan, commented on the move into domain ownership being made by traffic aggregators like DomainSponsor  “The great consolidation of the domain space this past year, with aggregators acquiring significant portfolios, is a signal of more and different types of consolidation to come. I expect there to be a continued number of domainers looking to cash out at what they perceive to be the peak of the market.  Still, many will hold and see where the industry goes.” 

Ron Sheridan
Director of Business Development
DomainSponsor.com

That wait and see attitude among the holdouts has been fueled by steadily increasing domain prices. Sheridan said “We saw tremendous growth in the domain aftermarket.  With decreasing and, in some cases, non-existent available generic domains in the primary market, the sales and value of these domains in the aftermarket shot up.” 

Sheridan sees another potential bright spot in the year ahead. “IDNs (International Domain Names) could be big in 2007. We’re already seeing a rush to scoop up generics in this category.  The recent release of the IE7 browser has a lot to do with the boost of interest here, with its ability to support non-Romanized characters.  Parking services will need to cater to these domains with relevant foreign language keywords and ads,” Sheridan noted. 

“Parking revenues overall will gradually increase in 2007, with the potential exception of high-risk names and portfolios.  Publishers will continue to demand higher levels of consistency and performance from their parking vendors.  Those with technical expertise, disciplined management and financial strength will continue to force the weaker players out,” Sheridan said. 

“On the opposite side of the spectrum, more risky names weren’t as valuable in 2006 as they were in past years. Domainers are consistently moving away from these types of domains because, in many cases, the reward isn’t worth the risk anymore.” 

On that point, Sheridan was alluding to domain names that potentially infringe on existing trademarks. This has been a lingering problem for the industry but one that prominent attorney, Paul Keating of Renova Ltd. thinks may be brought under control by the influx of a new breed of investors. “In 2006, serious money was brought into the industry by professional (non-domainer) investors for the second year in a row,” Keating said. “This shows that the returns being generated are becoming more widely known and that the nature of the industry is becoming more widely understood. The latter is important as it helps respond to the bad reputation the industry has had in the past and the former is important because it adds credibility to the model.”  

“Second, the fact that litigation has been undertaken against the likes of Dotster. This shows the level of risk associated with the industry if one does not run a clean ship. This and the presence of professional investors will bring the domain industry more into conformity with typical businesses - raising the importance of documentation, due diligence and proper risk management.” 

“I see a more and more aggressive stance being taken by trademark holders who, taking the lead from litigation such as that involving Dotster (and bowing to pressure from IP counsel in need of billable hours) will become more aggressive in enforcement,” Keating said. “This should in turn lead to a general "cleaning" house by registrants and parking services. Because of the inherent cash-flow benefits of trademarks, I believe this will in turn will lead undoubtedly to a concentration of registrants holding "challenged" portfolios (those containing domains with potential trademark conflicts) in intelligent and risk-managed structures."

Attorney Paul Keating
Renova Ltd.

"The final solution will be when trademark holders begin to realize that the best defense against inappropriate registrations is for the trademark holder to start registering them for their own use in capturing traffic," Keating said.

Ari Goldberger, ESQwire.com

Attorney Ari Goldberger of ESQwire.com has also noticed the chaging legal winds. "ESQwire.com saw a tremendous increase in domain name disputes in 2006 initiated by trademark owners in the form of cease and desist letters as well as actions under the Uniform Domain Dispute Policy and litigation," Goldberger said. 

"This is a natural progression as trademark owners continue to recognize the value of domain names and the importance of owning all variations of their brands including typos. I see this trend continuing. Just as the Industrial Revolution greatly increased legal disputes among manufacturers, resellers and consumers, the Internet Revolution will continue to see more disputes. As interactions among users worldwide continue to increase so will clashes. The challenge for lawyers is to assist with keeping these disputes to a minimum and helping to enhance trust and stability in the system.

When people assess risks to continuation of the current domain market boom, they often cite click fraud as trademark infringement’s evil twin. TrafficZ’s Kubba said, “As we predicted in your January 2006 cover story, the greatest risk we faced last year was the specter of click fraud. The issue came to a head in the middle of the year with a series of negative articles published that exposed the reality of the click fraud "epidemic" and sent advertisers into a frenzy."

"Although the problem certainly was real, it was also somewhat dramatized and exaggerated, which resulted in a significant advertiser backlash and declining bids across the paid search networks. As Yahoo!, Google and industry leaders like TrafficZ and other parking services stepped up our efforts to weed out the guilty parties, the negative press has died down considerably and advertiser confidence is back on the rise. I don't believe that click fraud will be a major issue for 2007," Kubba concluded. 

Next Page:

  • Sedo's Matt Bentley Blasts Mass Media's Domain Reporting Blunders

  • 2007 Forecast from Frank Schilling - The Man Many Say 
    Is The World's Most Successful Domain Investor

  • Moniker CEO Monte Cahn on His Company's 
    Multi-Million Dollar Live Domain Auctions

  • Co-Founder Howard Neu Has the Inside Scoop on 2007 T.R.A.F.F.I.C. Conferences in Las Vegas, New York City and South Florida

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