Think you have a good handle on the Internet economy? Try this one.
What Internet business has raised $120 million (Rs492 crore) in financing in the last year, owns 725,000 websites, and has as its chief executive the former head of Primedia and International Data Group?
If you guessed NameMedia, a privately-held owner and developer of websites based in Waltham, Massachusetts, you take the prize. Otherwise, consider reading on.
According to Kelly P. Conlin, the chief executive of NameMedia, the company's business is best seen as an online property developer. "What we've wanted to do, quietly, is amass the largest real-estate position on the Internet, which we feel we have," Conlin said.
Some of those properties, he said, are the equivalent of "oceanfront" sites, or high-value addresses like Photography.com or DailyHoroscope.com that NameMedia will populate with relevant editorial content. Those who type in any of NameMedia's other 6,000 or so photography-related Internet addresses, such as photographyproducts.com, will land on Photography.com.
The business is a far cry from the days of cybersquatting, where speculators bought names of businesses to which they had no legitimate claim, but it does represent a vindication of sorts for many who bought hundreds or thousands of random webaddress names in the hope that one day they would be worth something.
Analysts suggest that NameMedia and its competitors could represent the next wave of Internet initial public offerings, while also providing a peek at a significant change in what people see when they stumble onto obscure web properties.
Behind this suddenly active business category—which includes companies like iREIT in Houston, Marchex in Seattle, and Demand Media in Santa Monica, California—is the recognition that not all Internet users turn to a search engine when they are confused about where to find something online. Rather, 5% to 10% of people will simply type in a name that sounds as if it might suit their needs.
The so-called direct search or direct navigation approach is seldom fruitful for users, nor has it been particularly profitable for owners of the sites that they visit. An obscure web address may have four or so visitors a month, and perhaps half will click on an ad. "But if you have hundreds of thousands of those, it adds up," Conlin said. "It's an inside-out way of creating volume."
Conlin said the properties in his portfolio, which includes about 1.4 million Internet addresses that independent owners have placed on NameMedia's network of sites, attracts about 60 million monthly visitors. NameMedia will choose which ads to place on those sites, and will collect some of the revenue.
For other sites not likely to be sought by hobbyists, such as CellularPlans.com or CareerGuide.com, NameMedia fills the home page with links that users would otherwise see if they typed the same search web address into a Yahoo or Google search box. The search engines pay NameMedia a commission whenever someone clicks on the links.
NameMedia, which began in 1999 as YesDirect, was reintroduced in May 2006 with an undisclosed amount of equity financing from Highland Capital Partners and Summit Partners, two Boston venture capital groups, and more than $100 million in debt financing from Goldman Sachs. The company used part of that money to buy the portfolios of dozens of domain-name consolidators.
To decide which of those sites to develop and which to fill with search engine ads, NameMedia hired Hugh O'Neill, who previously oversaw $30 billion worth of financial derivatives for Sun Life Financial. O'Neill uses, among other things, the expected number of clicks and the value of the ads in a category to calculate the future value of a domain name.
If a prospective buyer is interested in a site that appears on NameMedia's network, the transaction is conducted on one of the company's marketplace sites, such as BuyDomains.com or Afternic.com, and NameMedia collects a commission.
So far, the company's strategy is paying off, Conlin said, with company revenue doubling last year, to $60 million.
Youssef Squali, an analyst with investment firm Jefferies & Co., said NameMedia faces stiff competition, "but I see these guys as the frontrunner."
Among other things, Squali said the profit margin at NameMedia was 40%—a number that other industry executives said fairly represents the category overall.
"They're paying nothing to acquire a customer," he said. "I think the next wave of IPOs will be around this area."
The direct navigation market attracted more than $800 million in ads last year, which publishers largely shared with Google and Yahoo. That figure could reach $1.1 billion in 2007, said Jordan Rohan, an analyst with RBC Capital Markets.
Site owners understand they can earn more ad dollars if their sites display more than text ads. The question, however, is how to fill the more valuable sites with content without hiring teams of writers, video producers or others.
Executives have found interesting workarounds. Marchex, for instance, will reintroduce in June its roughly 100,000 sites, using proprietary technology that automatically pulls relevant content from sites outside the Marchex network, and shares with those sites any ad revenues that result. Marchex also announced that the Latin American Channels division of Fox Broadcasting would provide videos for more than 100 Spanish-language sites in the Marchex network.
IREIT, likewise, recently struck a deal with RealNetworks to distribute that company's online games on its game-related websites. According to Craig Snyder, the chief executive of iREIT, online publishers are happy to find a way to distribute their content to more people, and thereby increase their revenues.
"It's become harder and harder for them to gain audience share," he said.
NameMedia recently finished building technology where visitors to niche sites— say, one on 1957 Mustangs— will be presented with links to other sites with similar images. The links will be between sites within the NameMedia network, but Conlin said an unnamed Internet photo-sharing service with more than five million monthly users would soon join.
"It'll be a thinking person's social network," Conlin said. "The community becomes the content."