Priceonomics

In the next year, we could see a host of new “top-level” domain names like .beauty, .app, and .blog, dramatically increase the amount of virtual real estate available for people seeking to register new websites. That could be a relief to every individual, company, and entrepreneur who has been frustrated by the search for a decent domain name. Or it could be a bonanza for companies that profit off their access to domain names. 

The Internet Corporation for Assigned Names and Numbers (ICANN), a private nonprofit in Los Angeles, currently administers domain names with the blessing of the US government. Its mandate calls for handling functions important to a stable Internet in a democratic, representative manner to develop a competitive market that supports consumer choice. 

ICANN administers domain names by partnering with private companies who sell domain names to businesses and individuals. Registry operators are the wholesalers - VERISIGN, for example, administers the “.com” top-level domain name - and domain name registrars like Go Daddy are the retailers, directly selling specific domain names (like awesomesauce.com) to customers. 

Under the current system, domain names are sold first-come, first-served. But for the new names, ICANN is considering a closed model that would give private companies the right to sell domain names at their discretion:

Under the single registrant model, companies like Amazon and Google could own exclusively .book or .cloud, both generic name strings, thus paving the way for monopolistic branding.

For a $185,000 registration fee, companies whose applications are accepted - which so far includes companies like Google and Amazon, who have applied for names like “.app” and “.book” - will receive the right to decide who should get access to that real estate and profit off its sale. The New York Times reports of L’Oreal’s plans for the “.beauty” name:

In its proposal for .beauty, L’Oréal said it intended initially to reserve second-level domain names — like personal.beauty — for itself, eventually opening up the domain to its own business units, selected licensees and partners.

ICANN is currently debating its closed model in response to widespread criticism. But one source of that criticism comes from a not so benevolent force - the speculators and squatters who profit off the current system of open domain names.

Domain names don’t sit around in the registries of companies like Go Daddy until someone buys them to build a website. That would be like a prime plot of land (or an okay plot of land, depending on the domain name) sitting unused. 

Instead, individuals and companies buy available domain names that they suspect someone will want or that people may regularly enter into their URL address bar. (Rather than using a search engine, many people simply type products they want to buy into their URL bar and add .com - think sneakers.com or awesomehotels.com.) One investor in domain names advises:

Online property typically increases in value over time, particularly generic or descriptive domains that have the enduring, evergreen quality that drives traffic. Similar to traditional real estate, if you invest in the right virtual property, and hold on to it for a while, you will likely see a solid [return on investment].

These “domain squatters” can sell their domain names at large markups to companies looking to use them for a site and make money off advertising. It’s easy to put ads from Yahoo or Google on the pages, or link to websites that pay per click. Great domain names that sell for 6 or 7 figures and bring in a large stream of revenue (like vodka.com) are not the norm, but even a lackluster domain name can earn enough to ensure that few domain names are ever available. The same investor notes

People buy domains and keep them because there's not much cost associated with them. If they can make even a trickle of income from advertising, that offsets the annual fee, if nothing else. 

Annual fees are rarely more than forty dollars and usually around $10. 

The most brash players in the domain name business created entire empires out of buying up and squatting on valuable domain names. Kevin Ham built a “$300 million empire” out of domain name investing. Mike Mann, who once registered 14,962 domains in a single day, has made tens of millions since receiving a $50,000 offer for “Menus.com” in 1998. Mann also thrived on buying up misspellings of popular websites or sites that used the Cameroon domain name (think “nytimes.cm”). Yun Ye, who mastered the art of snapping up domain names as soon as their registration expired and reselling them to their negligent former owners at exorbitant rates, once sold a portfolio of domain names for $164 million.

These speculators inspired a parasitic industry that diverts money away from productive businesses and makes it difficult for businesses and individuals without large funding to find a decent address in the digital world - thus initiating the annoying necessity of founding Internet companies that end in “ly” (Summly) or misspell words so that the url will be available (flickr). 

From the government’s perspective, it’s not easy to fairly distribute such an important resource. But we feel like there must be a better way.

Reading about domain names, we thought about how the American government distributed land to settlers in the American West. In broad strokes, early efforts to sell the land encouraged speculation by setting high minimums for the sale of land. Speculation led to high prices and battles between desperate farmers and the speculators that owned the undeveloped land they squatted on. But in 1862, the Homestead Act offered up to 160 acres of land to settlers who improved it by building a home of a minimum size and growing crops on the land for 5 years. 

We imagine a similar system for domain names. The condition for the sale of any domain name could be that its owner put the site to a constructive purpose - the equivalent of building a farm - beyond simply throwing ads on the page and waiting to flip it to an interested buyer. 

It would not be easy to define “constructive purpose” and fairly enforce the provision - just as American government officials struggled to verify land claims, especially as speculators hired people to make a claim on their behalf, bought up abandoned land, and “took advantage of a legislative loophole caused when those drafting the law's language failed to specify whether the 12-by-14 dwelling was to be built in feet or inches.” But given the hundreds of millions of dollars at stake, and the annoyances incurred by squatters and speculators, it seems worth the difficulties.

Priceonomics is not very sophisticated in our knowledge of domain names, so we leave it to our readers to discuss the merits of different systems in the comments. But establishing a minimum standard for holding a domain name would at least establish squatting as against the norm. And we might finally see an end to the deluge of nonsense word Web 2.0 companies.

This post was written by Alex Mayyasi. Follow him on Twitter here or Google Plus. To get occasional notifications when we write blog posts, sign up for our email list.


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