posted 12-07-1999 12:54 PM         

You're probably right that a top-notch domain doesn't give a startup instant legitimacy... for example, if a startup spends all its money on a domain name and doesn't have any left over for developing a good site, it will be obvious as soon as you visit the home page.

posted 12-07-1999 11:06 AM         

About three years ago, CNET paid $7,000 for search.com and $15,000 for tv.com, and AtHome paid $25,000 for work.com. But a lot can change in three years. GreatDomains has an ongoing auction with some of the best domain names out there (it's at http://www.greatdomains.com/showcase.asp). A dozen have bids of $1 million or more each, and the record-breaking sale of business.com will probably add fuel to the bidding fire. In fact, the seller of business.com paid just $150,000 for it two years ago, and he admits that most of his friends and family thought he was crazy at the time. (If you're thinking about visiting networksolutions.com or another domain name registrar to scoop up some great domains, don't bother. Six million have already been reserved... all of the good ones and a lot of the not-so-good ones.)

Nearly all the media coverage has been negative, saying that eCompanies paid much more than they should have. Actually, it's not that clear cut. If you thought it was difficult to estimate the value of your favorite internet stock, just wait until you've tried figuring out the value of a domain name.

The bearish case:
1. Good dotnet domain names are very inexpensive (whatever.net generally sells for about 5-10% of whatever.com). If dotnets gain in popularity over the next few years, they will be considered a viable substitute for their dotcom counterparts.
2. The Internet Corporation for Assigned Names and Numbers (ICANN) has proposed adding several new top-level domains (.web, etc), which would put downward pressure on dotcom prices.
3. It's very difficult to brand a generic term. Consider the strongest online brands: Yahoo, Amazon, eBay, Lycos, Excite, etc... None of them have merely descriptive names.
4. RealNames (formerly Centraal) operates a system it calls Internet Keywords, which could replace or at least reduce the value of domain names. The system has been rapidly growing in popularity following its inclusion in Microsoft Internet Explorer 5.0 and could be a serious threat to dotcom prices.
5. Picking a descriptive name locks a company in to one type of business: the name Amazon works just fine for products other than books, but CDnow is stuck selling CDs.

The bullish case:
1. A great domain name gives a startup instant legitimacy. Everyone knows that excellent domain names are expensive, so a startup willing to shell out big bucks on a domain name must mean business. Angel investors and venture capital firms will know that the startup is playing to win. According to Patrick Carter, who paid $1 million for wallstreet.com, on which he's developing a stock-market-themed gambling site: "You can be on Madison Avenue or Broadway - dotcom or dotorg - and one's right next to the other. But I'd rather have a Madison Avenue address."
2. Branding is easier, not harder, with a simple term. Cars.com, Quote.com, Realtor.com, and Mail.com are among the 100 most heavily trafficked sites on the web. And new category killers like sales.com from Siebel and retail.com from Retek will likely join them on the list soon. Common English words are already in people's minds every day, so with just a little branding the owner of the corresponding domain name gets a free ride. Why do you think Centraal changed its corporate name to RealNames? Because they get it. Who do you think will own the online pet store niche, Pets.com or Petopia.com?
3. As any collector knows, the most important determinant of value is rarity. And great domains are as rare as it gets: within each category, there's usually one that's clearly the best, and hundreds or thousands of people want it, so the price will naturally head for the stratosphere.
4. Internet startups are paying $2 million each for a 30-second spot in the upcoming superbowl. Compared to this, spending a few hundred thousand on a domain name that's going to last for the lifetime of the company doesn't seem so crazy.

So now back to business.com. While business.com was certainly eCompanies' first choice, there were probably a dozen other relatively good possibilities on their list. Good two-word names tend to sell for about $20,000-$50,000. In fact, the owner of allbusiness.com says he paid just "a few thousand dollars" for the domain about a year ago. So asking if the $7.5 million price tag was too much is equivalent to asking if business.com is at least $7.45 million better than allbusiness.com or one of the other choices.

If you think the answer is no, consider that Bill Gross, founder of internet incubator Idealab, said the following a few years ago in a Harvard Business Review interview: "I want to start a toy company with the name Toys.com, but someone already has that domain name. We're negotiating with the guy to buy it. I won't do the company if we don't get Toys.com. The name is that important to me: we need very simple, clear branding. People need to get it quickly. That is so important to the marketing concept that if I don't get that name, I don't make the company." As you probably guessed, he went with his second choice, etoys.com, and things turned out just fine. eToys had a market cap of $6.3 billion. The bears would argue that this supports their case. But the bulls would say the company have been even more valuable with the name Toys.com, and would point out that if this name made the company just 1% more valuable, that would still work out to $63 million.

As another example, the art.com domain name was bought for $450,000 in May by a company called Artuframe.com. The company wisely renamed itself Art.com and was almost immediately acquired by Getty Images for $200 million. One of the major selling points was the domain name. How much do you think Getty would've paid for the company if it hadn't changed its name from Artuframe.com?

Or consider China.com, which lost $4.4 million on revenues of $5.2 million in the latest quarter. China.com has a market cap of $2.6 billion. How much of that is directly attributable to its category-killer domain name? What would the company's market cap be with any other name? If you say $2.5 billion (which I think is very generous), then the domain is worth $100 million.

eCompanies no doubt has big plans for business.com, and if business.com IPOs with a billion-dollar market cap in two or three years I think we'll look back and realize what an amazing bargain $7.5 million was.

I believe the prices of single word domain names will continue to rise, with many selling for $3-10 million, and great two-word domain names reaching $50,000-150,000, within two years. Please note that I'm not encouraging individual investors to speculate on domain names, as they are highly illiquid and extremely risky... rather, I'm suggesting that you keep companies with top-quality domain names on your watch list, as a few of them might prove to be ten-baggers or better.

What do you think? Did eCompanies pay too much for business.com? Are great domain names too expensive, or will prices continue to rise?