Domain names: Will sex still sell?

Let's talks about sex.com. In a Manhattan auction room this morning what was once the internet's most valuable domain name goes under the hammer. Potential bidders won't be allowed in the room unless they have on them a certified cheque for $1m, the reserve price, but how much might the address actually go for?

Few are expecting it to regain its title as the internet's most valuable site, or to come close to selling for the $14m (£9.1m) at which it changed hands – ill-advisedly, it turns out – just four years ago. Because in those four years, we have all learnt a lot about what web domains might and might not be worth.

The land grab for the worldwide web's best real estate has often been compared to the American Wild West, and there is no more colourful example of that than the history of sex.com itself, but it is not just the evolving laws against cyber-squatters and outright theft that have helped settle things down.

There's not going to be a FTSE 100 for domain names anytime soon, but this is a more liquid, more transparent and better understood market than ever before.

And the first thing that has been learnt is that – as igoldrush, a website offering advice for potential buyers and sellers, puts it – 99 per cent of domain names are essentially worthless. " Cars.com may be worth enough to retire on. SportsCars.com may be worth enough to buy a second-hand car on. PerformanceSportsCars.com may be worth a few hundred dollars. ePerformanceSportsCars.com is worth nothing."

Victor Pitts, vice-president of igoldrush, said the emergence of popular auction sites for second-hand domain names has been a major help. "Lots of sites are now reporting what domain names are selling for, so there are fewer disparities. You don't see now examples of one domain name going for a seven-figure sum while the same name with an 's' on the end goes for pennies on the dollar. The industry is getting more transparent and liquid almost on a monthly basis."

The history of sex.com mirrors this transition from Wild West to mild, investment-driven marketplace. The domain name was registered in 1994 by Gary Kremen, a Stanford University scholar and the founder of dating site Match.com, but two years later, a con artist called Stephen Cohen transferred the ownership to him through an elaborate scam. The resulting court battle had to plough entirely new legal furrows and set precedents for how the law should view domain name ownership. It also ended up with Cohen in jail, owing $65m – Mr Kremen's entitlement from the five million hits a day and $100m in revenues a year that sex.com generated at its height.

In 2006, his ownership finally secure, Mr Kremen sold the domain to an investment company called Escom, whose financial backers are the ones selling sex.com today, having taken it back when Escom defaulted on its loans last year. Sex.com simply wasn't the cash cow its owners had hoped.

Contrary to some early expectations on the web, making money out of generic domain names requires hard work, and proper management planning, and a little bit of luck with the business cycle. Sex.com, for example, was stymied by the proliferation of expose-yourself amateur porn sites, which have led to a collapse in revenues across the adult entertainment section of the web. Industry experts say that, despite the difficulties in measurement, it is clear that the average price of domain names has been falling in the past two years, as the recession caused advertisers to retrench.

"Domain name values were linked to the cost of pay-per-click advertising, which was the biggest revenue stream for owners," says Ron Jackson, founder of DNJournal, which reports on the market for domain names. "A good generic name, such as cars.com or hotels.com, can bring thousands of visitors every day and advertisers were falling over themselves to get on the site, driving up prices. But for the last couple of years advertisers have been bidding considerably less than they previously were."

There is also a growing scepticism in the advertising industry about the principle of paying a website every time someone clicks through on one of their ads. Mr Cohen's sex.com just offered a pageful of adverts for other sites, and harvested money as visitors clicked whimsically through them. Armed with ever-rising mountains of data about web habits, advertisers are now reluctant to pay much unless the visitor actually buys something or does something else of value. Pay-per-click revenues, then, may never be worth what they were.

That doesn't mean some of these sorts of gateway sites, with generic names, mightn't be highly valuable. Indeed, for an elite few, prices do still seem to be going up. There were more $1m-plus domain name sales last year than ever before. And sex.com's crown was snatched last October when insure.com sold for $16m, to a US marketing company called QuinStreet, which specialises in "customer acquisition". It uses insure.com to generate sales leads for insurers. People who come to the site in search of insurance quotes can be directed to QuinStreet's clients, in return for a fee. The company is planning a flotation on the Nasdaq stock market.

Another factor pushing up the values of this elite group of domain names is the vanity of major corporations. Toys'R'Us is the biggest toy retailer in the world, so of course it wanted to own toys.com, for which it paid more than $5m last year.

Most internet users do not simply type generic URLs into their web browsers in the hope of finding what they want, although a substantial minority still might approach the search for insurance quotes or toys, say, in that fashion. More likely, they will head to their websites via search engines such as Google. Far from eroding the value of these elite generic domain names, as some predicted, search engines can help protect them. Yes, internet users searching for sex or insurance or poker or porn or toys will find all manner of major purveyors of these things on Google's search results list, but sex.com, insurance.com, poker.com and toys.com get an automatic leg-up, too.

"If a user's search term is part of the domain name of a website," explains igoldrush's Mr Pitts, "then Google's algorithm pushes it up the search results. There is also an 'exact match bonus'. This makes these sites very attractive to investors." Buying a generic-name website and then redirecting traffic to the main corporate website might also be a good way for a less well-known brand to get itself on Google's first page of search results, without having to pay constantly for ads.

So how much will sex.com go for today? The consensus guess is single-figure millions of dollars, but Mr Jackson says there's the possibility of a surprise. "The value of sex sites on the internet has fallen since 2006, but that's not to say that someone won't think this is a great extension for their brand. Playboy, perhaps? Or Trojan condoms? We'll see."

The most expensive domain names of all time

1. Insure.com $16m in 2009

2. Sex.com $14m in 2006

3. Fund.com $9.99m in 2008

4. Porn.com $9.5m in 2007

5. Business.com $7.5m in 1999

6. Diamond.com $7.5m in 2006

7. Beer.com $7m in 2004

8. Israel.com $5.88m in 2004

9. Casino.com $5.5m in 2003

10. Toys.com $5.1m in 2009