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07|25|2007 12:39 pm EDT

Domains – all that glitters are not diamonds

by Richard Lau in Categories: Domain Sales, Editorial

Images of DiamondsForbes recently had a story on the Most Expensive Web Addresses which likely had jealous dollar signs popping up above many readers heads. But let’s take a step back and analyze this maturing market.

Back in 2000, I remember presenting to an IT conference in Vancouver and having to explain that registered domains could actually be bought from the existing owners. Now, thankfully, the domain marketplace has matured well beyond this basic point. Domains are now bought and sold, resold, and resold. Was Business.com registered at some point for $35 and then sold for $7.5M? Well, yes and no. Mark Ostrofsky had the foresight, and dare I say, balls of steel, to pay $150,000 for Business.com for $150,000 in the mid-90’s, which was likely the highest price paid for a domain name at that time. A $7M+ profit on $150,000 investment is a very good return. It’s not the same ROI ratio as $35 to $3M for AltaVista.com.

If you see a domain sell now for 7 figures, and the owner did not own it before around 2003, then it’s likely that the ROI on the sale is more akin to Real Estate than to striking gold.

Let’s take a comparative look. Let’s say you want to buy a great generic domain and you find one for $1M that is 8x Revenue. Using round numbers, you are getting $125,000 a year in income on the $1M, or a 12.5% return. Now, in 3 years you go to sell the domain, and get $1.5M for the domain. A 50% increase on your purchase price for capital appreciation which gives you an annual ROI of 29% over the 3 years, or a total of $875,000.

Not bad, but not that far off the real estate market either. In fact, until domains can be borrowed against at similar rates to real estate, the Real Estate market is a viable alternative for returns. Taking the $1M and buying real estate at a 25% down allows you to buy a $4M real estate portfolio. If all of the rental cash is used to pay down the interest on the property, you’ll only need to see a capital appreciate of 22% on the property over the 3 years to match the $875,000 total profit. That’s 7% a year in capital appreciation.

Obviously this is just off the cuff calculations, and there are many other factors at play. But don’t mistake all 7 figure prices for 7 figure profits. The domain marketplace is passing the maturity of that point.

The real opportunity in the domain market is the same as the real estate market – to find (and buy) undervalued, or under-monetized, assets, then improve the property (best PPC/CPA/Developed Solution) and flip it out, and do the same. Lather, Rinse, Repeat.

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5 Comments

[…] Lau has an interesting post that points out several factors and examples to look at when calculating ROI. If you see a domain […]

team chicago domainers

July 25, 2007 @ 1:31 pm EDT

Hey Richard—Excellent Read!

I know it’s a bit OT of what the real message of your post is—but is it even still possible to find good quality generics for 8x anymore??

Richard

July 25, 2007 @ 2:49 pm EDT

Generics for 8x…. this is fodder for a whole new article.

Let me think of a title for it:

8x is not 8x is not 8x

or

Apples to Apples – my apple is bigger than your apple…

…you can pay 8x YOUR revenue if your revenue is higher than what the current owner is getting. For example, you might have a better rev share with the same PPC Partner, or you may have a direct relationship with a CPA Advertiser, or even a direct relationship with an advertiser willing to pay you on a per unique basis. I came across a domain that I arranged to be purchased for 13x the owner’s annual revenue. Using the Traffic Splitting feature at DomainManager.com I was able to figure out which PPC Partner best optimized the domain. Now the revenue is higher, so that the amount paid is actually closer to 5 years revenue.

Tim Davids

July 26, 2007 @ 8:29 pm EDT

Unless you own real estate in Miami Florida…

[…] Domains – all that glitters are not diamonds […]

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