The Domain Aftermarket Redux, Are Domainers “Investors” Yet?

By , April 27, 2010


This is the inaugural post of my new blog:, where I plan to write about applying a “value investing” methodology to web assets, internet companies and domains. Conventional thinking would suggest that the two are mutually exclusive. The Nasdaq bubble of 2000 and the current Web 2.0 phenomenon of “pre-revenue” companies gaining nosebleed valuations would leave us to believe this is no space for value investors. But there may be the odd value play to find out here in this space. Sometimes, value investing has nothing to do with publicly traded companies. We can approach any asset with a value mindset.

Three Years Ago I Said the Unthinkable

What better way to kick things off then to review the domain aftermarket, three years after my then infamous “Domain Aftermarket Overdue For An Asset Repricing” article which caused a bit of a stir at the time.

I said then that there was a big recession coming, in it everything would suffer severe price declines, and that domain names would not be exempt. I went on to say that the low-hanging fruit in the domain industry had been picked: type-in activity would go into secular decline over time, and that domainers would face increasing competition from other avenues such as DNS resolvers, ISPs and web browsers.

It didn’t go over well. The reactions to it can be summed up in the archetypical response from the “Domain King” Rick Schwartz himself who called it “the absolute worst article on the business he’d ever read”.

What I got wrong

I should acknowledge several factual errors in the article: that almost every number I cited for aftermarket sales wrong. At the time I wrote it, it was just for my own blog, I didn’t google the numbers to verify them, I just went from memory. CircleId picked up the post, errors and all, and next thing I know it’s one of the 10 most read stories there all year.

What I Got Right

  • OpenDNS came out fairly soon after the article appeared and started monetizing NXDOMAIN traffic.
  • Then Google Chrome came out and did what I warned about: they changed the behaviour of the location bar to treat keywords without suffixes as search queries.
  • In the swirl of the Global Financial Crisis, ad spending tanked, and took PPC earnings down with it.

In 2005 the parking services were citing revenue numbers like $60 to $200 RPM, while today a recent survey of domainers showed most are earning less than $20 RPM and many less then $10 RPM. From personal experience I can say my domain parking revenues are down 50% to 65% their highs in 2006.

As for aftermarket values of domains themselves? Take a look at some of the sales from Moniker/Traffic Auction Results in October 2007, what may be the zenith of the domain aftermarket before the meltdown hit the industry:

  • 2.2M
  • 900K
  • 450K
  • 270K
  • 260K
  • 210K

Every single one of those examples is currently parked on pay-per-click landing pages and I would be very very surprised if :

A) any of them are going to recoup those lofty acquisition values via PPC in any reasonable time frame, and

B) any of them would sell today for a third of what they were bought for then.

(Until recently, aftermarket values were lackluster at best. I’ll get to the recent “hot streak” in domains sales in a bit, but let’s first review what that terrain looked like over the past few years.)

The auction results from DomainFest 2009 or DomainFest 2010 looked dismal in comparison. When you look at the “quality” of names listed, which ones sold and at what price, not to mention what got “passed”, the contrast is striking:

From DomainFest 2009:

  • sold at 20K
  • passed at 100K – 250K reserve
  • passed at 100K
  • passed at 500K – 750K
  • sold at 25K
  • sold at 6K

From DomainFest 2010

  • 80K
  • 26,770
  • 20,888
  • 16,528
  • 9,250
  • 8,761

Category Killer Domains: The only thing they may kill is your business.

Perhaps the most instructive lesson today can be gleened from the recently revealed plight of  the Great White Whale of domain names: SEX.COM.

Without going into the whole story behind the name, suffice it to say that that single domain has been defining the terrain in terms of law, in terms of best practices and maybe now in terms of economics, since the day it was registered (and is  described in the book by Kieren McCarthy.)

SEX.COM is under foreclosure and when I started writing this article it was widely anticipated to be auctioned. It was purchased in 2006 for a staggering 14 million and was financed by Domain Capital. The industry was abuzz about the impending sale and some are heralding it as good news for the domain industry. As one blogger put it:

” should definitely exceed $5 million in the forthcoming auction. This is electrifying news for domainers big and small. It should increase your confidence in the industry and in the money that can be made at the very top. When you have a one word irreplaceable “got-to-have-it” domain, time and time again we have seen values increase.”

Really? You mean if somebody pays 14 million dollars for something and goes broke trying to operate it and then it sells for $5 million on liquidation, it proves that the asset has somehow become more valuable and it validates the asset class it’s in? is not a success story. It shows that owning the category-killer domain simply does not guarantee success. Depending on the price paid, it may in fact preclude it.

This is not an isolated case. Take the publicly traded Live Current, which was back when I mentioned them briefly in my original article. If ever there was a case study that demonstrates the irrelevance of category killer domain names to business success, this is it.

Live Current was a “portfolio company” that was trying to develop web properties around their portfolio of   category killers, most notably and

It hasn’t worked and the company has seen it’s share price tank from over $2/share when I wrote the 2007 article to around 10 cents today. In their last annual report filing to the SEC, their accounting firm included a “going concern” statement:


They have resorted to selling off the very domains in their portfolio in order to raise cash to survive.

So while having a category killer domain can definitely help your business it certainly does not guarantee it.  (Barnes and Noble didn’t bankrupt themselves to buy, and I’m sure they’re happy that they own it. But it’s not like it enabled them to kill Amazon. Now they just use it as a redirect.)

Another good example to look at is Marchex, since they are publicly traded we can get a good look at them and we know important parts of the story: they were the ones who bought the Yun Ye “ultsearch” portfolio for $160 million dollars.

When I wrote my original article, they were trading shy of $20/share. Today they are around $5, having lost shareholders about 3/4 of their value from pre-meltdown highs (2007) . The investor who made out the best in that story was they guy on the sell side: Yun Ye – who built his portfolio exclusively through drop catching expired domains and had a cost basis effectively nearer the cost of registration (there is a theme emerging here for those who care to notice it).

Most Domain “Investing”…Isn’t.

This is the reality that domainers have to face: Most of the activity in the space that is considered “investing” isn’t. Very few people are coming at domains from any semblance of methodical investment approach, and domainer “value investors” are near unheard of.

In the domainer space, it’s all about speculation. Not that there’s anything wrong with that. But let’s call it for what it is.

Value investors buy assets when their analysis of the business, the assets, the debt, or the cashflows show a favorable difference between what it’s worth and what it’s selling for.

Speculators buy purely on the basis that they think the price action will move up from their purchase price, and that they can subsequently sell to another buyer at a higher price.

The aftermarket is still in this greater-fool cycle. Names are being bought on the sole basis of a probable sale later at a higher price.

Unless you are looking at a domain for it’s cashflows, and these days that basically means PPC, CPA or website development, a domain can barely be called an asset. It yields no cash.

Domain Names Are Not A Store of Value

The recent buyer of called his 1.1 million dollar purchase a “no-brainer” because if he put the money in the bank it would yield a paltry 1.2% (which is true). But there is an important distinction between the two:

Putting the money in the bank only yields 1.2% but you get that crappy return in exchange for the guarantee on your principal. When you go back to the bank, you’ll get the money back. I would be surprised to see earn much more than 1.2% in PPC anyway, but getting his money back out of the domain on demand is iffy, at best. If he put the name back on the market tomorrow I’m not sure that he’d recoup. That is the difference between investing and speculating.

Now the buyer of this domain has previous success with his existing business in the space,, so he won’t park the domain. But personally, if it were up to me I would have just put the 1.1M into the existing business “as-is”. He’s already built his brand, I don’t know how spending this kind of money really adds anything he doesn’t already have. Maybe he could have used that capital to buy out a competitor or take a stake in a related business within his circle of competence.

If you develop a website or a business around a domain, then it’s the website or the business that is generating the cashflows, not the domain itself. This is where domainers constantly miss the point. If it were up to domainers, Google should have spent their seed capital on acquiring the domain, Godaddy’s Bob Parsons was an idiot for never grabbing and if Pearl Jam had any brains they should have called themselves and maybe they would have gotten somewhere.

Having a good domain name doesn’t hurt. It’s certainly better than having a crappy one. In the good-old days of type-in you could even get a business off the ground almost entirely propelled by the right name (the original comes to mind) – but for the most part, the domain name itself is ancillary to the execution of an actual business model. (Especially if your cost basis on acquiring a domain name puts you out of business.)

Don’t believe me? Then why do expired domains of former ecommerce websites eventually trail off and trend toward zero earnings? If all the secret sauce were in the domains, the cashflows on expired domains of former income producing websites would sustain themselves indefinitely. On some of them the tail may be long, but they definitely have a half-life.

The smart money domainers are liquidating domains.

When I wrote my original article, members of the inner temple were very quick to step-in and declare their undying faith in buy-side domaining. But then something strange happened within that small inner circle of domainers who had amassed the best portfolios in the world at the lowest cost-bases….they started selling. Not that there’s anything wrong with that either, it’s exactly what I recommended doing back in 2007.

Publicly, the big domain heavyweights still profess their unwavering belief that domains are the single greatest investment. And for them, they were. The basic core of  the legendary portfolios: Frank Schilling, Kevin Ham, Gary Chernoff, et al. were built on the early days of the expiring domain drop game. Their cost basis on tens of thousands of these premium names is under $100 and in a lot of cases under $20. It’s the grain of truth of the domaining world: they really are the single greatest investment on earth, when your cost basis is close to the price of registration.

The late comers to the game, the VC’s and hedge funds who want to get a piece of the domain pie and are throwing stupid money into domain funds and buying up names at aftermarket fantasy prices are setting themselves up for permanent loss of capital.

There are a few standouts in the domain world.

Look at Buydomains. They’ve built their portfolio on the drop game and are selling to end-users at retail prices. Owing to the depth of their inventory they have a predictable and steady transaction flow. They did it right.

DarkBlueSea is/was a registrar and parking platform that owned their own portfolio of domain names, monetized them and other people’s domains on their platform, and had an aftermarket sales pipeline. They were publicly traded in Australia, had a lot of positive cashflow and paid out at least one special dividend to shareholders.

What I find notable about what happened to DBS was that their stock price declined during the Global Financial Crisis, and was then capped off by a horrendous decline after they reported softer earnings on a weaker US dollar (all of their revenues were in USD).  The stock price tanked and then they were acquired by The Photon Group. The reason I note this is because this is exactly what I’m talking about. DBS was solid, profitable and as far as I know, debt-free – and suffering through a period of price-to-value mismatch. Photon swept in and snapped them up. Now that’s Investing.

Tucows is a publicly traded domain registrar that owns a domain portfolio whose value, even at my pessimistic, rock bottom valuations, exceeds the total market cap of the company. They have begun to unlock the value of that portfolio via their Yummynames channel and it’s significantly boosting the bottom line. The beauty of the entire setup is that Tucows feeds the Yummynames channel via the domain expiry pipeline of their wholesale registrar operations. A lot of registrars do this, but only Tucows is publicly traded – and massively undervalued. Management knows it and I believe they’re slowly taking themselves private through an ongoing series of share buybacks. In some ways this situation is similar to the Dark Blue Sea situation, except the only people swooping in to snap up Tucows these days are Tucows themselves…and maybe one or two others. (Disclosure: yes, I own them. More disclosure: nobody’s perfect, I missed an opportunity to back up the truck when they bottomed at .22)


The reason I wrote this article is because I can’t bear to see the word “investing” misused any longer when used in the same sentence as “domains”. I’m reading bloggers and private funds mangle the context of word and excuse the flimsiest speculative fancies as “investing”.

It is true that there is still money to be made from domain names. If you know what you are doing, it is possible to buy domains at a higher cost basis and either develop it into something productive, or sometimes you just know that you’re still getting a deal at xx,xxx or possibly even xxx,xxx depending on the name involved. That said, it cannot be considered “investing” in the strict Benjamin Graham sense of the term:

An invest­ment oper­a­tion is one which, upon thor­ough ana­lysis prom­ises safety of prin­cipal and an adequate return. Oper­a­tions not meet­ing these require­ments are spec­u­lat­ive.”

For domainers to be considered “investors” they must approach their activities in a business-like manner and employ a sound methodology. Don’t buy high and hope to sell higher.

I couldn’t help but simply shake my head in disbelief when I read a post called “Domain Education. Post #1: Top Domains are Solid Investments” at who paid an undisclosed amount for the name on the basis that it was the first domain ever registered.

Domain names are the secure assets you have been looking for.

Rest assured there are many 6 and 7 figure sales that the public is unaware of.

What do these numbers show?

Domains are running strong and moving forward.

People are starting to invest in domains more, and keep money in savings less.

There are still opportunities out there for both the well funded and beginning investors.”

Simply pointing out recent sales at high valuations and calling that proof that domain names are a sound “investment” excludes so many fundamental components of investing and relies on such a long leap in logic that the assertion is almost nonsensical. Every time I see a sale of a domain at massive valuations (recently: at 1M, at 800K, etc) I usually see a lot of remarks “Congrats to the buyer” or “what a great buy”.

What these really are are “great sales”. Congrats are in order to the sellers. Whether or not any of these transactions at such a high cost basis will amount to “great investments” for the new owners remains to be seen.

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