FAE Conference Speaker: Domain Names Are Big Business

By:
CHRIS GAETANO
Published Date:
Jun 10, 2014

What’s in a name? Millions of dollars, when it comes to the Web. Domain names, the unique identifiers that Internet users type into a browser to visit a site, can be serious business—take, for example, Sex.com, which sold for $13 million in 2011, or Whiskey.com, which sold for $3.5 million this year. Still, determining the actual worth of a domain name is less straightforward than it may seem, and CPAs performing valuations will need to know which factors to weigh, according to Jaime d’Almeida, a valuation specialist who spoke at the Foundation for Accounting Education’s Business Valuation Conference on May 19.

D’Almeida said that, as with real estate, the prices of domain names are driven by convenience and “location, location, location.” Since longer domain names are more difficult to remember and take more time to type, 92 percent of domain names sold contain 10 characters or less, he said, with 4-character names making up the largest sales. In addition, just as there are sexier zip codes, there are sexier suffixes—some 83 percent of domain names that are sold end in .com, rather than, say, .org or .net.

Beyond simple utilitarian concerns, d’Almeida explained that, for some companies, domain names are also an integral part of the brand and a shorthand for what they want it to be associated with. For instance, he said, Procter & Gamble currently owns toothpaste.com, Honda owns motorcycles.com and Book.com is currently the property of Barnes & Noble.

Establishing the value of a domain name, though, can be tricky. As an example, d’Almeida brought up business.com, which was purchased in 1999 for $7.5 million and sold in 2007 for $345 million. The sale is considered a landmark; d’Almeida noted, however, that the deal wasn’t solely for the domain name but for the entire business that had developed around the website, which had been acting as a business directory. “The name is important, but disentangling the name from the value of the business is very difficult to do,” he said.

D’Almeida went on to say that one method that helps CPAs to establish the value of a domain name is the market approach, which includes looking at comparative market prices of other domain names sold. He noted, however, that he usually employs the transaction method, focusing on recent comparable transactions of domain names that have taken place.

With the transaction method, d’Almeida said it would be helpful to look at domain names that contain a similar number of characters, rather than simply checking for a domain name associated with a website that’s similar to yours.

“If you have [a domain name] with 2 letters that sells for a dollar figure, I can’t use that transaction to value my 15-letter website,” he said.

Likewise, he said that the number of words also counts, since “a website with one word is easier to remember than one with two words.”

In general business valuation, comparability can be established by looking at factors like customer base, products, growth rate, size or industry. Since domain names are literally just names, though, other aspects will need to be considered. One is traffic, or checking how many times online users have looked up a similar website or websites of similar brands and comparing that to your own website’s stats.

Another thing to consider is how many people the name is relevant to: “Is it a niche, or is it like clothes.com?” he asked.

Income possibilities
A third way to value website domain names is the income approach. Usually, he said, if someone doesn’t actually own a domain name, he or she can still license its use for a fee. If you own it, however, you don’t need to pay that fee, and you’ve saved some money as a result. It’s very similar, he said, to purchase price allocation.

“Basically what you [ask] is, ‘What is the royalty rate I would pay to license it from someone else?’” he said. “And then you [say to yourself], ‘I have to pay that license fee for a period of time, and if I discount that cash flow to today, that is the value of the domain name.’”

As with the market approach, a CPA should determine comparability with other sites when establishing value, although since royalties would be in the mix, the discount rate should also be considered.

CPAs relying on the income approach could also look at revenue generated from that website.
D’Almeida noted that a website with a generic and easy-to-remember name would be good for type-in traffic—for example, users might instinctively go to chair.com hoping to find content related to chairs. In such cases, you can generate income simply by hosting ads and nothing more, expecting that viewers who come will click through, even if the site isn’t what they expected.

Whiskey.com, he said, started like that; in fact, there’s a whole profession devoted to speculating on domain names, with the object simply to later sell when people are looking to set up a website.

The need to find the proper value of a website will only grow as time goes on, as a veritable constellation of new domain names is beginning to be introduced to the Internet. This will provide new entrepreneurial opportunities, he said, as well as new complexities in valuating them.

“I think this is the next wave—in the next 5 to 10 years, all the growth will be from having these .bicycle, .alcohol, .buildings, .homes, whatever you want,” he said. “If you create that, you basically own everything with that extension.”

cgaetano@nysscpa.org

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