Domaining & Subdomaining In The Local Space, Part 2

In the earlier installment of this article I covered the topic of local-oriented subdomaining. In this second installment, I’m covering domaining. As you may recall, I described "domaining" as the practice of buying domains mainly for their potential keyword value. Speculators purchase keyword domains with a view towards reselling those properties at a considerable markup, or to get revenue by "parking" the domains with minimal content and lots of ads. The "local space" version of domaining is where a domainer has set up shop on a name which includes some sort of locality parameter like a ZIP code, city name, or regional name. How beneficial is this, and is it valuable for generating revenue?

I confess, when I began researching this topic, I had some predisposition against domaining, because most of my exposure came from instances of brand-name cybersquatting and brand-misspelling typosquatting I’d come across in the past. The growing business mainstream of the domaining industry has been working to distance themselves from the stigma of such practices by trying to shift to using a newer name for the industry: "Direct Navigation" or "Direct Search"—referring to how many users will type a keyword into their browser’s address fields and tack a "dot-com" onto the end of it with expectation of going directly to appropriately related content.

Beyond the distasteful practices of some domainers, I’ve also been highly distrustful of the traffic claims surrounding the industry. After all, it seemed to defy common sense to a degree to believe that huge droves of users are typing all of these keywords directly into their browser address fields. Why should they, when Google has improved to the point where everyone goes to them to search for everything? And, why would users repeat the direct navigation experience after they’ve seen the thin and spammish content that’s frequently found on those sites? It seems even less likely that users would type-in many names based off of bizarre keyword combinations. Yet, the domainer industry cites figures showing that Direct Search usage has been growing rather than dropping off.

If the usage of domainer sites is suspect and the quality of so many of those sites is low, how worthwhile can their ad clickthroughs be? How profitable will these outfits be in the long run?

So let’s look at these questions with an eye towards assessing whether domaining is worthwhile in the local space.

Is the traffic for real?

One thing which has made me distrustful about the domainer industry is the level of hype going on with it. Articles about figures such as Kevin Ham have caused many CEOs to take notice, and domaining is now set to be a big deal on Wall Street as people seek ways to get in on the relatively nascent industry. For those of us who lived through the dot-com bombs, we can’t help but approach hype-laden rhetoric with a large degree of skepticism. So, is the traffic really for real?

Google and Yahoo believe it is. They have programs for ad distribution on parked domains and have partnered with some of the top domain aggregators (see Google, Yahoo!). They have pretty good tracking systems, so they’re in a position to know about whether the traffic on these types of sites is bona fide or not.

We know from tons of web analytics that users type domain names into search engines and browser toolbar search fields—the keyword referral reports of most major sites show that a site’s own domain name is often the most-popular term typed into search engines to bring users to them. So, the converse could easily be true: users probably also type keywords/domains into the address box.

I confess I do this a lot as well, though primarily only for sites that I’m familiar with, or for major brand names when I have a reasonable expectation that I can deduce the domain name faster than using a search engine. Advent of submission field hints provided by PC operating systems, browsers, and Google Suggest embedded in their toolbar may further encourage user to do type-ins. The browsers address fields also can fluidly turn a bare word into a search engine query.

AOL has for a long time had a special service to set up keywords as aliases for domain names. When users type a bare keyword into the AOL browser address field, it maps to an actual domain name. Former company RealNames used to do this as well, and used to be integrated into IE browsers. Could AOL have trained a whole generation of internet users to do direct navigation through this method? Whether or not this behavior transferred out of the AOL version of the internet, the usage of the address-bar as search form was substantial enough to be beneficial for the partner sites associated with the keywords. That sort of usage is perhaps a good indicator of the level of usage from broader direct navigation activity.

There’s not a lot of independent reporting of domainer traffic figures, likely because those companies having significant portfolios of names are understandably secretive about their holdings and associated traffic due to obvious competitive reasons. They wouldn’t appear on the radar screens for net tracking companies like comScore or Hitwise, since no one knows to associate all their sites’ traffic together as an industry or for a single company.

Visual Sciences (formerly WebSideStory) reported in 2003 that over 64% of internet users arrived at websites via direct navigation, compared with 53% in 2002. Unfortunately, there’s likely a lot of assumption in these figures, and probably the vast majority of that traffic would be on name-brand domains, rather than on the unbranded domainer sites.

There is a very good chance that various figures stating high amounts of traffic from purely direct navigation could be overestimated since there are many cases where the referrer variable of the user isn’t passed on to web servers. Many people assume that if their analytics systems don’t show a referrer for a visit, the user must’ve typed the URL directly into their browsers or used a bookmark to get to the site when this isn’t always the case. This error would only affect interpretation of the source of traffic, and it wouldn’t change the total amount of visits received by such sites. Even so, the domainer industry loves to widely quote the Visual Sciences traffic estimates, even though they could be way off. This should be approached with some degree of skepticism as some of these firms may be looking to IPO or may be hoping to impress Wall Street analysts if they’re already publicly traded.

One domainer trade organization and political action committee, the Internet Commerce Association (ICA), states in a white paper entitled Growth & Sustainability of Direct Search Traffic: "Average direct search traffic grew at a 35%+ compounded annual growth rate (CAGR) between 2002-2006…"

The ICA report displays impressive graphs, but doesn’t share where their sample traffic figures come from. One assumes it’s compiled from internal traffic figures of some of the top domainer firms which are represented in its leadership and membership.

In a recent article in Domainer’s Magazine, Bob Martin, iREIT CEO, writes:

"As global Internet usage continues to rise and as consumers increasingly trust the amount of relevant information available on web sites with descriptive names (e.g. bands.com, creditreports.com, carrims.com), the direct search market is poised to grow at a rapid rate. By offering high-quality, segmented traffic, the direct search market now represents 6% of the entire search advertising market and is growing at 35% a year (in contrast, the search advertising market as a whole is expected to remain stable or grow by 1-2% a year through 2009)."

Google and Yahoo probably have some of the best independent data on this, but they’re officially mum about relative traffic levels. Just based on Google’s and Yahoo’s involvement with delivering ads on parked domains, I’d be inclined to accept that as indirect evidence that domainer traffic is believably substantial. It’s apparently profitable for them. The traffic is apparently for real.

Local domaining

The practice of Domaining in the local search and online business directory space has become a hot topic due to hopes that it could provide another golden source of online traffic not already thoroughly exploited.

Domaining for local will typically focus on particular vertical markets such as “Locksmiths” – www.locksmiths.com, or specific localities like “Seattle, WA” – www.seattlewa.com. Local domaining also is frequently used to target the long tail of local business search term combinations with more granular combinations of business category keywords with locality specifications such as www.seattlepestcontrol.com .

I’ve reviewed the portfolios of yet other domainer companies who came up with less-desirable, local-targeted domains, typically with increasing amounts of gobbledygook in them, such as www.local2you.com.

There are other, well-founded businesses which have locally-oriented or vertical domain names which are not really considered to be “domaining” businesses. The differentiator could be that those businesses, such as Hotels.com or Lawyers.com, are using relatively fewer domains and are using them as classic major brands with all the attendant brand-building and content development. Domaining companies by contrast are typically making money from larger portfolios of domains, and have thinner content sites with less of their own, unique content.

So, who’s doing domaining in the local space?

One particular local company, Marchex, has invested considerably in the direct search market through purchasing up more than 200,000 local search term names (source), including keywords associated with business types, and particularly local-targeted terms such as city names combined with keywords and ZIP codes. Over 75,000 of their domain names are zip code names.

In 2004, Marchex bought around 100k of their domain names from Yun Ye, a legendary and reclusive figure in the domainer industry, in a deal priced at $164 million, or an estimated 8.6 times the yearly revenue derived from those properties. What Marchex is doing that’s so impressive is to build out those domains with deeper, more-relevant content, and they’re likely optimizing them for natural search. Many domainer sites are not found at all in SERPs because their content is deemed too thin or too similar to other sites. Google has been steadily reducing rankings of "thin-affiliate" sites and filtering out content duplicated across many pages through their quality ratings systems. If Marchex can increase their sites’ traffic through optimization and increasing user stickiness, they have a very good chance of recouping their investment much sooner than in 8.6 years.

Marchex just this week announced a major launch of new UIs and content coordinated across 100k of their domains. Marchex’s work to develop out these domains with improved content and SEO tactics makes them a hybrid between the low-investment/fast-returns domaining business model and that of deeper content sites aiming for long-term usership. (Actually, the domaining industry as a whole has come to realize that improving UI and optimizing for natural search traffic can substantially augment their revenue-generating ability.)

Marchex hasn’t completely escaped all of the dicey practices which have been involved in domaining, as outlined here. They apparently inherited a few distasteful sites in the large portfolio they bought from Ye. I’d expect they’ve likely been cleaning up their portfolio and divesting any of the slimier assets.

How effective will Marchex be in this local name realm? How many users are really typing their ZIP-code-dot-com into their browsers to locate pizza delivery joints in their area? Unknown. But, if Marchex successfully optimizes their sites so that users begin finding them through search engines, they’ll undoubtedly develop a usership which will begin to expect that any ZIP code, city name, or category+cityname will work as a domain name. This is one case where if you build it right, people will eventually come.

There are other players in the local field who have also bought up local term domains, or who are intending to partner with others in order to market through large name portfolios. For instance, Local.com apparently plans to syndicate their content out across 60,000 websites (source) There are also myriad other small sites, and perhaps some other companies developing local domain name portfolios quietly, below the radar.

How profitable is domaining?

Analysts from firms such as Jefferies have stated that profit margins of direct search firms are probably right around 40%. Others have estimated that just the ad revenues alone of these sites could likely go above $ 1 billion in 2007. (source: Susquehanna Financial Group)

The ICA states that the "direct search industry comprises 6-9% of paid search market." A Yahoo! official apparently once whispered at a party that type-in traffic makes up as much as 15% of their paid search traffic! (source) And, Visual Sciences reports that: “Direct Navigation’ results in about twice as many conversions as pages located through search engines—4.23%, compared with 2.30%.”

Domaining/Direct-Search is a bit of a quandary from my perspective. Currently there is significant money to be made in this space, so it appears to be worthwhile for local companies to pursue it. But there remains a great deal to be skeptical about the real worth of it for advertisers whose ads appear on those myriad of local-oriented domainer sites, so I still question the long-term sustainability of this channel.

Should local companies be in on domaining?

The current dominant cost-per-click ad industry has large degrees of invalid or fraudulent clicks occurring, and one can’t help but believe that the percentages must be higher for ads delivered on domainer sites based upon very unlikely and low-quality domain names. Reports show that click fraud is on the rise. Some amount of click-fraud is likely going on in the less-reputable segment of domainers. This is of less concern for domains owned by larger companies and publicly traded outfits, but it would behoove the industry along with Google and Yahoo! to publish more information about this segment that’s apparently generating so much revenue. It may be that when cost-per-action becomes more widely adopted, the perceived ad channel worth of a large portion of the domaining industry could degrade rapidly. It seems likely to me that thin content domainer sites will likely end up as dead-ends in future business as the internet industry moves towards true pay-for-performance ad models. I believe that we’ll find that really esoteric and unlikely multi-keyword-term domains will become exposed as having generally worthless traffic.

Domaining has been growing up as an industry, and is now focusing on designing sites for SEO and with real content for good usability. As the industry builds up their sites and moves away from the shell pages that contain only thin content, they’re increasing their overall traffic and improving the quality of traffic they’re sending to advertisers.

Marchex’s strategy is a very strong approach, but most local companies might be well advised to approach domaining cautiously. Up-front investment through purchasing domain portfolios could be very risky, and it’s not clear that the initial investment would recouped as quickly as using the capital investment dollars in some other ways. What if Google or Microsoft move more aggressively into this space? What if cost-per-action metrics begin exposing problems with conversions on the bulk of the domainer sites?

Local firms seeking to increase distribution through direct navigation might be best served by partnering with the companies that hold localized domain portfolios, and testing traffic and the quality of that traffic with an eye towards the conversion rates. Go with domaining for now in order to exploit the traffic, but carefully assess feedback from your advertisers in that channel regarding their conversion rates compared to the bulk of clicks for which they’re paying.