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Studies
& Opinions
Madison
Avenue & Direct Navigation Domain Names
Alex
Tajirian
January 31, 2007
Introduction
The debate over the value of direct navigation[1] to companies has intensified and has taken center stage at the
TRAFFIC conference.[2] To understand its value contribution to a brand name,
one needs to first analyze its two components: the sources of
value creation and the value of these sources to a company. The
methodologies for analyzing the latter are well established in
the finance and statistics literature and have been tailored to
value domain names.[3]
This essay addresses the source of value
creation of direct navigation to a company by pointing out the
misconceptions voiced in some of the public statements on the
subject, highlighting additional issues that “Madison Avenue”[4] needs to contend with, and outlining issues that the
domain name industry need to address.
Incorrect Claims
1. “If Hyatt had bought the domain hotels.com a few years
back they would have had the power to have the surfer type-in
hotels.com and end up directly on the Hyatt.com site. Enabling
Hyatt to get first shot at selling a hotel room over their competition.”[5]
Although the statement
is true, such an acquisition does not necessarily translate into
value to Hyatt. Hyatt has to first consider whether searchers’
direct navigation intent to hotels.com is congruent with their
website’s content, which should objectively be driven by their
business strategy and provision of optimal visitor experience,
as implemented through the website’s “look and feel.” Thus, if
a large number of visitors to hotels.com were looking for hotel-related
information other than Hyatt, there would be a mismatch of intent
and content. Hence, under such a scenario, had Hyatt bought hotels.com
at a fair market price, they would have paid too much if used
to exclusively capture the direct navigation traffic. Conversely,
if they had bought the domain name, they would have the option
to use it to exclude competitors from access to the traffic, re-sell
it, or “open it up” for joint industry development.
Moreover, implicit
in the argument is the assumption that sellers of domain names
in general are willing to sell them at their fair market price.
However, with the dominant prevailing view that “the value of
the domain name is whatever the buyer wants to pay,” sellers might
have an inflated estimate of the price. A domain name is not valued
in the same way as a Picasso, but rather as an asset whose intrinsic
value is driven by the fundamentals of value creation to the acquiring
company.
Nevertheless, the
above ownership claim of hotels.com is tantamount to recommending
that advertisers should bid for the number one position on search
engine results, as the strategy results in the highest number
of visitors. Similarly, the argument that one should open a store
on Rodeo Drive, as they will be able to capture the traffic of
all these rich shoppers, is flawed. Advocates of such arguments
are ignoring the fact that the objective of a company is not to
maximize traffic, but to maximize shareholder value.
2. “…
owning the keyword and the FREE and PERPETUAL business that comes
with it in the form of thousands of people typing it into the
browser bar each and every day.”[6] It is not free, as there is opportunity cost associated with owning
the domain name.
3. The
TRAFFIC site also claims that the consequences of not owning hotels.com
is that Hyatt is “forced to compete with all other hotels at lower
room prices and have to pay a commission for the lead to the tune
of many millions over the years.” This is an interesting competitive
strategy recommendation! However, one should wonder why Bank of
America, which bought loans.com in the hay days of the Internet,
still competes with other banks on loans?
4. “As
a marketer, investing in direct navigation generally pays for
itself within a year or two, dependent of course on the quality
of the domain and how well you can convert the traffic into sales.”[7] This suggests an average
price-to-earnings ratio of 1.5. One should wonder if such opportunities
still exist!
5. “However,
instead of being an expense as with purchasing clicks from a search
engine, acquiring a domain (or portfolio of domains) for direct
navigation purposes becomes an asset that retains its value (possibly
even increasing in value) and can even be re-sold in the future
should your marketing objectives change.”[8]
a. First, for the comparison to be meaningful, the purchased clicks
from search engines have to appear on direct navigation sites.
Otherwise, if the purchased clicks appear only on search engine
results, then one would be comparing apples and oranges, as
the two marketing venues (search engine and direct navigation)
target complementary markets. Nevertheless, estimating the value
of such clicks is not a trivial task.
b. There
is no unambiguous answer as to whether a lump-sum payment (purchase
price outlay) is preferred to a stream of future cash outflows
representing purchasing clicks over time, even when these two
cash flows have the same present value. That’s why a well-developed
market for financial swaps exists.
c. The
argument ignores two other marketing options that a company has,
namely, the leasing and co-developing of such domain names with
one or multiple companies interested in the traffic source.
d. The
statement dismisses the possibility that prices of such domain
names can go down, despite empirical evidence that domain names
with certain characteristics have exhibited negative returns.
Other Issues for Madison Avenue
to Contend With
In addition to the question of intent,
and the above dubious claims, Madison Avenue needs to contend
with the following issues:
-
The original allocation
of the original extensions (.com, net, org) were based on
a first-come, first-served basis, rather than allocated to
the domain name’s best use. Thus, it was an inefficient mechanism
to allocate scarce resources.
-
Companies were slow
to take advantage of the drop mechanisms.
-
Bureaucracy
within large institutions hinders their ability to act quickly
to capture domain names when the owners are interested in selling
them.
-
History
is important in competition. Thus, if you already own a valuable,
unique asset, whether by luck or analysis, you are in a better
competitive position. And if the asset is more valuable to someone
else, then you can create even more value by selling it.
-
Looking
at the number of unsold domain names on the market, Madison
Avenue might incorrectly conclude that they must be “lemons,”
based on a model developed by Nobel Laureate in economics George
Akerlof, i.e., there must be something wrong with domain names
offered for sale. However, the lemon argument does not apply
to domain names, as illiquidity in the market is not driven
by asymmetric information[9], but in a large number of cases by irrational fear on
both sides of the transaction.
What Does the Domain Name Industry
Need to Do?
1. The
industry needs[10] to accept the fact that acquisition decisions typically
involve the best option among alternatives, given a budget. Thus,
if Hyatt, for example, did not acquire hotels.com, it does not
necessarily imply that they are ignoring direct navigation, i.e.,
a portfolio of other direct navigation domain names might have
been superior.
2. Accept
blame for some service shortcomings. It failed to implement quality
control, which diminished the credibility of a number of service
providers and thus, increased the suspicion of the messenger.
For example:
a. Typical
appraisals do not come with the rigor necessary for the deciding
acquiring manager to evaluate.
b. The
domain name industry has failed to efficiently disseminate information
on the firms that are engaged in analytical and quantitative
models.
c. Industry
seems to ignore empirical studies, which demonstrate that direct
navigation does not necessarily lead to higher conversion rates.[11]
3. Understand
that risk-return preferences of potential buyers are important
in the acquisition decision. Thus, higher returns offered by a
domain name, say, hotels.com, over an alternative does not necessarily
imply that hotels.com is a better purchase, ex ante.
Concluding Remarks
Madison Avenue needs to understand the source of value,
namely, the congruency of site content with user intent, and needs
to be convinced that the domain name industry has been providing
rigorous analytical models and robust valuation techniques. With
such an understanding and conviction, they will be better equipped
to evaluate the alternatives for capturing the unique visitors
through purchase of such domain names, advertise on such domain
names, lease them, or co-develop.
On the other and, the
domain name industry needs to also understand the sources of value
creation to Madison Avenue, to tackle Madison Avenue’s concerns,
and to facilitate a more efficient information sharing mechanism.
[1] In its simplest form, direct navigation is an information
retrieval method that is initiated by type-ins, thus, bypassing
search engines. Type-ins retrieve information on a topic when
a searcher inputs a keyword into a browser’s search box followed
by .com.
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