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Busting Domain Name Secondary Market Myths

   March 16, 2021 2:22 AM
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by Zak Muscovitch

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Domain The Secondary Market
 
The Secondary Market in domain names plays a critical role in Internet commerce yet is often misunderstood. This article will attempt to clear up some of the myths that frequently arise when discussing the Secondary Market.

1. Myth: Domainers are the Secondary Market Domain name investors are but one group participating in the thriving domain name Secondary Market, in which already registered domain names move from one owner to another. After twenty-five years of rapid growth of the commercial Internet, the most desirable domain names are already registered and therefore are not available to be registered directly from a registrar in the domain name "primary market." It may be possible, instead, to acquire them on the Secondary Market from the current owner. Individuals, businesses and professional domain investors, therefore, all turn to the Secondary Market when looking to buy or sell desirable domain names that have already been registered.

Individual 'everyday' registrants may offer to sell domain names in the Secondary Market that they registered but no longer need. GoDaddy recently launched a "listing wizard" to help its customers list their surplus domain names for sale. This resulted in over 350,000 new aftermarket listings in just three months, primarily from customers who are not domain investors. As reported in DNW.com, GoDaddy stated that "Lots of people who don't consider themselves domain investors own unused domains they'd be willing to sell. By making it easy for them to list these domain names, GoDaddy is unlocking inventory and making it easier for other people to acquire these domains".1

Businesses often seek to acquire domain names for use as memorable and intuitive brands for new business initiatives. If the desired domain name is already owned, it is potentially obtainable via the Secondary Market. The following are notable Secondary Market transactions, yet none involved domain name investors:

With its users increasingly relying on mobile devices to access the Internet, Facebook decided to acquire the FB.com domain name as a URL shortener. FB.com was already in use by its long-time owner, the Farm Bureau. The Farm Bureau agreed to sell FB.com to Facebook for $8.5 million.2 As is supposed to happen when the free market is allowed to function properly, both parties benefited from the transaction. When GoDaddy wanted a short acronym .com for its new GoDaddy Corporate Domains division, GCD.com, it purchased it from a Chicago law firm that had changed its name after a merger and no longer needed it;3 When rapidly growing online events platform HopIn.to was looking for the corresponding .com, it acquired HopIn.com from a Greek tour operator;4 Twitter launched using the domain name twttr.com. It soon became clear that it needed the twitter.com domain name. Twitter successfully acquired twitter.com from a bird enthusiast for USD $7,500.5 Tesla had long sought the Tesla.com domain name and ultimately paid USD $11 Million to purchase it from a Silicon Valley entrepreneur, enabling Tesla to transition from TeslaMotors.com to Tesla.com as its business expanded beyond cars6; and Major League Baseball obtained MLB.com from a big Philadelphia law firm, Morgan, Lewis and Bockius LLP in 2000, following the law firm's original registration of the domain name in 1994.7 An open and freely functioning Secondary Market is critical for maintaining the vitality of the Internet economy. Without the secondary market, Facebook would not own FB.com, Twitter would not own Twitter.com, Tesla would not own Tesla.com, and Major League Baseball would not own MLB.com — and none of these transactions involved domain investors. The Secondary Market provides a means of repurposing domain names from lower value uses to higher value uses. Without the secondary market, the DNS would stagnate.

The Secondary Market is a robust industry in its own right with various areas of specialization and numerous participating companies, including:

Sedo, GoDaddy, Flippa, Dan.com, BrandBucket, DNWE.com and SquadHelp, among many others, offer online marketplaces that provide a venue to buy and sell registered domain names; Namejet, SnapNames, DropCatch, and Godaddy Auctions among others, host auctions where expired domain names, and at time privately owned domain names, are sold via auction to the highest bidder; Heritage Auctions and Hilco Streambank are specialty auction houses that sell Intellectual Property (IP) portfolios of trademarks and domain names; Bankruptcy trustees and receivers at times are tasked with selling domain names owned by insolvent companies such as when a trustee sold off CBA.com to raise money to repay creditors8; CatchWord is a leading naming agency that lists for sale curated domain names that it originally acquired for potential client use, but now no longer needs; MediaOptions.com, Guta.com, DomainAdvisors.com, DomainAgents.com, Saw.com, NameNinja.com, NameCorp, and Lumis among many others offer domain name acquisition services or represent domain name sellers; NamesCon is the leading conference provider for the domain name secondary market; Large diversified Internet companies such as GoDaddy with Afternic.com and Newfold Digital with BuyDomains include a domain name secondary marketplace as one of their key business units; Tech companies such as MicroStrategy (NASDAQ: MSTR) may invest in domain names as strategic digital assets that can be used to attract partners or that can appreciate dramatically in value, as when MicroStrategy sold Voice.com in the Secondary Market for USD $30 million9; Large companies may turn to the secondary market to dispose of domain names that are no longer required, as when Yahoo sold Contests.com for USD $380,00010 and when Proctor & Gamble sold off numerous generic domain names it acquired in the early days of the Internet11. While domain investors by necessity focus on the Secondary Market, they are only one group participating in a critical and active global marketplace which has numerous other active participants ranging from individuals to the largest public companies.

2. Myth: Domainers Provide No Value to the Domain Name Ecosystem Domain investors provide liquidity to the illiquid domain name Secondary Market. Domain investors help ensure that there are ready buyers when domain name owners wish to sell their domain names. Domain investors also help ensure that there is a readily available supply of appealing domain names when companies are in the market to acquire a domain name.

A well-functioning Secondary Market connects buyers and sellers. Unlike the stock market, for example, each domain name is unique, and there may not immediately be a buyer who is interested in a particular name at the very same time that a particular seller is interested in selling. For example, when a pizza parlor named Zaw went out of business and wanted to sell its domain name, Zaw.com because it no longer required it, there was no immediate buyer ready, willing, and able to purchase it. Instead, a domain name investor was ready with an attractive offer to purchase it immediately, thereby creating liquidity in an otherwise notoriously illiquid market.

Similarly, when Yahoo wanted to sell Contests.com since it no longer had a business purpose for it, it was a domain name investor which offered Yahoo the highest price at auction, USD $380,000. A bankruptcy trustee who was mandated to sell CBA.com sold the domain name to a domain name investor, thereby benefiting from the immediate liquidity that domain name investors can provide in contrast to holding and waiting indefinitely, for an "end user" to come around to purchasing it. These are all cases where domain name investors created a market where none may have existed otherwise, thereby enabling a timely sale of a domain name that was attractive to the seller.

When a domain name investor purchases a domain name at a price that is necessarily satisfactory to a seller, the domain name investor is essentially 'stepping into the shoes' of the seller, by providing the seller with immediate cash and taking on all the risk of the transaction. The domain name investor is making an investment with no guarantee that the investment will earn an attractive return — or any return. The domain name investor may have to wait many years for a motivated buyer to appear, the domain name investor may have overpaid and be forced to sell the domain name for a loss, or the domain name investor may never find anyone interested in acquiring the domain name. Accordingly, domain name investors are really "proxies" for sellers; they step into the shoes of the seller and try to make a sale that the seller otherwise would have had to accomplish itself.

Domain name investors can be compared to antique dealers as they build up an inventory of items that were no longer of use to the previous owners to be made available to new owners who can give them a new home. If you want to buy a certain kind of antique dresser, you are certainly free to scour the countryside, bazaars, estate sales, and local auctions, tracking down leads in the hope of finding the right one and acquiring it. Many people instead find it easier and more efficient to walk into a well-stocked antique shop and choose from amongst a curated collection of available dressers and walk out with one the same day.

3. Myth: Domain Name Investing is Easy Many people think that buying and selling domain names for a profit is easy, with the sellers having all of the advantages. The reality is that making a living in domain name investing is extraordinarily challenging, requires skill and diligence, and is risky, with relatively few able to succeed.

Domain name investors' main skill is identifying under-utilized domain names that may be available for sale. For example, a domain name investor might identify a small local company using a scarce and valuable three-letter acronym that would benefit more from selling the domain name than using it and where a larger company might be able to make better use of it. Or, for example, a domain name investor might identify a single-word dictionary term domain name that is only being used for forwarding but which has far greater potential as an appealing stand-alone brand identity.

Identifying such instances of underutilized domain names where the domain owner is willing to sell at a price that makes sense to the domain name investor is a laborious and time-consuming process. Even when such a domain name is identified, purchase negotiations may drag out for months before a mutually acceptable purchase price is agreed upon or may even fall through altogether despite a concerted effort to reach an agreement. Even after a price is agreed upon, it can take months to conclude the purchase. Approval may need to be obtained from other partners in the business that owns the domain name. A plan to transition away from long-standing email addresses may need to be adopted. The domain name investor will attempt to do due diligence to ensure that the purported seller is the lawful owner of the domain name, the purchase agreement will need to be drafted, reviewed and revised, and the mechanics of the domain name transfer will need to be completed.

The domain name investor has to accurately value the domain name, offering enough of her own money to make it attractive to the seller without taking on excessive risk by overpaying. The domain name investor then ties up her cash indefinitely while she waits or looks for a prospective purchaser who sees sufficient value in the domain name to purchase it from the domain investor at a profit. If the domain name investor is successful, she will have identified and freed up a domain name that can be repurposed to a higher value use than that put to it by the original owner.

All the parties involved benefit from the efforts of the domain name investor. The original owner would rather have the cash paid by the domain name investor than the domain name itself. The new owner obtains a desirable domain name at an attractive price that he can immediately make use of that was otherwise tied up and perhaps unavailable. The domain name investor has been compensated for her efforts in making this happen.

There is the common misconception that most domain name investors are "fat cats" with huge portfolios raking in the big bucks. The reality is that most domain name investors have small portfolios to which they have committed a large share of their modest available cash. For most people, domain investing is a part-time job or a side hustle as it does not generate enough income on its own to replace the domain name investor's main job. Increasingly, domain name investors are located internationally in developing countries and enjoy the prospect of making more than they otherwise would from working in a low-paying menial job. Registering a few domain names for $10 each and selling a few of them for $100 each can be a life-changing alternative to grueling manual labor.

With the pandemic, many people around the world have lost their livelihood and domain name investing offers an opportunity to earn income while working from home. Even so, the domain name investor must put in long hours and risk their capital in the hopes of making a profit.

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