The new gTLDs won’t change the price structure of the secondary domain market – but danger looms on another front

By Tim Schumacher

As the CEO and co-founder of Sedo.com, the world’s largest secondary market for domain names, I’ve recently been asked the question: Will the new gTLDs change, or more accurately, devalue, the prices of existing domain names? My answer is a clear: No. The new gTLDs won’t affect the price structure of the secondary domain market.

Before explaining why, let me start with an apt analogy which Thies Lindenthal, creator of the IDNX domain index and a Domain Pricing Specialist at Sedo, recently put forward in both his Scientific American article and Sedo’s recent IDNX webinar:

"On April 22nd, 1889, large areas of what is now Oklahoma were officially opened up for homestead settlement. At high noon, thousands of pioneers raced from the territory’s borders into pristine land, claiming lots on a first come, first serve basis. Within hours, first cities emerged around railroad stations or at other well-connected spots, quickly establishing local governments, basic infrastructure and property rights. Despite opposing laws, land claims were directly sold off in secondary markets.” […] “But even then, Manhattan had already been settled much earlier, and land prices in Manhattan were, and still are today, more than hundredfold the prices of Oklahoma’s rural areas.”

The same will happen with the new gTLDs: While some will flourish relatively well, others will go barely noticed. The 2001 introduction of the new gTLDs .aero, .biz, .coop, .info, .museum, .name, and .pro even provide a blueprint for this process. Five of these TLDs are barely noticable today (though .pro, with their new ambitious CEO, has a good chance of catching up), while only .info and .biz enjoy relatively good success among their cohort of TLDs.

But even .info and .biz have less than 10% of the market compared to .com names, and the value of a .info is on average only 13% of the value of the respective .com domain (as shown at IDNX.com). They are also less frequently used than the primary domain extensions, and many registrations are simply as a protection against other companies’ registering those names. The inconvenient truth for new gTLD enthusiasts is that, in 2001, you needed a .com to start a business (or a .de or .fr when starting one in Germany or France respectively), and that this still applies ten years later.

In the case of 2011’s potential new gTLDs, another hurdle for companies to overcome is the substantial cost and infrastructure required to apply. If your company manages multiple brands, has a presence in multiple markets, or sees a significant threat of cybersquatting, you may want to consider your own gTLD, but otherwise, the costs may be prohibitive and not a wise investment at this early stage.

In the last ten years, our market studies have supported this trend. Any new gTLDs have only bolstered the dominance and strength of existing gTLDs such as .com, and ccTLDs (.de or .co.uk, for example). These are the domain extensions that mean something to most internet users: .com has remained king, while businesses provide language-specific content via the relevant ccTLD. I’m happy to be proven wrong by “the billboard test” in five years time, but I believe that any billboard or other company advertising will still feature the company or product name with a .com, or a local top-level-domain like .de or .co.uk behind it.

Danger for the domain name system looms on another front

Although the new gTLDs are an exciting change, this is not the first instance of online innovation affecting the domain name landscape. When social media began to influence online business, I was often asked whether domain values would decrease as more internet users navigated via social media platforms and mobile apps.

Advertising a search instead of an Internet address: A practice especially prevalent in many Asian countries, in order to avoid the usage of western characters and make it possible to display Asian characters (Here: using a popular Japanese search engine)

Apart from directly advertising search engines , Google and others profit from companies bidding on its own brand to ensure the top AdWords spot. This is a practice which Google obviously encourages, with some of its latest product enhancements like “Sitelinks” geared towards it.

New gTLDs aside, the same billboard test I mentioned earlier has revealed an unusual development in recent months. Especially among companies who consider themselves trendsetters, domain names are starting to disappear or move into the background. Instead, companies advertise their Facebook or Twitter addresses, their iPhone applications, or even searches at search engines like Google (see the example in the box). Furthermore, these advertisements aren’t limited to drawing new customers; instead, existing web sites and communications are used to promote these new media channels.

I’ve caught myself encouraging the very same behavior at my own company, Sedo, – why shouldn’t we use these channels as we are trendsetters in our industry? Besides promoting our web site (the domain name Sedo.com, which we purchased for the handy sum of $80,000 in 2003), we promote our Twitter account (sedo.com/twitter) and our Facebook page (sedo.com/facebook). We advertise for the term “Sedo” on Google, Yahoo! and Bing, and our own iPhone app is slated to arrive soon. So entrenched have we become in those efforts, that we, much like any company out there, have lost sight of the extreme long-term danger looming on the horizon: the “Navigation Nightmare”.

Here’s the problem: while it’s smart – and very “web 2.0” – to use all of the above channels as additional means of advertising and customer interaction, it’s inherently wrong and even dangerous to rely on social media or web apps as means of navigation. By fully switching their advertising and internet presence to 2.0 giants like Facebook, Twitter, Google or the iPhone, businesses put their fate in the hands of those providers. As a result, three things can happen:

1. Providers can kick out any business, or an entire industry, with or without reason.
2. Providers can go out of business, and there is no regulative environment in place. If that seems unlikely, consider how popular FortuneCity or Geocities were. Think of those of us who migrated from Friendster to Facebook, and who may migrate in the future to Google+.
3. But here’s the biggest threat: Providers can and will maximize profits, once lock-in is sufficient, and profitability goals will follow growth goals. If your company has a million Facebook or Twitter followers, how good will your negotiation position be if the provider suddenly starts charging hefty fees?

The domain name system, on the other hand, can avoid all of these pitfalls, even with its continued problems with cyber-squatting and a somewhat cumbersome governing body in the form of ICANN. Pricing of new domains is regulated so that domain name registries—even those eventually offering new gTLD registrations—cannot charge prices aimed solely at maximizing their own profits. Turn these examples around, and imagine for one second how wrong it would seem if Facebook.com had to pay an annual $50 million registration fee for its very own .com domain name. They could certainly afford it, and it would be the right business decision for them to spend that money rather than lose their key domain name. But Facebook has built its company by being innovative, so it would be wrong and would stifle future innovation if a monopolistic organization such as a registry could charge arbitrary amounts. And so, for a good reason, they can’t. Individual proponents for Internet and government openness around the world have ensured that this won’t happen, making the domain name system a safe harbor for the future.

Comparatively, Facebook, Twitter, Google’s Ad Network, and iPhone apps are proprietary, walled-garden approach¬es; they are not what the Internet needs, and they present a danger for any business relying on such channels as navigation and addressing mechanisms. In regards to every business’ strategy: Building an online business primarily on Facebook, Twitter, Google, or iPhone Apps, is like building a house on rented ground, with the landlord completely in control. The reliance on outside platforms and providers is easily circumvented with wise domain name investment, and although some larger companies will be investing in new gTLDs, most will rely on their trusted and true domain extensions: .com and local ccTLDs.

Tim Schumacher is the CEO of Sedo – operating the world’s largest domain market place under Sedo.com and Europe’s leading affiliate platform under Affili.net – with a combined $200 million in revenue this year. Tim holds an MBA from the University of Cologne, Germany and a Major in Finance from the Stockholm School of Economics, Sweden. In 2000, he wrote his master’s thesis on pricing mechanisms of Internet domain names, extensively studying the history and future of addressing systems.