People scoffed when investment firm eCompanies paid $7.5 million for the Web address business.com in 1999 from a person who had paid $150,000 for it.

The purchase, though, shined a light on a secretive world where people actively and aggressively buy and sell Web domain names.

Thousands of Web addresses were bought in the early days of the dot-com boom on a hunch by people who expected Internet real estate would appreciate in value.

They were right, and still are.

In July, directory services firm R.H. Donnelley (NYSE:RHD) RHD bought business.com for ... $345 million. Reportedly, Dow Jones and the New York Times NYT also were interested in buying the site.

The domain name business has matured since the early speculation days. Business.com, for example, wasn't just an empty site. It's a repository for ad-supported business-to-business e-commerce Web links, ranging from business travel and construction services to legal services and industrial goods. It claims sales of $50 million last year.

The domain name industry has largely consolidated into a handful of big players that have received hundreds of millions in funding in the past year. Companies or individuals are paying tens of millions for thousands of domain names sold in a single block. Last year, Seattle-based Marchex MCHX paid $164 million to the holder of some 100,000 domain names.

The best generic names were taken long ago, but that hasn't stopped domain name seekers from coming up with ideas for new ones. One analyst estimates that up to 45,000 domain names are registered each day; 146 million domain names were in use as of Sept. 30, 31% more than a year earlier. So says VeriSign (NASDAQ:VRSN) , which operates the Domain Name System servers that support the dot-com and dot-net top-level domains and provides services to companies that sell domain names to end users.

Domain names often sell for thousands of dollars into the many millions. In 2006, diamond.com sold for $7.5 million while sex.com sold for $12.5 million. Casino.com sold for $5.5 million in 2003. Computer.com sold for $2.1 million last year. In all, 33 sites have sold for $1 million or more, according to research firm Zetetic.

Bold Early Adopters

"This field got started by a group of very early adopters, bold business people willing to take the risk," said Courtney Montpas, an executive vice president at Demand Media. The company buys and sells domain names and provides other services that help domain name owners build their business.

Demand Media, based in Santa Monica, Calif., received $100 million in a funding round last July, led by Goldman Sachs (NYSE:GS) GS. Demand Media has raised $320 million since its launch two years ago.

Another big player, Oversee.net, last month said it received $150 million in a funding round from private equity firm Oak Hill Capital Partners. Oversee.net owns 700,000 domain names and helps service and maintain another 2.4 million domains owned by others.

Oversee also has a $100 million credit line from Bank of America (NYSE:BAC) , says Lawrence Ng, Oversee CEO.

Ng co-founded Oversee in 2000 with $10,000, in a 400-square-foot office in downtown Los Angeles. Today the company occupies 56,000 square feet on two floors of an L.A. high-rise. He says sales last year topped $200 million, up from $125 million the year before.

Part of the money comes through fees paid by firms to put their Web links on Oversee's generic sites.

Oversee also does a brisk business in managing domain sites, in addition to registering, trading and selling domain names. "This has become a very sophisticated market," Ng said. "We've seen a tremendous amount of consolidation in the past 12 to 18 months. We want to be at the forefront of this business."

Another large player, Name Media, recently filed to raise $172 million in an initial public offering. The Waltham, Mass.-based company owns 750,000 domain names and represents an additional 1.5 million names held by third parties. It generates revenue through online ads and the sale of domain names.

For the quarter ended Sept. 30, the company reported a profit of $254,000, up 50% from the year-earlier quarter, on revenue of $21 million, up 28%.

"The business is so different now than it was seven years ago," said Ron Jackson, editor and publisher of DNJournal.com, which tracks the domain name business.

Several events made domain names a big business. One was the emergence of ad networks developed by Google GOOG, Microsoft (NASDAQ:MSFT) MSFT and Yahoo (NASDAQ:YHOO) YHOO. They place ads relevant to the domain name. Links for western wear, for example, would be placed on Cowboys.com.

Search Navigation Trend

Google's network, called AdSense, reported third-quarter revenue of $1.5 billion, up 40% from a year ago.

This search ad revenue is expected to jump 15% this year in the U.S. to $14 billion, says Jupiter Research. That's 62% of total U.S. Internet advertising.

Also fueling growth in the domain name business is direct navigation. Many people search for things by putting dot-com or dot-net when typing in a search term, as a way to more quickly get options. Typing diamond.com into any search engine takes you to a Web site with links to many diamond and jewelry sellers.

Analysts estimate 15% of searches are conducted this way.

"That produces a steady flow of natural traffic that's always there (for generic sites)," Jackson said.

It also produces the kind of highly targeted traffic that advertisers desire most. Advertisers typically pay per click, and the Web site owner gets a share.

"Pay per click is definitely driving the growing interest in this market," said Matthew Zook, founder of ZookNic, a domain name industry analysis company.

Other firms in the domain name field include GoDaddy Group and Australia-based Dark Blue Sea. (OOTC:DKBLY) Individuals who control thousands of domain names include Kevin Ham and Frank Schilling, both of whom reportedly have become multimillionaires as a result.

As with any gold rush, some observers say many of the primary veins have been mined.

"A lot of people are losing money because they don't take time to learn the ins and outs of this business, and register crappy names," Jackson said. "You have to learn what domain names have value."

Others still see plenty of growth.

"We're in the early stage of much of this," said Jeff Kupietzky, executive vice president of Oversee.net. "We're still seeing new people (domain name speculators) come into this space."
[Via - Investor's Business Daily]

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