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Is "Internet Domain Estate" worth it?

Submitted by prodosh on 5 November, 2007 - 12:01.

NameMedia just filed for an IPO (filing). They are looking to raise upto $172.5 million based on the initial filing. Potential investors will soon have to find answers to the big question of how valuable "Internet Domain Estate" really is. The real estate (real world) market is in a crisis right now after a prolonged period of ever increasing valuations. Is this a harbinger of things to come for Internet domain estate as well? Let's first take a look at where the value of real estate (real world) comes from and we will then analyse whether this applies to so called internet domain estate as well.

Real estate usually involves a house or office building or public utility facility (stadium, conference centre etc.) whose bricks and mortar have an intrinsic value (it cost a good amount of money to build it in the first place). The object is usually on a piece of land and if the land comes with the object, there is even more intrinsic value associated with the value of the land. The total price of the object (building and land) varies based on the demand and other factors such as the interest rate, the location, the architecture etc.

In the case of internet domain estate, what a buyer really is paying for is a name and precious little else. Occasionally a buyer may get the equivalent of a house with the name, i.e., a name with an associated web site that may have some additional intrinsic value. The concept of location as a value driver, an important factor in real estate, is missing on the internet (all names are globally reachable).

That leaves demand as the main value driver for domain estate. While certain internet domain names (pieces of internet real estate) are very much in demand because of their name recognition, most names aren't memorable. The supply of names is limited only by our imagination - there are no zoning laws tp put a cap on supply.

Companies like NameMedia have added other revenue streams to their internet real estate businesses to help generate revenues. While revenues have been growing, margins are still pretty low. Where do you think the real value for internet real estate is going to come from for investors?

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