Studies & Opinions
A Review of
Dan Warner’s “Aftermarket Domain Valuation
Factors”*
Alex
Tajirian
March 31, 2007
INTRODUCTION
This essay provides domainers with an alternative
to the views on domain name valuation factors recently presented
at conferences and published in an article[1] by one of the industry’s
prominent figures.[2]
Dan Warner’s article is rife with unabated
nonsense, lack of analytics, and indifference toward publicly
available related studies. Furthermore, the highly visible industry
site that published it refuses to present alternative views.
It is not clear to me or to many others whether this modus
operandi is due to incompetence or Domainospinning. Nevertheless,
this pervasive attitude has hijacked analytical discourse, causing
damage to the domain name ecosystem. To save the ecosystem,
analytically minded industry practitioners and researchers must
find other venues to promote useful and unbiased information.
A sick ecosystem undermines all members’ interests.
CRITICAL EXAMINATION
Below, I analyze the article sequentially and point out the
weaknesses in its arguments. I will confine my comments to the
factors and not the issues related to the marketplace.
(A) First Paragraph
-
The analysis is limited to valuation of
retail domain names and does not consider purchases for investment
or personal use.
-
Only factors from the perspective of buyers
are considered; factors influencing the sellers’ decisions
are ignored. However, if buyers use factors other than the
ones described in the article, there can be no convergence
in value, as each side of a transaction would be speaking
a different language. No efficient market can exist without
both sides speaking the same language.
- The motivating factors behind a purchase
are described as “unique.” However, if one deleted the word
domains, the factors could be seen to apply to the purchase
of any retail name and to have done so for centuries. There
is nothing unique about them for domain name analysis.
The statement that “a domain’s true value
can only be attributed to a specific buyer” ignores the commonly
used definition of true value as referring to an asset’s
intrinsic value, not a buyer’s willingness to pay. Moreover,
eliminating the word true would make the statement
correct for any product or service, demonstrating that it
is not, as the article suggests, unique to domain names
-
The article claims to put forth a “framework.”
However, frameworks and models have a purpose, namely, to
put a structure on a complex real-world problem with the aim
of aiding normative decision-making. In this article, the
factors are intuitively relevant and lacking in any structure.
As a result, the proposed framework is not analytically useful
and cannot be empirically tested or validated.
-
The factors are claimed to be those that
buyers “commonly attach to each domain purchase.” However,
it is not clear how the article reaches the conclusion that each domain name buyer analyzes these factors. Is the
conclusion based on a scientific survey, proprietary data,
or anecdotal evidence? To be credible, a theoretical model
must back such a strong assertion. We are beyond a sampling
issue when the claim is generalized to include each purchase.
(B) Graphic Representation
The graphic representation of the factors gives the wrong impression
that the centerpiece factor is realization and that these factors
are all disjoint. However, none of these impressions are necessarily
correct, theoretically or empirically.
(C) Brandability
A brand is described as the “emotional value that a buyer attributes
to a domain name.” Without getting into the definitions of branding,
does that mean that Volvo’s brand name has only an emotional link
to safety, not one based on factual support?
The article’s litmus test for brandability
is the “radio test,”[3] and it gives the example of Fantastic.com as brandable.
But wouldn’t, say, FantasticBoats.com be more memorable, and thus
more brandable, than Fantastic.com? Hence, wouldn’t FantasticBoats.com
command a higher price than Fanatastic.com?
(D) Mindshare
This factor measures familiarity of a domain name. But, by definition,
aren’t well-known brand names familiar? Thus, aren’t brandability
and mindshare related? Well, one can distinguish between whether
a domain name has brandability potential and whether it’s a recognized
brand name. However, no such distinction is made in the article’s
analysis or in the examples.
The article goes on to suggest that the “easiest”
way to measure these factors is “by comparing search data on domain
phrases.” It might be the easiest method, but it’s not necessarily
the best. After all, high search volume might be a result of newness
of the keyword, or of a buzz prompting a large number of searches.
The resulting volume surge might only be in a short-term blip
without any payoff in long-term mindshare. Furthermore, a high
search rate does not necessarily imply widespread familiarity.
Instead of a large number of people performing the search, a handful
might be doing multiple searches.
(E) Commerciality
The article states, “A good measure of commercial value is
the bid price that advertisers are willing to pay for a phrase
(domain phrase) in pay per click search advertising.” Not necessarily
true. One needs to look at the expected revenue, which means looking
at price and click volume. Moreover, the price is not a “relative”
measure of willingness to pay — it is absolute. Furthermore, the article gives CriminalLawyer.com
and BusinessSoftware.com as examples of commerciality, while it
states that GarageDoor.com and BonzaiTree.com are examples of
mindshare. It is not clear what the discriminating criteria are,
or whether it is possible to find explanatory variables to statistically
classify domain names under these factors.
(F) Specificity
Why does UsedBikes.com belong to the specificity factor, while
GarageDoor.com is an example of commerciality? Why isn’t SeattleSailBoatRental.com
more specific than SeattleSailing.com when “a buyer needed a domain
for a sailboat rental company in Seattle”? Thus, wouldn’t specificity
then imply that SeattleSailBoatRental.com is more valuable than
SeattleSailing.com?
(G) Realization
-
“The value a buyer can realize through the
use of a domain name directly correlates to the price they
paid compared to the benefits achieved.” There is absolutely
no causality, and thus any correlation is spurious. Conversely,
assuming that the purchase price is lower than the value of
benefits does not necessarily imply that the business will
generate any positive net income from the use of the domain
name.
-
Why would ConstructionSupplies.com be “inappropriate
for a local business”? The local owner may, for example, build
a portal for nationwide local construction supply stores,
while retaining control of information for his/her local store.
-
The article incorrectly states, “Domain
value is a direct reflection of what value can be extracted
from each domain by the intended buyer.” The value should
reflect the domain’s best use, not the value generated to
the buyer. Realized value by the buyer does not necessarily
reflect the value of the domain name.
(H) Immediacy
(1) The article states: “Most retail buyers have a specific
purpose in mind that they are trying to fulfill and are frequently
under short time constraints. Common reasons include: having new
business cards printed, building a new website, having a new product
to promote, or meeting a strategic objective.”
(a) What is the support for “most”?
(b) What is the support for being “under short time
constraints”?
(c) Why would a $50 cost for business cards
result in immediacy?
(d) Unless the time to construct a functional website,
to develop and launch a new product, or to develop a strategy
is extremely short, why would these activities result in immediacy?
These arguments suggest bad planning by most domain name owners,
a highly unlikely scenario.
(2) “These buyers usually do not have the knowledge
or experience to ‘shop around’ for the right domain name.” The
poor buyers. They can come up with viable new products, they can
strategize, but somehow they can’t make competent consumer decisions
or get on the phone to a consultant.
(3) “These buyers usually will only purchase an aftermarket
domain if they can find one that aligns with their perceived value
in price and purpose within a short period of time. Otherwise
they commonly buy a ‘new registration’ domain of less apparent
value.” This implies that most buyers don’t realize that the acquisition
of a single domain name involves mutually exclusive decisions,
and that the buyer therefore needs to estimate the return from
each alternative purchase, then choose the highest. In short,
such statements imply that most domain name buyers are
ignorant of basic investment decision-making principals!
(4) Premiums/discounts associated with immediacy are
not unique to domain names. A seller that can ascertain the immediacy
need of the buyer will insist on a premium. However, such immediacy
would be applicable in the domain name market only if one believed
the article’s claim that most buyers require immediacy.
(I) Intent
It is not clear why buyer intent should be a separate factor instead
of being at the top of the pyramid of factors, with branding and
traffic values lying below it. Moreover, the paragraph also wanders
into issues that are related to alleged shortcomings of the domain
name marketplace, not to buyer intent.
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