November 30, 2005
Masters of their domains
By Paul Sloan | Business 2.0
Forget condos. Domain names, the real estate of the Web, have been delivering far greater returns.
NEW YORK (Business 2.0) - Remember those Internet bubble headlines about domain names fetching millions of dollars? Well, those days have returned -- with a vengeance.
Just ask Mike Bahlitzanakis of Astoria, Queens. He just negotiated a deal to sell a single name -- www.cellphones.com -- for $4.2 million in cash, making it one of the richest deals ever. He paid $90 for the name in 1996. "I just went to my 10th high school reunion, and I thought to myself, 'Who's laughing now?'" says Bahlitzanakis, 29.
In fact, plenty of domainers, as they call themselves, are having the last laugh. The boom in Internet advertising and the success of the pay-per-click ad model are making the go-go '90s look sluggish by comparison. Back then, buying a domain name was pure speculation: Snap up Whatever.com and sit back until some big company with a get-on-the-Internet-at-any-cost mentality offers you a set-for-life payday to buy it.
Now it's all about the income stream. A single good domain name -- Candy.com, Cellphones.com, Athletesfoot.com -- can bring in hundreds of dollars a day while the owner hardly lifts a finger.
"I don't like to work," says longtime domainer Rick Schwartz, almost yelling as if to convince everyone within earshot that they're fools if they do. "I figure any moron in the world can generate work for themselves and tie up their time. I have one laptop, no employees, and no product whatsoever -- none! This is magic." Magic, he claims, that's earning him $2 million a year.
Schwartz, for instance, directs the traffic from his 5,000 sites to one of the many small companies that serve as go-betweens with Google and Yahoo, the two giants that make this all possible. The middlemen, known as aggregators, do all the heavy lifting, designing the sites and tapping into one of the search engines' advertising networks to add the best-paying links. Many other big domainers cut out the middlemen, creating their own Web pages and working directly with Google or Yahoo.
The secret? It has to do with what's known as type-in traffic, or, in Wall Street jargon, direct navigation. Though it may seem odd in the era of powerful search engines, it turns out that millions of Internet surfers don't use search at all. Instead, they type what they're looking for right into the top of their Web browser.
Looking to buy candy? Type in Candy.com, a name Schwartz bought in May 2002 for $108,000. A page filled with links to candy-related products comes up. Click on one of the ads and the advertiser pays Google, which in turn sends a share to Schwartz and the company that runs Candy.com. Some days Candy.com makes Schwartz $300 in profits; the site paid for itself in a year and a half.
No one knows for sure how much Web traffic comes from type-ins, and Google and Yahoo execs won't discuss it. But privately, one Yahoo official estimates that type-ins could make up 15 percent of its search business. Marchex, a Seattle-based public startup whose strategy rests largely on type-in traffic, estimates that it accounts for nearly 10 percent of the global paid search market, which is projected to soar from $9 billion this year to $23 billion in 2009.
That's why some domain names are now commanding six- and seven-figure price tags and attracting big-money players. Private money manager Stuart Rabin is cutting those kinds of checks to domainers two to three times a week. In November 2004, Marchex shelled out $164 million for a single domainer's portfolio.
Even a few venture capital firms are now placing bets. Earlier this year, Boston-based Highland Capital paid $80 million to acquire BuyDomains, a company with 500,000 names, according to people familiar with the deal. Says Highland principal Richard de Silva, who wouldn't confirm the price, "These are profit machines."
That's why Rabin is on a domain shopping spree. Rabin runs a private fund called Jacobson Family Investments from the 56th floor of Carnegie Hall Tower, a suite with sweeping views of uptown New York City. It's a fitting view, since the Internet in 2005 looks to Rabin a lot like Manhattan 100 years ago -- awash in real estate opportunities.
Rabin teamed up a year ago with a Harvard-trained finance whiz named Bob Martin and domain speculator Marc Ostrofsky. They named their company Internet REIT and, according to Ostrofsky, are spending $250 million, probably far more, buying out domain owners as fast as they can find good names.
(Ostrofsky, for the record, was the man who pulled off the much-publicized sale of Business.com for a reported $7.5 million in December 1999.)
When Martin and Ostrofsky approached Rabin about forming a business, Rabin knew little about domains. Then he did some research and was astounded. Type-in traffic is a growing phenomenon, the fixed costs are minimal, and U.S. advertisers are expected to spend $26 billion on the Internet by 2010 -- roughly double the current level. He immediately thought of the billboard industry a decade ago, before Clear Channel and Viacom bought up the small operators. "We've only just begun the roll-up phase," says Rabin, 39. "This market will likely be in the billions."
The team of Martin, Ostrofsky, and Rabin is working the Delray Beach conference hard. Ostrofsky, the salesguy, dives right in: "What are your names? What’s your monthly traffic? What kind of multiple are you looking for?" Ostrofsky pulls aside Bahlitzanakis, the Ye worshiper. Bahlitzanakis, who works from his apartment in Queens, N.Y., owns fewer than 100 names, but at least one is a gem: Cellphones.com. The site -- a plain page with relevant links -- makes an average of $1,300 a day.
Bahlitzanakis spends his last night in Delray Beach at an Internet REIT party, tossing back Grey Goose vodka and tonics. He returns to his hotel room in the early morning to find a contract under his door. Total price: $4.2 million. He paid $90 for the name in 1996. "I just went to my 10th high school reunion, and I thought to myself, ‘Who’s laughing now?’" Bahlitzanakis says. Ostrofsky talks about fuzzy concepts like "mindshare" when it comes to evaluating a name. But like all the top domainers, he and his crew also analyze traffic data. Internet REIT figures it will run some of its sites, like Officesupply.com, as virtual stores, with links to suppliers and products. But they’re expecting that the pay-per-click model will drive the business.
From his office in Houston, Ostrofsky trolls the Web late each night to find prospective sellers. That’s how he ended up negotiating with Marie and Bob Benz at their home in Philadelphia one evening in September. The couple, both doctors, began buying names in 1995 as a hobby. They bought some they liked -- Heartdisease.com, Highbloodpressure.com, Athletesfoot.com. In some cases, they developed the sites and added content; in others, they set them up as simple landing pages with relevant advertising links.
After an evening of talk, Ostrofsky and the Benzes reached a deal, and Internet REIT is paying $3.6 million for their 101 names. Says Bob Benz, who specializes in kidney diseases, "It’s a lot more lucrative than being a doctor."
Plenty of things could spoil the domainers’ party. Internet advertising could turn south. Click fraud, in which someone writes a program that repeatedly clicks on paying links, could become a bigger problem for the paid search industry, making advertisers reluctant to spend. The model itself could change entirely. Or sites could become so commercial that Web surfers sour on them.
But the way domainers look at it, they own the property. "And if you own the real estate," Rabin says, "people are going to wind up there at some point." Soon, he figures, Wall Street at large will begin to catch on, providing opportunities to tap into the public markets. Then big Internet players like Rupert Murdoch or Barry Diller could buy out the domain owners. Some even speculate that Google or Yahoo -- or Microsoft, which is entering the paid search business -- will roll up the domainers, cutting out a layer and serving up the type-in traffic directly to their advertisers.
In the meantime, Google and Yahoo are trying to keep the type-in business coming -- and execs from both companies are using the Delray Beach conference to court the folks who control it. As the party at Delux winds down, 14 Yahoo executives pile into a stretch Hummer with a few of the domainers, including Schilling, who has an exclusive contract in which Yahoo serves all the ads for his sites. The limo heads 35 miles south on Interstate 95 to Scarlett’s Gentlemen’s Club. The men kick back in the VIP section, outfitted with plush booths and red velvet curtains.
When the woman in charge of the area comes by and mentions the cost of the booths, the Yahoo crew gets nervous. And in the end, no one wants to submit the $1,000 tab to the expense department back at headquarters. Finally, Schilling pulls out a roll of cash and pays up. Not a big deal for a guy who owns a share of a jet. But considering that Schilling’s traffic generated more than 1 percent of Yahoo’s $3.6 billion in revenues last year, you’d think one of those guys could have stood up and taken one for the team.
