Potential Domain Investing Risks

All of us buying domain names for several years now can share a few stories on the satisfactory return on investment that we’ve had. Nevertheless, when considering investing in more domains (or simply holding to the ones you already own) there are some factors to evaluate on the durability and appreciation of those assets. The following are potential domain investing scenarios where the asset could depreciate in value:

* Internet market consolidation - In a mature Internet market consolidated into a few dominant leaders, there is a possibility of encapsulating the user (think of AOL) into a user experience controlled by the roles set out by those leaders. In this scenario, users could be led to a new form of browsing dominated mostly by “proprietary” keywords owned by influential players.

* Excess domain supply - Opposite to an Internet market consolidation, in the event of an open Internet with relaxed domain extension creation protocols (read ICANN) the market could become saturated with domain extensions. In this scenario domain supply goes ad infinitum. When users have the availability and Internet knowledge to browse through .whatever, then whatever.com could lose value.

* Increased user knowledge - Many of the wealthiest domain investors rely on type-in traffic at generic domain names as its major source of revenue. The current user, unaware of the existence or nonexistence of a website is wrongly trained to type in the topic they are searching for and add the “.com”. Thus, owners of generic term domain names are currently earning millions of dollars from this practice. These domain names are usually resold based on yearly earnings multiples ranging in average of 8 to 15 times. However, as users grow more tech savvy, there’s a possibility that the type-in water well dries up.

* Widgets and applications - Similar to the first point, as Internet widgets and applications proliferate user browsing behavior could change. A user that interacts with the Internet through a collection of widgets and applications could reduce its dependence on traditional domain browsing (think Facebook apps).

* Evolution of television - currently, there are powerful companies pushing for the creation of an interactive television experience, studies show that users are ready. Depending on the extent to which televisions supply the tools for browsing the Internet, users might find themselves interacting in a whole new way detached from the need of domains.

* Liquidity - Domain names have very low liquidity. As a result, investors facing an urgent need to sell their domains will most likely see a huge decline in the selling price from the actual domain worth. This by itself reduces greatly the amount of investors and investment money available by traditional and wealthier investors.

The constantly evolving Internet technology poses many more risks in the way a user interacts in cyberspace. A recent example of how a domain extension’s viability was seriously questioned is the .mobi extension in response to the launch of the iPhone and the way the cellphone allowed for regular browsing, rather than limited mobile browsing.

When deciding to purchase a domain name as an investment, the investor should consider the above factors and understand that domain investing is a high risk investment with a strong chance of having a relatively low durability.

New Top Level Domain process
http://www.icann.org/announcements/announcement-10aug07.htm

Studies on Television Interactivity
http://www.bsu.edu/news/article/0,1370,-1019-41365,00.html
http://lib.tkk.fi/Diss/2004/isbn9512273225/article7.pdf

Post on domain liquidity
http://www.conceptualist.com/?p=405

.mobi problems with the iPhone
http://blog.rafaelsosa.com/2007/06/08/apple-iphone-could-hurt-the-mobi-extension/
http://www.circleid.com/posts/iphone_dotmobi_domain/