A Biker's Domain

Forbes article 5-23-06 by Rachel Rosmarin Interview with Marc Ofstrofsky (pic at right) Pres of Ireit

The housing bubble may be leaking air, but virtual real estate is booming.
Internet domain names, a once-hot market left for dead after the tech market crashed in 2000, are in play again. The difference: This time around, investors aren't merely squatting on addresses they think will be in demand in hopes of reselling them; they are selling advertising on the sites themselves.
Advertising on so-called "parked" sites may have generated $400 million in sales last year, estimates Susquehanna Financial Group, which figures the business could hit $1 billion by 2007. The under-the-radar business is helping drive up the prices for Internet real estate: Domain name sales generated $29 million in 2005, according to market research firm Zetetic.
Here's how it works: Web site entrepreneurs scoop up unclaimed domains with generic but potentially useful names--or misspellings of already-claimed names--for $6 to $8 a pop. They then load them up with ads from Google or Yahoo!, sit back and collect pennies per click.
Someone hunting for tickets to Avenue Q on Broadway or in Las Vegas, for instance, might type http://www.shows.com/ into their Web browser. But instead of getting information about tickets, those Web surfers get a site full of links that eventually connect them to text-based advertising. The domain name is owned by Internet REIT, a Houston-based domain name aggregator that has racked up 400,000 Web addresses.
This is Internet REIT President Marc Ostrofsky's second stab at making money off Web real estate. In 1999, he famously sold the domain name Business.com for $7.5 million in cash and shares to eCompanies.com.
Ostrofsky's company, which recently received funding from Perot Investments and Starbucks boss Howard Schultz's firm Maveron, isn't the only company hoping to cash in on traffic trends. Last month, startup Demand Media surfaced with 150,000 names and $120 million in investments led by Richard Rosenblatt. Rosenblatt was formerly the chairman of Intermix Media, the company that owned MySpace before it was acquired by News Corp. for $580 million last year.
Ostrofsky and Internet REIT Chief Executive Bob Martin talked with Forbes.com about why "domainers" have gotten a bad rap, and whether buying up Web site names for the sole purpose of selling ad space is similar to investing in highway-adjacent land and filling it with billboards.
Forbes.com: Who are your competitors? Other domain name owners or domain name registrars?
Marc Ostrofsky: Everyone who owns a domain is in the market, and a few hundred serious players are called domainers. However, the number of registrars who buy up the names they sell is increasing. There's no law against a registrar grabbing domains that don't get renewed. Some companies have built up a huge portfolio this way--and since they are the registrar, they have access to statistics about those domains as well. That's a huge competitive advantage over the open market.
But, the way those registrars typically make money is by pointing those sites straight to Google or Yahoo! They sit back and collect. What we do is work on those domains to find technical ways of enhancing each one's income stream, such as building up content and directing traffic.
Are you "cyber-squatters"?
MO: Let me defining cyber-squatting, since I've been called a cyber-squatter. A cyber-squatter is someone who owns a name that is trademarked, copywritten or otherwise [intellectual property]-protected by another firm. But as an industry, we typically only buy generic names like "cars," "shoes," or "mutualfunds." I wouldn't ever own "Fidelitymutualfunds.com."
I do own a lot of names. This is like when California opened up its land rush, and some people got 50 parcels of land and some got one. I went and got 50. It is really relevant to real estate and not to IP law, and courts have ruled that way.
Bob Martin: Our analogy is that Home Depot will locate its stores next to large Wal-Mart Stores. They do that because Wal-Mart gets a lot of traffic, and people might also stop in at the Home Depot. Taking advantage of traffic patterns is a fully vetted economic model. The analogy in Internet real estate is that certain terms that are not trademarked--for example, a misspelling of "bankruptcy," or "African-American"--are valuable, because they get inherent traffic. Some of it might be accidental, and some might be people who want to go type in that word or phase.
You make money when people who are looking for content go to one of your URLs and find advertising instead. Do you hear criticism about this business model?
BM: We have not. 10% to 20% of traffic to our site arrives through direct navigation--either intentional or accidental. Our objective is to help them get to where they're going in a more efficient manner, so its profitable for the advertisers. The ads help the Web users go to where they really want to go.
MO: If you go to Google and search for "E-Tickets" you're going to get a listing of ten ads. If you go to our site, Etickets.com, you're going to see that same listing, but presented in a slightly different way. Are people criticizing Google for the way they make money? It is the same way we make money. We're supplying some of that traffic to Google. My business model finds it is better to point people to Google than it is to put up my own site. Google ads direct searchers to a site that actually sells tickets.
BM: 300 to 400 people a day type in "Etickets.com." Would it be a better user experience if they typed in "Etickets.com" and got a blank page with nothing, or is it better to have the ads redirecting them?
MO: There are three ways people get to Google and Google makes money. You go to Google directly, you go to a link that connects you to Google, or you go to a domain name that connects you to Google. All three are part of the Google ecosystem of making money.
Putting a billboard on a piece of raw land so that people drive by and see it isn't inappropriate. It is a business model used all over the world, and it isn't right or wrong.
Your ecosystem relies on search portals like Yahoo! and Google. Is there anything that could threaten those relationships?
BM: Like any company in any market that has a lot of supplier power, there's a lot of risk. It is the 800-pound gorilla. This industry was born out of the roots of organizations that weren't run in the most honest or ethical way. In our relationships with Google and Yahoo!, we try to be a very professional corporation with real corporate governance. Google, Yahoo!, [IAC/InterActiveCorp's] Ask.com and Microsoft--they see this as a valuable channel, and they understand the importance of it. They want to capture our traffic on their platform.
Could they one day come in and decide that the 10% to 15% of revenues that they're getting from parked domains would be even better if they owned the domains? We think that's a real possibility. But they're more likely going to buy firms like ours than start over, because the names that we own already amount to 2% of the dot-com market.
This industry will grow and then consolidate, like long-distance telephone service companies. It will deregulate, there will be a lot of players, they'll slowly come back together, and then there will be a few big ones around that consolidate the traffic. As long as you've got eyeballs, you've got a marketplace.
Is there still room for other ad networks to profit from your type of Web traffic?
MO: At a recent trade show I attended, there were at least 50 different advertising networks. These guys would go up to a Web site and say, "You have 1,000 viewers a month. We would like to put ads on your Web site and count you as part of our network." They then aggregate 500 of those Web sites and go sell information about the demographics of their traffic so they can place ads on those networks. Those guys don't even know we exist as an industry. Those advertisers are right next to us, and they don't even know we're there. Yet just our little company has 50 million unique visitors a month--it'll get attention.
What types of domain names are hot right now?
BM: There are three categories of domains. One category is your generic mutalfunds.com, bands.com or shows.com. Those are consistent performers growing at or above Internet growth rates. Ten percent more people are coming on the Internet every year, and usage is increasing by 20% a year.
Another category is words that are faddish, or traffic that is faddish. HurricaneKatrina.com was timely and popping, but now those types are going through a massive decline.
MO: Another example of this is the word "ringtones." It is worth millions right now, but five years ago, it wasn't worth 50 bucks. If you see a trend or something that you see coming out that the next guy doesn't--spend ten bucks and buy up that name.
BM: The third category is names that are nonsense right now. We own Aelf.com Things like that will sometimes get some traffic, but the area of the market with the highest speculation and overheating are on names that are three or four words long.
MO: The success of a name is directly proportional to how much you're willing to spend. If you're going to put $10 million behind a name, I can give you almost any name and it will become known by a certain number of people. But if you've got a generic name, you're one step ahead. That's why Business.com sold for $7.5 million. You've got instant brand recognition. Every person that goes directly to the site is one less $2 click that the owner would have to pay to get the traffic.