Discussing
Domain Names: A Framework
Alex
Tajirian
November 14, 2005
When one discusses or communicates relevant information
about a domain name, it is important to tailor the discussion to
the audience. Below, I consider five such groups and highlight the
important issues for each audience. Such discussions almost never
fail to ultimately lead to valuation issues.
Analogies are commonly used and are helpful a
technique for communicating a message to an audience. However, analogies
have to be based on the knowledge and interests of the audience.
In attempts to draw on existing knowledge, similarities between
domain names and other markets have been drawn with real estate,
leasing, and patents, to name a few.
The least controversial classification of a domain
name is that of being an intangible asset; it lacks a physical existence.
Unlike tangible assets such as property, plants and equipment, intangible
assets derive their value from the rights and privilege granted
to the entity using them.
Audience Groups
There are at least five important audience groups
that may be interested in the discussion.
1. Business
For a business enterprise, the most important question is “what
can domain names do for me?” I have attempted to answer the question
in “Roles of Corporate
Domain Names.” Based on the outlined roles, the analogies vary
from instruments of traffic generation to patents.
A company’s decision to acquire a domain name
is a capital budgeting decision. Each domain name acquisition is
an independent project among the company’s list of desired projects.
Thus, as long as a domain name’s expected net value creation exceeds
its purchase price, it should be acquired.
Like any other asset, companies should be aware
of sources of domain name risk and
instruments that mitigate them.
2. Investor
I distinguish between two types of investors: non-diversified and
diversified. For the former, the most important issue is whether
domain names outperform other assets on a risk-adjusted basis. On
the other hand, a diversified portfolio holder needs to know whether
adding domain names, as an investment class, improves the portfolio’s
risk-reward ratio. An asset class has the greatest positive diversification
effect if its returns are perfectly negatively related to movements
in the market, typically represented by the S&P 500.
There are two components of return calculations:
end-of-period value and intermediate dividends in the form of traffic
monetization revenue.
The investor has also to consider whether to choose
the “do it yourself” approach or choose to use a professionally
managed domain name investment account.
3. Accountant
For an accountant, the two major issues are:
(a) As an intangible asset with limited useful life, its purchase
price is typically amortized.
(b) That it is an off balance sheet item.
4. Legal
Yet unresolved issues include:
(a) What is a country?
(b) Is a domain name property?
(c) Should domain names be protected in a manner similar to intellectual
property?
(d) Can a domain name be owned?
5. Personal User
Applications include email, family website, resume, etc.
Valuation
The market value of any asset at a specific time is the sum of two
components: its intrinsic value and the magnitude of dispersion
from intrinsic-value.
The intrinsic value is measured by the net benefits
generated from its expected best use over its life. The dispersion
from intrinsic value component (positive or negative) can be as
short as few seconds or as long as several years. The latter scenario
prevails in markets where there are obstacles to arbitrage. (The
Internet bubble, for example, has been rationalized within an arbitrage
context.)
Intrinsic valuation
methodology is well developed. However, naïve
appraisals can be useful too.
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