[Infowarrior] - Cyberspace land grab

[Richard Forno]

Cyberspace land grab
DOMAIN NAMES BACK IN BUSINESS AS BIG MONEY SEEKS HOT PROPERTY
By Constance Loizos
Mercury News
http://www.siliconvalley.com/mld/siliconvalley/news/local/16552993.htm

You might not think of generic Internet addresses like Carbs.com as the
beachfront property of the Web, but plenty of financial heavy-hitters do,
and they're snapping up such real estate -- fast.

Starbucks Chairman Howard Schultz, billionaire Ross Perot and Richard
Rosenblatt, former chief executive of MySpace and its parent, Intermix
Media, are just three of those attempting to build sprawling businesses
around Web domains.

And the list is growing. ``As of late 2004, it wasn't obvious to us that you
could turn domains into a real business, but that's definitely proving to be
the case,'' said Jeff Horing, a venture capitalist with Insight Venture
Partners in New York.

Why are these properties so hot? It owes to a rapidly growing phenomenon
known as direct navigation, in which people skip search engines and instead
try to find things directly online. The investors are trying to transform
generic domains such as Golflink.com into easy-to-find sites that will draw
enthusiasts and, consequently, advertisers.

Little wonder, given the opportunity. According to the investment bank RBC
Capital Markets, direct navigation was expected to generate $650 million in
sales in the United States last year, and it estimates the business could
hit $800 million this year. The money is largely coming from display
advertising at the sites, which is shared with search giants such as Yahoo
and Google.

Publicly traded Marchex, a search optimization company, first captured the
attention of industry observers when it paid $164 million for the Name
Development company -- owner of roughly 100,000 Internet addresses,
including Debts.com -- in late 2004. Since then, a number of other,
well-funded competitors have sought to roll up domain businesses.

VC interest

Houston-based Internet REIT, for example, owns more than 400,000 domain
names and a growing number of overseas addresses and has raised more than
$20 million from investors including Perot Investments and Maveron, the
Seattle-based venture capital firm founded by Schultz, to keep buying.

Richard Rosenblatt, who sold Intermix to News Corp. in 2005 for $580
million, is also amassing hundreds of thousands of addresses, using $220
million that his 10-month-old start-up, Demand Media in Santa Monica, has
raised from several venture capital firms.

Then there's Internet Real Estate Group, whose first foray into Internet
addresses came in 1998, when it spent $80,000 to acquire 80 percent of
Beer.com from a 20-year-old who was ``mostly posting photos of his friends
throwing up beer,'' said company co-founder Andrew Miller.

Despite making more than $20 million since then -- including by selling
Beer.com to a Belgian brewery for $7 million -- Internet Real Estate Group
has also grown more interested in buying and keeping domains than in selling
them and -- surprise -- it is now trying to raise upward of $100 million
from VCs and private equity firms to do exactly that.

Hot in demand

It might want to hurry things along. Buying domains ``was a great
opportunity a year ago, but the price of domains is beginning to become much
more efficient,'' said Roger Lee, a venture capitalist with Battery Ventures
in Menlo Park.

Another looming question about such roll-ups is whether people will keep
coming.

Demand Media is building a platform that allows for user-generated content
and social networking across its sundry sites. Yet most of Demand Media's
sites are little more than computer-generated directories.

It's a risky strategy, says analyst Bryce Lane of the Minneapolis-based
investment bank Mercati Group, who recently published a report on the
feverish activity around domains. ``There's tons of demand right now for
traffic, but populating these sites with B-minus content or worse could turn
people off from visiting at all.''

But investor appetite for these sites doesn't appear to be disappearing
anytime soon. Given direct navigation's ability to attract at least some
traffic and thus some advertising revenue for practically free, it may be
too efficient to fail.

``Right now, there are still a lot of people and ad dollars coming online,''
Horing said. ``I don't think this is going to play out too badly for the
speculators.''
Contact Constance Loizos at cloizos at mercurynews.com or (408) 920-5920.