In addition to technical SEO posts, I want to spice up my contribution to SEOmoz with a few posts that are a bit more business-oriented. In my position running a business, I spend a lot of time thinking about business models, and before this, I used to be a management consultant (no, really) where I was paid to make complicated Excel models of businesses.

So, for this week's business thinking, I wanted to spend some time on domains.

Domains are funny things. Are they intellectual property (see Sarah's post on domain tasting), valuable investments, technical devices to prevent people having to remember your IP address, or political playthings (does anyone think the new TLDs are a good idea apart from the benefit of allowing new character sets - maybe that's one for another post?)?

Of course they are all of these things.

But the element that has been intriguing me recently is the real-world property analogy. Owning a domain name is much like owning land. On top of that land you can build something valuable (or something you want to use yourself), you can sell the land on to someone else (with or without construction), and it has an address. Of course, this applies more to generic domains (meaning not just something like chocolate.com but also non-product-specific generics such as ooh.com - see below), but it does apply to company-specific domains as well - they just aren't as valuable.

Just as with real estate, there are brokers, security services (OK, that's stretching it a bit), developers, public health rules (stretching that one a bit too!), etc.

Continuing this analogy further, there are a few obvious services that are available with real-world property that appear to me not to be available with domain names.

Now, I realise that I have slightly mixed metaphors here - is the domain name the land or the building (or a combination of both), for example? But I think it is still a useful way of thinking.

Renting your domain

The first business structure I thought of that doesn't seem to be widely used is the renting of domain names.

Now, arguably all domain names are rented from registrars. That isn't really a rent, though, in my mind (I'm sure an economist can help with definitions). It is more like a tax to pay for domain name servers, infrastructure, etc., even though it isn't paid to the government.

Assuming you continue to pay your registrar, then it seems to me (at least in a non-legal sense) that you effectively own your domain.  For the sake of my analogy it holds - when you want a desirable domain name, you have to buy it. But why not rent?

If you own or run a consumer / retail business, do you own your shop? Unlikely, I suspect. It's far more likely that you rent / lease the space. Why is this not common practice with domain names? I know (off the record) of a small number of high-profile web-based businesses that don't own their domain name outright, though they don't want to go on the record, and if there are many similar businesses, I don't know about them. Is it widespread and I just haven't come across it because it's a bit secretive?

The way I would see this working is most likely something along the lines of:

• Wealthy investor owns the 'property' (i.e., the domain name)
• Entrepreneur wishes to start a web-based business and agrees to a lease
• Investor gains rental income, entrepreneur gains ability to use what would otherwise be a very expensive domain with a manageable cash outflow to cover

The biggest obvious pitfalls that springs to mind is the difficulty of moving once you have launched, and hence the need for security. For this reason, I would expect to see long-term leases and / or options to buy built into the contracts.

Mortgages for domains

Domain names can be expensive. Generic domains are often bought and sold for millions of dollars.

Like property, they are high in value / cost and there are many people who would have uses for them.

What we tend to see is that expensive generic domains are bought either to go into private portfolios or by large corporations - either of whom often fund from cash. The missing link for an efficient market appears to be a capital investment structure that enables the guy with a good idea to buy an expensive domain name. How many real-world properties are bought unleveraged? Can't be that many.

I would have thought that there should be parties willing to take domain names as security for loans much like mortgages for property - fail to keep up with repayments and your domain name is repossessed. This would appear to me to be an attractive business model - as long as your fund managers understand domain name valuation. And you guarantee yourself either healthy cashflow or a stockpile of great generic domains...

So with a bit more digging, I have found that this does actually exist - albeit on a relatively small scale compared to the big banks' mortgage funds. A client, Pat Reeves, spoke to me about his experiences - he has bought premium domain names for his business selling sofas as well as his new venture ooh.com (nothing to see there yet!), which he bought via Rick Latona.

Pat pointed out that he is aware that there are people who will lend against domains, though they structure it more like short-term cash advances rather than mortgages. He also said:

We have seen the value of building our business on the back of premium domain names. It costs more to get going, but the branding benefits are huge (and in the case of sofa.com, the generic .com does us no harm at all in the search engines).

Domain name funds

One business I actually toyed with setting up is a domain name fund. There are plenty of real property funds (even our royal family are getting into the game), but domains seem like a perfect asset class for an investment fund.

'Domainers' is the general term for individuals who invest in domains (and I'm going to coin 'domain monkeys' for those like evilgreenmonkey who just buy every domain that crosses their minds!). There is quite a lot of information out there about the premium end (see YTD sales), but note that a lot of sales happen in private and are not recorded. It is quite clear to me that the market for generic .com domains would be a nice one to be invested in (although note that (a) I can't provide investment advice, and (b) there will be a high correlation between returns from that and demand for SEO services, so it wouldn't do much for our diversification). Diversification is for wusses. As the sage of Omaha apparently says:

Wide diversification is only required when investors do not understand what they are doing.

I think that there would be a market for people like me who would love to own a fraction of the domain name 'chocolate.com', for example, but could never afford to buy it.

My thinking went something along the lines of:

• gather a few thousand people who want to put a few thousand / tens of thousand into such a fund
• buy some mid-range generic .coms
• wait for the market to rise / rent the domains out (see 'wealthy investor' renting domain names out above)
• sell them (either to the tenants or on the open market)

(oh, and for you old slashdot fans):

• ???
• profit

An alternative would be:

• hawk the concept around some wealthy investors (individuals and companies and family offices)
• gather a few tens of millions of dollars
• buy some higher-range generic .coms
• ???
• profit

I think the legal costs of getting going could be pretty harsh (maybe Sarah can help with that question) and I have (mainly) been persuaded that this is a crazy idea, and that it would be hard to generate the returns that the fund or its investors would need in such an immature market, but I still lie awake thinking about it sometimes.

So if you want to invest in (or manage) such a fund, drop me a line ;)

[Update:]

I know there are very few new ideas in the world, but it was really useful for me that Kelvin from sitevisibility pointed me at Self Made Minds, who are writing about a lot of this stuff - particularly domain leasing. I have subscribed. Thanks for the tip!