Domain Name Investment Growth - Premium Names

The continual escalation of online use and commerce has once again restored values in the marketplace. While prices have not reached fever pitch of the early 00's, they have been consistently growing at +30-300% Pa.

However, is there a limit to the high end premium domain name market? What is the likely growth in domain name prices?

So what makes a premium domain name valuable?

Market perception - A domain that looks great, is great, because potential customers will attribute status and trust to the entity holding it, I.e. If the domain is highly sort after (.com) and therefore valuable, the company owning it must be trustworthy enough to undertake transactions with.

Recollection attributes - With consumers having short attention spans and the mass of advertising thrown at them, then short domain names that are familiar are more likely to stick in their minds for less marketing outlay.

Traffic - Daily Unique's that the domain receives (Type In's) - This is akin to free foot count to your door. Measured individually, free traffic is worth a capitalised value of the saving in future marketing spend (To acquire "Clicks"). If you gained 75 type in's a day that would cost you 15c a time to procure, and you require a 10% return on capital, then this element is worth $41,063.

Leverage (Connection/Synergy) - This is a combination of all the above, essentially given the high amounts necessary to conduct an effective advertising campaign, these need to be as effective as possible. The increasing connection between the Net and all media forms enables the domain name to become the "Connecter" between all formats. E.g. a $25k radio advert with a high quality domain may well achieve the same penetration as a $100k radio advert with a weaker brand name.

What could limit premium domain name values?

Risk

That .com may not always have the highest status or that it may become less important. Is this likely/conceivable?

Potentially enough second line advertisers could make the general public aware of numerous other extensions. However, the fact that there are so many other extensions effectively disperses their efforts and likely only leads to the generation of more leads to the appropriate .com (Consumer confusion). If there were fewer extensions then the scenario of market shift could be more feasible/probable

Secondly, in terms of brand protection (less dilution) many large entities have bought the minor extensions and effectively closed them down, thus ensuring the general public focuses on the .com. In their own interest they generally don't want consumers visiting their name on an extension they don't potentially own.

Is the underlying "free traffic" that valuable?

Interestingly the value of free traffic would appear to be inversely related to the more highly generic the name is. (Which tend to be the most valuable). As an example - someone typing in party.com is not necessarily as valuable as someone typing in partysupplies.com. It is this dispersion of traffic that may on filtering, lead to significantly less valuable leads. Also, consider traffic from geographic locations around the planet that you cannot service.

On the other hand you can purchase traffic that is targeted, geographically focused and that you can service.

Hence, depending on the scale and geographic coverage of your entity a great deal of value in this category may be inaccessible.

Market perception, Recollection and Leverage

These would appear to be far less valuable if your advertising and trading is completely Net focused/based. Clicking links, paying for advertising and especially content are the determinant factors.

What is the future market like for Premium domain names?

The market at the top end will further stratify with the truly best names growing at above normal rates for the market. Essentially large corporates can use these generic names to create marketing campaigns distinct to their own brand (Tap into different layers/Segments using Price/Quality combinations) without the need to build a new brand. I.e. Music.com (Think of say low cost airline carriers in Europe or plain pack food at supermarkets - Often there is a major brand backing these generic start up's). However, because there are large corporates in the background to these deals, the variability in price will be substantial for a given level of liquidity.

There will become a second tier which also will grow at above average market rates. Smaller companies (SME's) will want to acquire these, basically to tap into the "Market perception" and "Recollection attributes". A small music store chain could grow significantly with the domain MusicShop.com and rebrand itself as such. Short high grade marketing .com names also would fall into this category (Although not generic). E.g. Geek.com etc.

What is the projected market growth rates?

This over the medium term should correlate to the following factors with a weighting factor.

User connections to the internet

For all intents and purposes we must assume that likely and potential consumers have reasonable accessibility to the internet (From a USA/Western Europe/Australasian perspective). If they have issues with connection then they are unlikely to fit the profile for a useful consumer candidate. The US has a market penetration of around 68% in 2005. Europe 37% and Australasia 53% (Source:http://www.internetworldstats.com/stats.htm)

Assume: +5% growth Pa for population and take up rates.

Purchasing spend online

Purchasing spend online is growing at 10-20% in the 2005 fiscal year according to various industry sources. This growth rate is forecast out to 2010 at least. (Source: http://www.shop.org/learn/stats_usshop_general.asp)

Assume: +15% Pa

User time spent online

User time online will further drive clicks on ads especially for entertainment based activities. This would appear to be currently around 15% Pa. (Source Growth online usage clicks: http://www.clickz.com/stats/sectors/traffic_patterns/article.php/3522241) (Source Growth in entertainment usage: http://www.imediaconnection.com/news/5736.asp)

Assume: +15% Pa

Pay per click rates

If we accept that growth in websites will offset increased time online then we would assume that click rates will not increase (Other than inflation). However, It is more likely that additional users online will focus on a "pool" of useful websites and will have a greater propensity to click those adverts on that particular site. Given that the number of clicks per user, per site, would expected to be finite, then we may well see higher click prices, as advertisers scramble to claim those site specific clicks. Quality of domain name other than content, will be pivotal to this.

Also, Advertisers spent an estimated additional 46% on online advertising during the first half of 2005.

Assume: +10-15% Pa

Hence:

Generic market growth is estimated at: G=(1+(1+Ic)(1 +Os)(1+Ppc))-1 = 36% above inflation.

For Entertainment sites: = 41% to 46% above inflation (Assumes a straight slide of 5% to 10% towards the increasing entertainment value of the internet).

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