Thoughts on Tech, Deals, and Markets

The Real Estate Crash You Haven’t Heard About

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Everyone knows about the real estate industry’s crash by now.  But few know about the crash in the online real estate industry–that is, the marekt for domain names.  It’s a story worth telling, though the space is so opaque it’s unlikely anyone ever will do it.  It’s dripping with irony.  For example, a major selling point of domain industry advocates  was that domains are like real estate.  I don’t think they meant it in this way, but they were smarter than they realized–like offline real estate, domains experienced a huge bubble.  Now, both markets have crashed.

The list of domain companies that took private investment is ugly:  Geosign, Oversee.net, and Dotster, to name a few, have not been able to hide their massive problems.  Internet REIT raised a ton of money and has also had huge layoffs.  NameMedia pulled its S-1, leaving its investors tied up in a troubled asset.  The public companies with large domain portfolios have been crushed.  Marchex (MCHX) is off about 60% from its 52-week high, and about 80% from its high back in mid-2006.  Dark Blue Sea (DBS, listed on the ASX) is down over 60% since last May.  Not counting Demand Media (which has large domain assets, has attracted over $200m in capital, will likely lose investor money, but has signifiant non-domain assets as well) the space has attracted over $600m of institutional capital in recent years.  Equity investors will be lucky to get half of their money back, particularly given they sit behind large levels of debt.

What happened?  I don’t have the space or the knowledge to give  a comprehensive list, but a key driver was the success of early speculators.  They earned growing domain parking revenue then plowed that revenue back into buying more domains.  Just like flippers bidding up the prices of housing of all price levels, domainers bid up the prices of domains of all quality levels.  Likewise, the housing run up attracted hot money that drove prices even higher.  Same in domains where, as referenced by the companies above, hot money entered the market and accelerated price increases.

What truly staggers me is the magnitude of ignorance displayed by industry players in both industries.  In real estate, investors such as the buyers of RMBS were utterly disconnected from the value of the assets underlying their securites.  In domains, investors were similarly in the dark.  They would buy hundreds of thousands of domains while only visually inspecting a fraction of them.  As a result, they had little understanding of which domains were actually producing revenue.  Not only were the most brandable generic names not producing as much revenue as often assumed, but often the lion’s share of revenue in domain portfolios was generated from typos and trademark-infringing domains.   If investors in either industry had dug just a bit into what they were buying, much of the boom and bust would have been avoided.

Written by sandykory

January 14, 2009 at 12:49 pm

Posted in Uncategorized

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