Domain Reign

Domains are the undeveloped land on which e-commerce properties are built and like real estate, it’s about location, location, location.

Gary Kremen is driving along I-5 in San Diego. He’s talking on his cell phone and sounds like he’s just had a pot of coffee he talks fast and furiously. Kremen is not from Southern California, but he seems to relish his newfound role as alien resident, an East Coast boy playing the part of the laid-back, easygoing renegade entrepreneur.

“I’m even more of a disgrace here than the Heaven’s Gate cult was,” proclaims Kremen, who is living in a mansion in the tony enclave of Rancho Santa Fe, a neighborhood known for its wealthy residents, in a six-bedroom, Spanish-style spread that he received as a result of a court ruling.

He may be a disgrace, but divine grace smiled on him when the court gave Kremen the beautiful property, a luxurious villa once occupied by Stephen Michael Cohen, a con man who forged documents in order to take away Kremen’s money-making cyber-property – that of the domain Sex.com. Cohen now owes Kremen $65 million and is out of the country and on the lam. But Kremen is still hopeful he’ll recover some of what he’s owed. Even if he doesn’t, he’ll be OK – in addition to the real estate, he had another windfall earlier this year, when the Sex.com domain sold for a cool $13 million.

Kremen’s experience was a harrowing ordeal; he paid investigators to track Cohen’s whereabouts and he endured long-fought battles in court. But Kremen’s experience is also an object lesson in how trading in the domain-name space can prove lucrative. The stakes are high, and counting on fortunes to be made isn’t a sure bet. It takes a tough constitution to weather the ups and downs of playing the domain-name game.

Luck

Kremen says that when he originally registered names (in the mid-90s), he snapped up Jobs.com, Housing.com and Autos.com. He also bought a site you may have heard of – Match.com. He paid $2,500 for Match.com; when he left Match.com, his payday was in the tens of thousands. (He was asked to leave because he refused to sell Match.com to Cendant for $7 million; after he left, the sale went through and Cendant later sold the name for $50 million.)

Fresh out of business school, Kremen thought the domain game was fun. On a lark, he bought Sex.com. Then he largely forgot about the site and focused on other pursuits.

But Cohen noticed the domain, and forged documents to take advantage of the cyber real estate. Kremen got lucky and found out that Cohen had fleeced his way into Sex.com. Kremen wrested back control of the site in 2001; Cohen had bilked so many others that Kremen had other litigants to back him up.

Even before selling Sex.com for millions, Kremen made a mint; it’s been reported that ad revenue for Sex.com was bringing in $8 million a year, a nexus of adult-entertainment websites offering products and services. His story shows that marketing geniuses can clean up if they know what they’re doing in the domain space, even if they don’t own domains with as flashy a name as Sex.com.

Easy Street

Plenty of other domainers are laughing all the way to the bank. Mike Bahlitzanakis sold Cellphones.com for $4.2 million in cash, a domain he paid $90 for in 1996. And others are profiting from the fact that today’s technology makes it easy to set up a revenue stream. According to Ron Jackson, publisher of DNJournal.com, “It’s such an easy process. In two minutes, I can set up a thousand domain names. I know quite a few guys making over a million dollars a year from advertising on their domains. It’s like a 24-hour money-printing machine.”

And it seems like easy money. With operations like GoDaddy offering a domain name – and a potential chance at untold riches – for less than seven bucks, the allure is rather appealing. It’s like playing the lottery; in this case, pick the right name, wait the right amount of time, play your cards right, utilize the name wisely or sell to the highest bidder and boom, you’re a winner.

Ad Dollars

Domainers, as they call themselves, are living as if it’s the dot-com heyday all over again. In the ’90s it was all about buying a name and then selling it to some sucker for a mint. Some domainers still approach it that way. But now, many prospectors are buying names in order to cash in on the riches that are freely flowing into online advertising.

Various winners view the idea of using their domain names wisely in different ways. Take Dan Warner, the COO of Fabulous.com and Dark Blue Sea Limited in Australia. His companies own thousands of websites and manage another 500,000 for other people. According to Warner, 4 million websites are owned by only a few hundred professional domain owners: “These domains attract $750 million in search advertising spend each year, and are actively traded as real estate.”

People are snagging scads of domains, like DigitalCameras.com, for example, and loading them with pay-per-click advertisements using services from Google and Yahoo. If you happen to visit one of these sites, you might see a review or two but you’re certain to be overloaded with text ads for products or services related to the domain name.

News of a New Boom

Pay-per-click advertising is prompting increases in the number of domain-name sales and the dollar value of deals. The space is red hot, and recent news underlines this fact. GoDaddy, with a $250 million market cap, has been reported to be going public. eNom merged with eHow and was bought by Demand, run by a former MySpace exec.

Cambridge, Mass.-based Sedo managed the sale of $17 million worth of domains in the first 10 months of 2005, up from $8 million in the same period in 2004 and $3.1 million three years ago. Domain sellers pay Sedo a 10 percent commission. Afternic Inc., of Orlando, Fla., brokered the sale of $5 million of domains last year. In 2004, the firm managed the sale of $2.2 million of domains, and in 2003 it did less than $1 million. Its standard commission is also 10 percent.

The domain-name market is also attracting new investors. It used to be for Internet entrepreneurs only, but now public companies and venture capitalists want a piece of the action. Domain aggregator Internet REIT is raising $250 million to buy domains, because Web addresses can be long-term investments that provide a steady stream of revenue.

Sedo managed the sale of Website.com for $750,000 this year, and according to Matt Bentley, CEO of Sedo, the business is shifting: “The fact that it is moving from individuals to larger corporations ” represents a legitimization of the domain-name industry.” For years, many in the industry had a bad rep for “cyber squatting,” registering names associated with famous brands in hopes of selling them to a big company at a hefty price, which fueled trademark legal feuds. But now that there are legitimate domainers and not just squatters, that is changing.

Personalities

Rick Schwartz is another prominent name in the business. He owns thousands of names (some are in the “adult” category and some are not). It has been reported that he wears a $65,000 Rolex on his left wrist and lives in a waterfront house in Boca Raton. Other people have invested in smart names – Candy.com, CellPhones.com, AthletesFoot.com – and can bring in hundreds of dollars a day, while the owner does little work to bring home the bacon.

Schwartz, for instance, directs his traffic to one of the many small companies that serve as go-betweens with Google and Yahoo, the two behemoths that have revolutionized online advertising and marketing. The middlemen aggregators do the major work, creating the sites, buying keywords and tapping into one or the other of the search engines’ advertising networks to add the best-paying links. Some other big domainers cut out the middlemen completely and work directly with the search giants themselves.

A Domain by Any Other Name

So what’s in a name? “Domains are the undeveloped land on which e-commerce properties are built, and like real estate, it’s about location, location, location,” says Dark Blue Sea’s Warner. “They can be bought, sold or leased and there is a limited amount of valuable property.”

While many Web-address purchases are motivated by investors looking to earn money from ads, some aren’t. Last summer, the owner of Dog.com bought Fish.com for $1 million. The buyer plans to grow an online pet supply store.

Pets United CEO Alex Tabibi wanted to expand his firm’s list of pet-related domains, which include Horse.com and Bird.com. He says the new site will sell fish food, fish tanks and accessories.

Pets United LLC, parent of Dog.com, acquired Fish.com from Dan Farmer, a tech exec. Afternic Inc. brokered the deal. Farmer, CTO and founder of computer security firm Elemental Security Inc., bought Fish.com in the early ’90s and used it for a personal website. He had multiple offers for the domain over the years. “I glibly decided that if anyone offered me a million dollars that I’d sell,” he told the Wall Street Journal. He said he used the after-tax proceeds to pay off the mortgage on his condo and “gave a bunch to charity.”

Large Portfolios

Several firms have quickly amassed huge portfolios of thousands of domains. A single site may get relatively little traffic, but aggregators aim to earn enough ad income across their network of sites to cover the expense of buying existing domains and registering new ones.

Houston-based Internet REIT, launched last year, has quickly acquired tens of thousands of domains, including MutualFunds.com. The company’s lead investor is Jacobson Family Investments Inc., an investment vehicle for a wealthy New York family.

Internet REIT’s president and cofounder Marc Ostrofsky purchased Business.com in 1995 for $150,000, and sold it four years later for $7.5 million. He also had the smarts to snap up Bachelor.com and Consulting.com. Internet REIT takes its name from real estate investment trust, a legal term for a company that buys, sells and operates properties. CEO Bob Martin compares it to owning and developing real estate: “Rather than having a speculative approach to what a domain name could be worth, you can now generate cash flow from these assets and value them like securities.”

Internet REIT wants to buy domains from hobbyists and retain them, rather than resell them. It uses “Google AdSense for domains,” a variation on Google’s popular search-ad network. Owners of large numbers of domains, those that generate more than 750,000 page views a month, get ads for their sites. The companies and Google share the revenue.

Other big domain buyers are looking to make money with pay-per-click ads without ruling out the possibility of selling their domains to other businesses. BuyDomains Holdings has 500,000 domains, like JobFinder.com and TravelChoices.com. Highland Capital Partners Inc., a venture capital firm in Lexington, Mass., bought a stake in the closely held company, which has advertising- oriented domains in 90 “verticals,” including travel, music and finance.

Marchex wants its portfolio of 200,000 domains to become destination sites filled with relevant content, but the sites mostly sport ads right now. The company paid $164 million to get domains such as Debts.com and Camcorders.com. Ad revenue from Marchex’s direct navigation sites totaled $7.7 million in the third quarter, up from $6.4 million in the second quarter.

The Future

The enormous growth means new businesses. A handful of companies now sell “domain parking” services. You can pay a parking service to create a page filled with pay-per-click ads so you draw revenue, which is distributed among the domain owner, the parking company and the advertising broker, like Google or Kanoodle.

The surge in online ads is also contributing to a big increase in the number of registered Web addresses. VeriSign estimates that about 10 percent of all .com and .net domains being registered are created to host pay-per-click advertising. The risks? Consumers could hate being deluged by ads and advertisers could shy away if the backlash gets too great.

DIANE ANDERSON is a senior editor at Yoga Journal. She previously worked for Brandweek, the Industry Standard, HotWired and Wired News. She lives in San Francisco.