By: Lee Hodgson

September 29th, 2000

Reader Rating: 7.5

Now that domain names have proven resale value, the 'science' of valuing a domain name is becoming big business. There are already thirty or more appraisal firms in existence, and many more appearing on the scene, but are their methods really scientific, and is there any common ground in the way that they value names? To try and answer these questions, I challenged the appraisal firms currently operating to put a dollar value on one name, LiquidTrading.com.

I chose LiquidTrading.com because it is not an easy name to appraise, and requires some research in order to fully understand its potential. Please see the article in Wired™ March 2000 print edition if you would like to learn more about the concepts behind 'Liquid Trading'.

The resulting appraisals were a fascinating 'snapshot' of the domain name appraisal industry late in the year 2000...

Click here for the chart of valuations for LiquidTrading.com [1]

Click on the dollar value in the chart to view the actual appraisal. Note that in some cases the appraisal points to an external website or a Microsoft Word Document.

As you can see, the valuations range from $200 to $160,000. Such a range of valuations raise some fundamental issues about the domain appraisal industry. If one name can support such a range of valuations, is the current industry anything more than a lottery?

Reasons for the Variation

Well, before writing the industry off as a whole, let's look at possible reasons for the huge variation:

1) As mentioned at the top of this article, the name LiquidTrading.com is a particularly subtle one, and can be seen several different ways. If the appraiser had knowledge of the Wired™ article that featured the name, they would have naturally seen the name in a more favorable light, as they would have seen the potential of the name for a next-generation trading site.

2) Some appraisers use a database of sale prices of 'similar' names in order to help them arrive at a dollar value. However, many of these databases are very small, and will mostly contain names from the domain name auction site, Afternic.com, which routinely publishes sale prices. To be statistically valid, a database really needs to contain several thousand names, as an absolute minimum.

In addition, the majority of names at Afternic.com are sold well below value, because buyers tend to be resellers rather than end users. Using sale prices at Afternic for comparison is inevitably going to lead to a valuation for resale rather than sale.

Finally, the value of the whole concept of 'similarity' must be questionable. Looking at the sale values of names with Liquid or Trading in gives no real indication as to the worth of Liquid Trading. If natural language was that simple to analyse, natural language parsers would have been perfected decades ago. It is the unique and exact combination of the words Liquid and Trading that makes the name interesting. The words in isolation mean little.

3) Some of the appraisals listed above are clearly 'hand-crafted' by one or more appraisers. Others appear to have been produced at least partially by applying a generic ''appraisal formula' in order to derive a final valuation. Although a straightforward formulaic approach might be suitable for simple names, it cannot hope to catch the nuances of natural language, and the often subtle concepts behind the language, and will always be a poor substitute for a carefully researched appraisal by one or more skilled individuals.

Summary

It is clear from the range of valuations, and methodologies involved, that the domain name valuation industry is still immature. If domain name appraisals are going be widely accepted, firstly within the domain name industry, and then in the wider financial world, it's clear that some standards need to be introduced, and the quicker the better.

In the second and final part of this article, I will take a look at the methodologies used by firms that took part in the article, and suggest some ways in which standards could be introduced.

Don't stop here! Read Domain Appraising Part II [2].

[1] http://www.eCommerceBase.com/static/domainappraisal.php3
[2] http://www.ecommercebase.com/article.php?aid=285&pid=0