Valuation

Overview

The primary reason for the dramatic increase in domain name value is the importance a domain name plays in the ability for a website to be found and recognized. In the physical world it is common for the success of a retailer or restaurant to be directly related to their location, hence the phrase, "location, location, location." On the Internet there are no physical locations, but rather sites are found and recognized by the address they choose.

"For months, investors in Computer Literacy were anxiously awaiting a new corporate moniker, counting on us to come up with a catchy, cool, in-your-face Internet name," recalled Chris MacAskill, CEO of the online technical book retailer. In late March 1999, they got it: Fatbrain.com. Investors were thrilled. The stock jumped 36 percent, to $28, in one day, adding more than $100 million to the company's market cap(1).

In January 1999, Chris Sargent, co-founder of Vancouver-based Bingo.com Inc., bought bingo.com for $1.1 million. Sargent contends that the URL alone, being developed as both an online bingo site and a full-blown portal, accounts for half the company's market cap. Bingo.com's stock then traded at about $6 on the over-the-counter market, giving the URL a value of $36 million, for an ROI of 33x (2).

Many companies today are even choosing the branding of their services or products based on their ability to secure the appropriate domain name. Geographica, a travel bookstore, had to rename itself Longitude Books after finding that the domain name for its original moniker was already occupied, and even at that, it had to settle for longitudebooks.com because longitude.com is in the hands of a names investor, according to proprietor Daniel Kaizer (3).

Although domains are valuable, ascertaining their exact value is very difficult. Because most of the negotiations in the transfer of domain names have been private, very little documented valuation information is available to the public. In virtually all cases of domain name selling, negotiation or bidding has played a major part in the eventual price. As the world has woken up to the power of the Internet, the volume of domain name trading and the value of domain names sold has skyrocketed.

Because it is necessary to have someone who values or sees value in the address before it can be sold, sellers often must wait for the buyer to wake up to his or her need. Pricing a domain name low will not necessarily speed a sale. One still needs a potential buyer that sees a need. This can happen in 3 weeks or 3 years. Fortunately, public recognition of true domain name value is just now developing.

An alternative to buying a domain name is leasing. The terms, amount, and length of the lease are negotiable. Moreover, the lease can also stipulate a right, but not an obligation, to buy the domain name at some point in the future.

(1) http://www.iw.com/print/1999/05/10/news/19990510-what.html
(2) Internet World, “The Million-Dollar Name Game”. August 1, 1999.
(3) Internet World, “The Demise of Dot.com”. August 1, 1999.