Why Domain Investing is Dead

In 1837 Hans Christian Andersen published his classic tale “The Emperor’s New Clothes” – the story of an entire population maintaining a pretense that the emperor’s clothes can only be seen by those not hopelessly stupid.

It’s not difficult to see the parallels between this and the current state of the domain investment industry – where owners are discovering their portfolios can’t generate real cashflow and have little prospect of delivering capital growth.

Domain industry advocates will no doubt disagree with all this by citing a handful of premium domain sales.

A few events over the last few months, however, provide solid evidence that the domain investment party is officially over.

Firstly, Sedo – arguably the largest domain marketplace – acknowledged in their 2011 9-Month report that both their Domain Trading and Domain Parking businesses are in decline. We saw further evidence of this earlier this year with the exodus of key sales staff from their domain business. And, despite all the fuss and publicity, they’re still trying to find a buyer for teaparty.com.

Secondly, we’ve seen some of the industry’s most prolific commentators abandon the cause – or at least shift directions. Examples include Rick Latona doing this a few months ago citing that the domain bubble had burst as far back as late 2008, and Rick Schwartz just last week announcing that he was leaving the domaining pond to “jump into Rivers and Oceans”.

Thirdly, any remaining revenue being generated by a domain’s parked page is under constant threat from updates to Google’s algorithm. Even last week’s search update specifically called out that detected parked pages will no longer appear in search results (see point three at Google’s InsideSearch blog).

As a result, we’re seeing an increase in whole portfolios of domains being put up for sale on Flippa.com, as owners become increasingly keen to sell their portfolios to buyers who are more likely to develop these domains into websites. This is in stark contrast to even 12 months ago, when we would field calls from domain owners expecting “multi-million dollar” yields off largely worthless domains.

What Happened to Making Money Off Domains?

The underlying premise of making money off domains is intoxicatingly simple – you buy a domain which generates click revenue while you wait for someone who is willing to pay you a premium to turn the domain into a website.

Basic economic theory, however, indicates that you can only extract a premium when you’re adding value.

The market now realizes that the guy who registers the domain is not adding anywhere near the level of value as the guys who define the business model, develop the user experience, build the brand, create and manage the content, attract the users, refine the monetization … and so on.

As a result, the folks who are building websites are squeezing domainers down on price in recognition of the fact that domains are simply a commodity, while the skills to build a profitable website are seemingly scarce. This means that pretty much the only people making money off domains right now are registrars who cash in the renewal fees each year.

So What’s Next for Domain Owners?

This is an important question for traditional domainers willing to concede that domaining alone no longer offers much value.

The first option is to roll up your sleeves and get your hands dirty. Take one of your domains, put your shoulder to the wheel and turn it into a website. Sure, it takes more time and effort than owning a domain, but the sense of ownership and financial reward is also higher – and you’re more likely to be actually producing something of value.

Another option is to have someone else turn one or several of your domains into websites. There are a number of these services on offer, ranging from venture-funded DomainPower through to smaller operations such as LintonInvestments and Epik. Just be sure you’re not spending more than the site will be worth.

Finally you can drop your domain portfolio altogether and buy an existing website. This is not as daunting as it sounds – just be sure to do your due diligence. There is a wealth of resources available to assist with this – including our own Pro Guide to Buying Websites.

Fortunately for domain owners, a lot of the wisdom and mettle gleaned from domaining transfers relatively well to the real world of websites. This includes recognizing an opportunity when it arises, using third party tools to evaluate these opportunities, reading and networking widely to learn new skills, and understanding the role of a quality domain in a web-based business.

So go ahead, stop pretending and take the leap into the real world of websites. Oh, and maybe reconsider your renewals on those long-shot domains that you aren’t willing to turn into websites – they’re worthless. Much like that emperor’s new clothes…

This post was guest blogged by Andrew Knibbe from Flippa.com.