WebProNews November 3rd, 2000 Issue
http://www.WebProNews.com

Considerations Related to Domain Name Valuation

Before turning to other factors, which I consider to be relevant to Domain name valuation, allow me to deal with the matter of name length. The vast majority of domain appraisers are in agreement that short names are more valuable than are the longer ones. I would certainly add my vote in favor of brevity when examining generic names and their near proxies. However, in the case of non-generic names (which make up the vast majority of all names for sale) I am prepared to accept the proposition that longer names are capable of creating significant asset value provided that other, key factors of value are present. Think of how many of the well-known companies, which comprise the "old economy", are identified by names which are comparatively long. It is only over the short span of e-commerce history that abbreviated, hip, generic business names have risen to the rank of cultural icons. As the merger of the "old" and "new" economies progress, it is reasonable to anticipate that transitional names will also progress and that these names will necessarily be greater than four or five letters in length. As I see it, valuable names must be kept as short as possible and consistent with effective branding of the product or service with which they are associated. To continue to insist that only short names can represent value is to ignore the need for and the desirability of the fusion between the two spheres of the economy.

In addition to occupying the ideal length, the domain name must also be directly linked to a useful product or service. If the name does not, of itself, suggest the brand target it must be developed by means of advertising and association with an active web site. It is becoming a rare case indeed where a stand-alone domain name (unassociated with a web site) sells for more than $1,000. In this regard, the domain name and the web site must become synonymous; that is, the domain name must be transformed into a recognizable brand which identifies an active web site. How can a name such as Versitrol command any real value absent extensive development? The name itself has a good sound; it is suggestive of a major space-age corporation. Nevertheless, as a stand-alone it possesses only the potential for limited market value because it has creativeness and little else going for it. On the other hand, given extensive development and advertisement, Versitrol could attain brand recognition comparable to that of Amazon or QVC.

Names which directly relate to consumer items which commonly appear in the media are relatively rare, and they definitely have the advantage here; such names are unique in that they serve as near proxies for the market segment occupied by the goods and services which they evoke. Names such as autoharbor.com and grocerybag.com fall into the category of near proxy since they evidence immediate recognition, intrinsic strength and memorableness. Words, which are in daily use by the media, are memorable, and domain names must be memorable in order to have value. Thus pleasantness of sound, intrinsic strength, brand identification and web site notoriety are important factors of domain name value.

Other characteristics to look for are creativeness and suitability of sound. Since there are few if any generic names available other than on the basis of resale, it is essential that a high degree of creativity be employed in crafting what I refer to as "manufactured" or "invented" names. Names such as OneStopLoan.com and LetterNvelope.com show creativity in the way that they quote the generics which they are meant to brand. Notice that the above names avoid the use of hyphens and that they get the point across with names that are not tediously long. They are memorable to a moderate degree, they are easy to pronounce and they use words, which are part of our daily converse. The above names also cover large market segments, the loan and office product industries, a good indicator of their ability to generate revenue and income.

The assessment of revenue and/or income production capability has rarely been mentioned in conjunction with domain name valuation. However, now that the first blush appears to have faded from the e-commerce bloom, it appears quite likely that serious investors will be looking with more than idle curiosity at the income records (both actual and potential) of web sites and .com names offered for sale. There are several acceptable methods and approaches to the capitalization of income all of which are characterized by the anticipation of future performance. In the case of domain names with no record whatsoever of income production, the investment decision must be made based upon sheer speculation and comparison of the market for comparable names (if comparability can be attained). In the case where the domain name is related to a going concern, I favor either the yield capitalization or the discounted cash flow methods. I must emphasize that I do not foresee income capitalization becoming the dominant factor in name valuation over the near term; however, I do expect that it will serve as an indispensable valuation factor from this time onward. It is high time now that we all realize that seat-of-the-pants appraisal methods will no longer suffice. Subjective appraisals unaccompanied by formal reports conforming to the standards of the Appraisal Institute are, in my opinion, virtually worthless. Names listed for $5,000 or more which are not supported by relevant appraisal reports must be subjected to a higher degree of due diligence than would otherwise be the case.

Lastly, it is most important to note the fact that there is a distinguishable syndrome of value factors which can be used to characterize all domain names capable of commanding substantial sale prices ($100,000 and above). Such names trigger immediate recognition and memorableness, they directly relate to widely known goods and services, they play a key role in forging the consumer's decision to buy and they ultimately become accepted, familiar brand names within the market segments, which they represent. Any valid domain name valuation method must, in some manner, address the above factors and must, in the appraisal report, make clear specifically how these factors enter into the valuation which is found.

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