A Long Hard Look at Domain Name Valuations
by Edwin Hayward - Internet Goldrush ^®

"How much is my domain name worth?"

This is one of the most common questions surrounding domain names, asked on bulletin boards and in chat rooms with almost alarming regularity. The short answer is almost always: "Not as much as you think!" - but there is more to this issue than meets the eye.

Value Drivers
Several recent domain name transactions have reach 7-figure dollar amounts, most notably the (re)sale of business.com, which retook its crown as the world's most expensive domain name after selling for $7.5 million in November 1999.

This spate of high-priced sales has fueled a lot of excitement in the resale market, excitement that brings with it impossible expectations.

The market for domain names is driven on the one hand by the scarcity of "good" domain names. Most companies, large or small, would prefer a domain name ending in ".com" to any other top-domain. In many industries, all memorable combinations of words that can realistically go into a domain name have already been exhausted, driving prices up. Books are one area where the look-alike factor is strong, with just about every permutation of bookstore, bookmall, bookshop and several dozen other expressions already snapped up.

At the same time, there is a perception within the domain name market that "generic is good" i.e. that common English words have more value. For instance, "books.com" is worth much more than "flyp.com" since the former domain name is instantly recognisable and easy to remember.

Another factor that has to be taken into consideration when trying to price a domain name is the commercialism of the industry it relates to. Law is an industry with a huge number of players and very deep pockets. At the other extreme, Bonsai tree growing, while appealing to a hard core of devotees, will never be a subject that will command big $$$ from major companies.

Reality Time
And now it's time to burst a few bubbles... the vast majority of domain names will never sell at any price! Once you go below a certain "quality level" there is no longer any incentive for a company to purchase a domain name in the resale market - after all with a bit of brainstorming it can come up with an equally mediocre domain name for $20 a year.

"Genericness" in itself is not enough to ensure value. Sure, a common single word domain is going to have a reasonable intrinsic value, but the trend has been taken to extremes by too many domain name speculators who go to great lengths to produce a "1 word domain" by making lavish use of endings such as "ly" or "ed" and by leaning on extremely dubious plurals of words that normally are only used in the singular. There is no particular value in domain names made up of a single uncommon word. It is a myth to assume that all one word domains are valuable.

Similarly, the strength of the field or industry that a domain name relates to is not enough to make all domain names in that field valuable. Sticking with law as an example, a domain name such as "LawFirm.com" is very valuable; a domain such as "LawDogmen.com" is worthless.

At the same time, if the industry is small or not given to participation from large companies, the maximum value of any domain names relating to that industry or field is very low. Taking our trusty Bonsai growers as an example, a domain name such as "eBonsaiExperts.com" has practically no value at all since there is little or no money in Bonsai trees, whereas "eLawExperts.com" would have more significant value. The domain name "bonsai.com" will have more value, but still remain far, far below "law.com" in ultimate intrinsic value.

Many people use the rarity of domain names as a justification for their own poor-quality names. "Domain names are running out! All the good domain names are gone..." Remember that over 17 million domain names have already been registered, and the total resale market for domain names will NEVER even begin to make serious inroads into the existing domain names, let alone new ones being registered daily. What is true is that each domain name is unique, so that high-value domain names cannot be "copied". There is only one "business.com" or "books.com"

If we take a figure of 20,000,000 for the total number of domain name sales (including extensions other than .com, .net and .org) then perhaps 1% of domain names will have the potential to change hands over the next 5 years. Of those 200,000 names, 90% will be valued at 4 figures or less. I estimate that less than 20,000 domain names have a potential value of $10,000 and above... and of those 20,000 domains a likely 80-90% will not sell for lack of buyers.

In short, the market for very special, unique domains is very strong. There will likely be untapped demand for a "Law.com" or "Business.com" for many, many years to come, with prices continuing to go up.

In the middle market, with "good" combinations of two words or less common generic words, the saleability of a given domain name will depend less upon the intrinsic value of the name than on the ability for the seller to track down willing buyers for the name.

Beyond this, there is the dark territory of millions of domain names snapped up by speculators caught up in the Internet Gold Rush. The vast majority of these names have no commercial value whatsoever, in that no self-respecting company will spend money on them. Perhaps a few years from now when the initial 1 or 2 year reservation periods have expired, the domain market will reverse course, with fewer and fewer names being registered until equilibrium is reached at somewhere between 3 and 5 million names.

One thing's for sure: the next few years are going to be very interesting indeed!