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$7.5 million for the business.com domain name: too much?[1 page, 12/07/99] Introduction | The bearish case | The bullish case | Conclusions
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Introduction Last week, internet venture capital fund eCompanies paid more than $7.5 million for the business.com domain name, shattering the old record of $3.3 million. Did they pay too much? About three years ago, CNET paid $7,000 for search.com and $15,000 for tv.com, and AtHome paid $25,000 for work.com. But a lot can change in three years. GreatDomains had an auction with some of the best domain names out there (check out the clearinghouse at http://www.greatdomains.com). A dozen have bids of $1 million or more each, and the record-breaking sale of business.com will probably add fuel to the bidding fire. In fact, the seller of business.com paid just $150,000 for it two years ago, and he admits that most of his friends and family thought he was crazy at the time. (If you're thinking about visiting networksolutions.com or another domain name registrar to scoop up some great domains, don't bother. Six million have already been reserved... all of the good ones and a lot of the not-so-good ones.) Nearly all the media coverage has been negative, saying that eCompanies paid much more than they should have. Actually, it's not that clear cut. If you thought it was difficult to estimate the value of your favorite internet stock, just wait until you've tried figuring out the value of a domain name. The bearish case:
So now back to business.com. While business.com was certainly eCompanies' first choice, there were probably a dozen other relatively good possibilities on their list. Good two-word names tend to sell for about $20,000-$50,000. In fact, the owner of allbusiness.com says he paid just "a few thousand dollars" for the domain about a year ago. So asking if the $7.5 million price tag was too much is equivalent to asking if business.com is at least $7.45 million better than allbusiness.com or one of the other choices. If you think the answer is no, consider that Bill Gross, founder of internet incubator Idealab, said the following a few years ago in a Harvard Business Review interview: "I want to start a toy company with the name Toys.com, but someone already has that domain name. We're negotiating with the guy to buy it. I won't do the company if we don't get Toys.com. The name is that important to me: we need very simple, clear branding. People need to get it quickly. That is so important to the marketing concept that if I don't get that name, I don't make the company." As you probably guessed, he went with his second choice, etoys.com, and things turned out just fine. eToys had a market cap of $6.3 billion. The bears would argue that this supports their case. But the bulls would say the company might have been even more valuable with the name Toys.com, and would point out that if this name made the company just 1% more valuable, that would still work out to $63 million. As another example, the art.com domain name was bought for $450,000 in May by a company called Artuframe.com. The company wisely renamed itself Art.com and was almost immediately acquired by Getty Images for $200 million. One of the major selling points was the domain name. How much do you think Getty would've paid for the company if it hadn't changed its name from Artuframe.com? Or consider China.com, which lost $4.4 million on revenues of $5.2 million in the latest quarter. China.com has a market cap of $2.6 billion. How much of that is directly attributable to its category-killer domain name? What would the company's market cap be with any other name? If you say $2.5 billion (which I think is very generous), then the domain is worth $100 million. eCompanies no doubt has big plans for business.com, and if business.com IPOs with a billion-dollar market cap in two or three years I think we'll look back and realize what an amazing bargain $7.5 million was. I believe the prices of single word domain names will continue to rise, with many selling for $3-10 million, and great two-word domain names reaching $50,000-150,000, within two years. Please note that I'm not encouraging individual investors to speculate on domain names, as they are highly illiquid and extremely risky... rather, I'm suggesting that you keep companies with top-quality domain names on your watch list, as a few of them might prove to be ten-baggers or better. What do you think? Did eCompanies pay too much for business.com? Are great domain names too expensive, or will prices continue to rise? back to top Update 7/23/01: Obviously things haven't played out as I expected, at least not so far. The implosion in internet stock prices has had a proportional effect on domain name prices. But despite the protracted bear market in the internet sector, I believe that in the long term, the best domain names will continue to rise in value as companies find increasingly valuable enterprises to build around them. page 1 of 1 Send feedback
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