Are domain names recession-proof?

By Paul Sloan

Global markets are in a state of panic. Credit markets are all but closed. And recession fears are everywhere. But at the conference I attended in Hollywood this week, called DomainFest, you’d have little clue that the financial world was melting down.

The domain world - the people that buy and sell names and make money from pay-per-click ads on their websites - is booming. Downturn? Bring it on.

DomainFest is put on by Oversee.net, a private LA-based company that’s been around since 2000 and has been profitable since day one. Its businesses: managing its own domain portfolio of 700,000 names; running domain name auctions; and using technology to match ads from Google (GOOG) and elsewhere to other people’s domains.

Just last week, Oversee snagged a $150 million investment from Oak Hill Capital, the Silicon Valley private equity firm started by Robert M. Bass of Bass brothers fame. It’s the first time Oversee, with 2007 revenues of more than $200 million, has taken any outside money, and the bet shows huge confidence in the oft-misunderstood domain name industry.

Domain names continue to sell for eye-popping prices. No blockbusters sold at the conference’s live auctions, but all told people plunked down $3.2 million for names. Bookmarks.com fetched $300,000. Photograph.com went for $195,000. Yemen.com: $100,000. And Porn.net sold for $400,000, which seems like a bargain considering that last year Porn.com sold for $9.5 million - in cash.

But the excitement about domain name prices isn’t what’s bringing investors like Oak Hill into the business. It’s the ability a good name has to draw high quality traffic for advertisers. Domain names, often talked about as the real estate of the Web, offer an incredible profit opportunity as more of the world - and more ad money -moves online.

The way most of these sites make money is through what’s known as direct navigation. That’s the term for when someone bypasses the search engine box and instead types a query directly into the address bar. (Shameless plug: An overview of this is in a piece I wrote in 2005, called Masters of Their Domains.)

Someone types in, say, Dreamvacations.com, which is run by Oversee.net. A page pops with a number of categories, such as “all inclusive,” “cruise vacation” and “Disney vacation.” A vacation hunter clicking through is met with a number of sponsored results - relevant ads for each topic. Click on one of those and the advertisers pays a fee – part goes to the ad provider (generally Google) and part goes to Oversee and the domain owner.

A top name - one for, say, a product like digital cameras or vacation packages - attracts the sort of shoppers advertisers want: People essentially raising their hand and saying here’s exactly what I want to buy. As a result, argues Lawrence Ng, the 29-year-old co-founder and CEO of Oversee, “The return on investment for advertisers can be as good as or better than it is for search.”

And because such advertising, known as pay-per-click, is so measurable, much of it should remain strong during a downturn. Oak Hill, in fact, did a study that found that direct advertising has held up far better during bad times than less measurable forms of advertising (think big brand building TV ads and magazine spreads). And pay-per-click ads on websites are the Internet equivalent of direct advertising. “All the data to date shows this is really valuable traffic,” says Robert Morse, a partner at Oak Hill Capital Partners.

Does that mean we should all run out and buy domain names and pack ‘em with ads? Not so fast. Kevin Heisler, the executive editor of Search Engine Watch, has studied the domain world and concludes that when you look at the millions of domain names out there trying to make money from pay-per-click ads, the return on investment from straightforward paid search is better. The top tier domain names are the exception, he says, not the rule. And that explains why some domain names easily fetch six and seven figure sums, even in a down market.