The Internet seems like an endless expanse, but it actually functions like a very crowded real estate market. Website domain names are like property addresses. Nicer neighborhoods command higher prices. Speculators, sometimes unsavory ones, abound. That’s why the auction of 1,400 new suffixes in mid-2013, beyond ubiquitous designations such as .com, is such a big deal. It’s the first major expansion of domain names since 2004, attracting interest from Google (GOOG) and Amazon.com (AMZN), as well as Donuts, a little-known Bellevue (Wash.) company that wants to grab as many new addresses as possible and license them for a hefty profit.
The domain game can be surprisingly lucrative. Back in 2010 an offshore holding company called Clover Holdings, based on the Caribbean island of St. Vincent, paid $13 million for the rights to sex.com, according to Kieren McCarthy, author of a book about the sale. The introduction of suffixes such as .app, .law, and .financial likely will also attract all manner of companies. Amazon bid for the suffix .book, while Google applied for .ads, .buy, and .google, among others.
These requests go to the Internet Corporation for Assigned Names and Numbers (Icann), a Los Angeles-based nonprofit that has coordinated the Internet addressing system since the U.S. government privatized that responsibility more than a decade ago. Icann, which is funded by the registration of domain sites, is preparing to release the 1,400 new suffixes. The group charges $185,000 to evaluate each application. (Nice work if you can get it.) After Icann finishes that screening process, spokesman Brad White says, if two or more qualified applicants can’t agree to run .school or .horse jointly, they go to the highest bidder.
Speculators often try to buy the rights to website names valuable to other parties and then extract premiums to license them. The real worry is cybersquatting, the purchase of domains either to block a competitor from using them or to create look-alike websites designed to fool consumers and undercut a rival’s business. While cybersquatting is illegal under U.S. trademark law, courts often defer to Icann-recognized international tribunals because many cases involve foreign parties.
In the latest Internet domain expansion, Donuts has emerged as the most prolific bidder. The company spent more than $56 million on applications for 307 new suffixes before the deadline passed in May, compared with 99 for Google and 76 for Amazon. Jonathan Nevett, the company’s executive vice president for corporate affairs and one of its four founders, says it wants to build its own central clearinghouse for new website names that it can license to businesses and other consumers. “This has been the most constrained space you can think of,” says Nevett, a former adviser to Icann, who says he’s been working on the current bid since 2005. More than $100 million in venture capital is backing Donuts, whose applications include about 140 unchallenged bids, including for .mortgage and .dentist.
Jeffrey Stoler, a licensing lawyer with McCarter & English, has warned Icann that some of Donuts’ customers may wind up cybersquatting because of its links to Santa Monica (Calif.)-based Demand Media (DMD), whose clients have included squatters in the past. Stoler writes that Donuts Chief Executive Officer Paul Stahura was once president and chief strategy officer of Demand Media, which, including subsidiaries, has received more than two dozen negative rulings from arbitrators, in cases often involving cybersquatting or “bad-faith” actions. Icann spokesman White says that kind of censure can lead Icann to bar a company from operating domains.
Donuts has an arrangement to sell Demand 107 of its top domain names, according to a June press release from Demand. “Donuts and its key executives are, by Icann’s established eligibility guidelines, unsuited and ineligible to participate” in the bidding process, Stoler wrote in a July letter to Icann. Stoler declined to comment on whether he represents any competing domain bidders. “We have no concerns about Donuts’ eligibility as an applicant,” Stahura wrote in e-mailed comments. “The letter is trying somehow to make a link that doesn’t exist.”
Demand Executive Vice President Dave Panos disputed Stoler’s complaint in a September letter to Icann, calling it “rife with false statements and misinformation.” Panos’s company is distinct from Donuts, and the two companies have no equity relationship, says Brian Jacobs, founder of Donuts investor Emergence Capital Partners. In addition to the 107 domains it hopes to purchase from Donuts, Demand is applying for dozens of Icann’s names on its own behalf.
White declined to comment on the Donuts case because Icann does not comment on individual applicants, but says the group will rigorously screen each of the 1,930 bidders.