Priceonomics

 

The Internet is running out of real estate, and Donuts, a 4 year old domain name registry located in Bellevue, Washington, has bet over $100 million that soon people will no longer look just for websites that end in .com -- they’ll be visiting sites that end in .app, .bike, and even .sex.

To relieve the scarcity of available website names, ICANN, the LA-based nonprofit in charge of domain names and web addresses, has made available hundreds of alternatives to .com, known formally as generic top level domains or gTLDs. Interested in creating a website that sells sneakers for girls? Someone owns girlssneakers.com and has put it up for for sale for $11,000. But with the new gTLDs, girls.sneakers, sneakers.girls, and girlssneakers.cool are all possibilities. 

Although relatively unknown to the public, this huge expansion in the set of possible domain names is the constant topic of conversation in the domain name industry. Some tout it as the biggest change in Internet history -- a claim obviously given some credence by the investors who gave Donuts over $100 million to dominate this new digital real estate. 

Donuts exists because ICANN entrusts private companies to run gTLDs as private businesses. The companies make money by selling specific domain names. So Verisign, for example, the registry for .com, sells facebook.com, whitehouse.com, travel.com, and so on. 

Running a new registry is a sizable investment; the application fee alone is $185,000. And no one has invested more in new gTLDs than Donuts, which has already spent $57 million for 300 domains like .guru and .bike.

If the founders and investors behind Donuts are right, domain names will begin to look very different over the next 5-10 years, and Donuts will own a substantial chunk of profitable, digital real estate. If they are wrong, a lot of money will have been spent on useless domain names, and we’ll continue to see Internet companies choose oddball names to ensure that they can find an available dot com website.

Crowded Real Estate

The average Internet user typing facebook.com into his or her address bar may not give a second thought to domain names. But finding an available domain name is more difficult than finding an affordable two bedroom in San Francisco. 

As Priceonomics has covered before, domain names are very valuable real estate. “Real word” domains like candy.com and giftcards.com have sold for several million dollars. A number of early speculators who bought thousands of domain names at a time to sell later at a premium made tens to hundreds of millions of dollars by controlling the limited supply of intuitive dot com names. 

Domain name speculation remains a thriving industry, and efforts to avoid buying from speculators has led to weirdness including all the Internet companies with “ly” tacked onto their names (Summly, Optomizely, etc) and the country of Colombia’s ‘.co’ domain becoming a profitable enterprise for selling domain names to startups like Twitter (t.co) and AngelList (angel.co). The Internet Corporation for Assigned Names and Numbers (ICANN), which may be the most important organization most people have never heard of, introduced the new gTLDs in response to this perceived scarcity. 

In addition to .com, six other top level domains -- .edu, .gov, .int, .mil, .net, and .org -- date back to the 1980s. In the early 2000s, ICANN introduced 13 new gTLDS including .biz, .info, .jobs, and .museum. In 2012, ICANN began accepting applications to create an unlimited number of new gTLDs, and it has now approved hundreds including .bike, .app, and the first gTLDs in chinese and other non-latin alphabets.

“With .com and .net, if you wanted a nice name, it’s all taken,” president of ICANN’s Global Domains Division Akram Atallah told The New York Times in 2013. “The idea is to provide real-estate availability in the market.”

Arrested Development 

The reactions to ICANN’s push to create new digital real estate has been mixed.

“You are creating a business, like derivatives on Wall Street, that has no value,” former ICANN chairwoman Esther Dyson told the Times in the aforementioned article, stating the opinion that additional gTLDS are unnecessary. As a writer for PC Mag points out, people increasingly find websites by Googling a company’s name or typing a website’s name into toolbars that remember or anticipate the desired site. This means that Internet users type out full domain names less and less frequently, making the domain name problem less pressing.

He also cites the disappointing results of TLDs added in the early 2000s, with relevant sites like the San Francisco Airport, Smithsonian Museum, and Kayak ignoring their relevant .aero, .museum, and .travel domains -- or only buying them defensively. One domain investor we spoke with expressed skepticism, noting past buzz about new domains overtaking dot com that ultimately took years to achieve positions well behind .com: "At one point, registrars were practically giving away .info domains." He'd like to see competitors to dot com, but more easily imagines new domains confusing Internet users.

The top TLDs by zone size. Source: Verisign Domain Industry Brief

Another critique -- one we’ve postulated ourselves -- is that the new domains will only serve to enrich speculators. Domain name investors who buy and sell domain names (usually without using the site for much other than hosting a few ads while waiting for a buyer), attend ICANN conferences and represent much of the minority of people that actually know about the new gTLDs. That said, Michael Mann -- a speculator who once registered 14,962 domains in a single day -- has expressed his opinion that “.com is king, people will be disappointed with all other tlds.” Moreover, while the new gTLDs could be a boon to speculators, it could also threaten their holdings of current domains.

Chairman of the ICANN board Peter Thrush has expressed his hope that the new gTLDS will “lead to innovation in ways we can't imagine." On NPR, one marketer speculates what this could look like:

Canon could acquire dot-Canon, and even the generic dot-camera, and could create photo-sharing Web sites grouped within those domains… [Canon could] embed a chip in their cameras that link that camera owner to their ID so that as they're taking photos they could just be automatically uploading photos to a photo-sharing site. That's just one possibility.

Where some see innovation, others see the possibility for big companies to monopolize valuable real estate. Should Canon decide who can have a .camera site? Should L’Oreal, as it once planned, be able to reserve .beauty domain names for itself and its partners? Existing generic TLDs have an open-use policy, and the possibility of closed gTLDs inspired furious debate within the domain name community.  

There’s also the small matter of the money. ICANN’s latest financials estimate that it will garner $300 million in revenue from the new gTLD program. The nonprofit charges a fee of 18 cents for every domain name registered as a dot com, meaning someone paid ICANN 18 cents for almost every website that exists worldwide. Its fiscal year 2014 budget is $200 million with operating expenses of $146 million.

Many domain name speculators look at all this money and see ICANN as corrupt or greedy. Although ICANN’s financials are public, what exactly ICANN does with all the money -- besides throw lavish conferences around the world as part of its mission to solicit dialogue and feedback -- is a source of constant speculation. Many critics say they see the new gTLDs as a money grab. 

Launching a large, expensive project allows ICANN administrators to justify large salaries, like current president Fadi Chehadé’s $560,000 base salary and $240,000 of potential additional compensation. It isn’t Cayman Islands bank account type corruption; it’s more similar to college administrators who demand more resources for more programs to increase their own prestige and justify higher salaries -- after all, they are administering larger programs. 

Others point out that as many ICANN leaders are highly involved in the domain name business, they have an incentive to create more digital real estate for companies to work with. At Donuts, for example, two of the cofounders had significant roles at ICANN. (A Donuts spokesperson replied to this concern that the gTLDs are highly regulated and came about through years of debate with a wide variety of interested parties.)

So why does Donuts, the world’s largest investor in new gTLDs, feel bullish about the new domains?

A Strong Bet

Richard Tindal, co-founder and COO of Donuts, does not have any problem with us characterizing his company’s business model as a bet.

“We have absolutely made a very large bet,” Tindal tells us over the phone. “It’s based on a strong belief that the product we’re offering is a superior product.”

Donuts applied to administer over 300 gTLDs, three times more than their closest competitor. The process is still ongoing, so Donuts controls 150 domains that no one else applied for, while auctions will take place over the rest of the year to decide control on names for which multiple companies applied. At the same time, 60 or so of Donuts’s domains have gone live. (Donuts doesn’t sell domain names directly, but directs customers to buy a name from third-party registrars like GoDaddy -- a standard practice in the industry.)

One of the twists of the new gTLD process is that the tricks used by domain speculators to decide which website names to buy are being used by companies to decide which domains to apply for. With the list of possible domains limited only by a company’s willingness to pay the six figure application fee, Donuts created a list of names to apply for over a year and a half by looking at a large amount of data: the use of different words in advertisements, the revenue they generate as search keywords, and so on. 

Responding to critics of new gTLDs, Tindal exudes optimism about their value. “Dot com is not human intuitive,” he tells us. “All it really says is that you’re online, like the www that no one uses anymore. It’s a vestigial thing from the past.” He encourages us to compare the name of an early customer, Republic Bike, as a dot com versus with a new gTLD:

republicbike.com

republic.bike

“See how much faster you understand what the second one does?” he asks. “Over time, technology moves toward being more natural and human.” Tindal says that most buyers of Donuts domain names are small to medium businesses looking for a memorable web presence. "Our business play doesn't seek to convert major websites because there is a lot of friction," he explains.

Charges that previously introduced domains fell flat are news to the Donuts team. Tindal used to run a registry responsible for .biz and .US, and he says that the domains introduced in the early 2000s “are strong, profitable businesses, with renewal rates sometimes higher than .com.”

The most successful new gTLD to date is .guru, which Donuts owns. It reached over 50,000 domain names registered in a few months, a feat other Donuts domains .photography and .email will soon reach. Guru is also the most successful domain so far, although two chinese domain names (“online” and “chinesewebsite”) recently had very impressive launch numbers and the registration numbers are influenced by which domains happen to go live first. 

It took .info about a year and half to reach 800,000 registered sites, and it now has 5.8 million. It’s hard to make any direct comparisons though. That is partly because the new gTLDs are simply so new. But it is also an apples to oranges comparison.

Internet traffic and savvy has developed a lot since .info launched in 2001. In addition, the launch of hundreds of new gTLDs is very different from the prior release of a set group of 12 domains. Richard Tindal concedes that previously released domains failed to “capture the public imagination,” but he believes that the marketing message will be much stronger this time.

“Previously all you could say was, ‘If you’re a museum, you have a choice,’” he says, alluding to the .museum domain released in 2001. “But now we have hundreds of specifically tailored names based on data of what people have the strongest opinions about.” Tindal expects it will be much easier to get the word out about the new domains now that they offer people meaningful choice, and it helps that some of the world’s largest companies, including Google and Amazon, have applied for domains. While they represent competition to Donuts, they also provide validation for the new gTLDS. This time, Tindal says, “It’s a lot more comprehensive and powerful message.”  

Tindal and the Donuts founders believe it will be many years before they see hundreds of millions of registered names. But they are already all-in. Donuts raised additional capital to its initial $100 million, and it has made clear that its investors are prepared to provide even more funding. Donuts has staked a large claim on soil where it expects to see a huge land rush; time will tell if Internet users migrate over to join them.

This post was written by Alex Mayyasi. Follow him on Twitter here or Google PlusTo get occasional notifications when we write blog posts, sign up for our email list. The number of registered .info websites has been updated with better information.



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