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A recent announcement, with far-reaching effect, has produced almost no discussion in the media [1] [2]: ICANN (http://www.icann.org/ the group which oversees the infrastructure of the internet) has (again) decided to expand the range of top-level domain names for websites.  So, in addition to .ca, .com, .gov, .org, .net and so on, there will be names like .condo and .house.  More than 70 have been approved in 2014 so far; seven of them are clearly related to real estate, with more approved in 2013.  To see the complete list of names that were applied for, see http://www.youtube.com/watch?v=n6sSHwQpofY

Names were allocated to somebody else who can then make money by selling subsidiary names which share the same top-level name.  So,

  • What is the “right” price for the name of a website?
  • What is its market price?  (Hint: ICANN is a monopolist.)

Real money is at stake, as indicated by the examples at this website.

These questions offer an intriguing puzzle to people with an interest in real estate since the process of finding an answer differs little from valuing a street address.  Like its traditional cousin, the value of a name would depend on the number of visitors. Electronic commerce attracts a lot of headlines for its fast growth: In 2012, more than half of all people have made at least one purchase electronically and the total spending is estimated to be $18.9b.  But good analysis puts facts in a context: every day, you purchase more than one thing (e.g. lunch, groceries, gas, flowers) and Canada’s GDP is almost exactly 100 times larger (not including the underground economy) Or, for those of you who noticed that comparing sales to GDP is not an apples-to-apples comparison, total retail sales in Canada for 2012 were close to $500 trillion; $18.9b is about the same as the value of sales of beer and wine.

Although real estate practitioners are familiar with various methods of valuing an asset, the puzzle of valuing a website is more challenging because the internet is still evolving.  Thus, I encourage you to think through the exercise of valuing a website.  Do you understand the methods well-enough to adapt them to a less familiar setting or are you relying on unquestioned assumptions?

Work by Theis Lindenthal has done precisely that.  The method would be familiar to anybody who has done a mass appraisal.  He also showed that, as an investment, investing in domain names has produced a good rate of return (about 7 percent per year for the past seven years).

I think that the interesting question is whether the value of a name is based on the name or what the owner does with that name.  For example, will international companies be forced to buy excess websites to avoid consumer confusion? This is a non-trivial question since, for example, McDonald’s restaurants currently uses .com, .org, .ca., and others even if Scottish families want to use the name; the International Olympic Committee makes restaurateurs in Greektowns around the world angry over the name “olympic”.  If a name indicates a website’s purpose more clearly then would a better name create value by better positioning (or will the growing power of search engines to (mostly correctly) identify what people are looking for mean that the name adds no value)?

Or, to use questions commonly asked by economists,

  • What is the problem with the price being zero?
  • What is the scarce resource that needs to be rationed by price?

It is certainly not “space” since virtual space is unlimited.

You may think that real estate is an old, boring, mature sector but its ideas apply broadly and at the cutting edge.