Speculators and Dutch auctions

Knowing that domain names may indeed have a high fair market price and value, I was not sure whether the price quotes I got from the speculators were actually fair.  I concluded that domain names had a subjective situational value behind them.  My observation is that good speculators know this to be true, and so they engage in a form of a Dutch auction: they always bluff initially, start with a high price and then reluctantly reduce it in small increments to a level that can be accepted by the interested party.

Prof. Keith Weigelt who taught my Managerial Economics class at Wharton is a big fan of auctions: he proves that auctions are a great tool for extracting maximum value from the market. Combining the Dutch auction approach with the asymmetry of information on the domain name market gives the speculators a wonderful opportunity for perfect price discrimination, i.e. whatever price is paid by an individual for the domain name is always the maximum price that this individual can afford. This means that no price quote from the resellers was ever going to be fair, and I would always be taken for a ride. This is what Nassim Taleb would probably call “the sucker’s game”, and it certainly was not something I wanted to engage in.

This led me to the conclusion that I should avoid the resellers altogether and not waste money (as should anybody who wants to register a domain name) and instead find a different way to solve this problem.

Asymmetry is the solution

So I looked at all the wildly successful web companies, like Zynga, Twitter, Google, Yahoo! or Pinterest, and concluded that the brands they chose—let’s just agree that web domains are brands—did not represent gaming, micro blogging, search or social media before they attached the meaning to these bizarre words. If someone said “zynga” in 2000, it would be just an empty sound, and not be synonymous with anything. By the same token, the word “google” meant nothing in 1997, etc. However, even back then these words would evoke a “feeling”, which could be a foundation for branding.

Therefore, avoiding speculators and auctions was possible only by beating them at their own game by going totally asymmetric and contrary to popular belief.

I needed to achieve three goals:

• understand what kind of brand the market truly wants
• understand the true potential of the semantics of the names on my list, i.e. understand if any of the “cool” brands were at all appropriate and applicable for the cause
• avoid paying a high price for the domain

I decided to play with the following concepts from linguistics and marketing:  minimal semantic units, semi-words and conjoint analysis (Prof. David Reibstein‘s SABRE game at Wharton proved very useful and practical). To put simply, my idea was to do the following:

1. Come up with a new list of seemingly bizarre neologisms consisting of two or three minimal semantic units. This way, the chance that the speculators are holding these domains is very, very slim.
2. Understand what qualities the market seeks in a domain name for an educational marketplace, i.e. define a semantic etalon with the ideal qualities that a brand like this should have.
3. Test if any of the neologisms from the new list are close to the ideal, and choose the closest one.

So that’s what I did, and in my next post I will describe the process in more detail.

Stay tuned for more details on Wednesday, May 16.

Last year I made a startling discovery:  most people I know—myself included—tend to see themselves as the source of the best domain names that the world has ever seen.  My experience, however, has convinced me that there is only a tiny, yet very valuable grain of truth in that perception. In the next several posts I will share a simple analytical approach to generating domain names.

Background

The main idea behind the education marketplace that our company is creating was conceived three years ago during one of those very satisfying “aha!” moments when waves of ideas came up in my head one after another in a continuous storm until I formed a complete picture of what might be.  Back then I was a first-year MBA student at Wharton and the Lauder Institute, which is where I refined the idea further over several months.  However, there was no official name for the marketplace until I registered the domain name.

Problem emerges

As many people faced with the task would do, I scribbled down a long list of names for the website that I thought might be good. I also asked three of my friends to generate similar lists for me. People love donning on their “expert in domain names” hat, so asking for help is really worth it. In one day we collectively generated over four hundred domain names.

I soon discovered a big problem: the absolute majority of the domain names from those lists had already been registered—speculators and cybersquatters rein in this market.  Domain names that are obviously cool usually cost a fortune: for example, a good friend of mine paid $500K for a domain name a few months earlier for his online store in Brazil.  In my particular case, every time I asked speculators to sell a domain they would usually demand a ridiculous price right away regardless of what the domain was. One such speculator from Toronto wanted over $40K for a four-letter domain name, and that was a “bargain” offer which paled in comparison with some other quotes I received.

Further analysis of the situation revealed an unfortunate trend:  100% of these quotes were light years above my reach. If I were to pay for all the “cool” domain names from my lists, I would end up paying over $2 million. This revelation rang a very loud alarm bell:  if the quotes I received were fair market prices, it would mean that my friends and I generated $2 million worth of ideas in just a day. This was hard to believe.

My next post on Sunday, May 14 will detail my solution. Stay tuned, post comments and questions, like us on Facebook, Tweet about us, sign up for our launch.

Now with development work going at full speed, we decided that in addition to all things education, we will blog about our experiences building the company and about the technology that we are developing.

Tomorrow, I will start implementing this change with a series of posts on how we approached choosing our domain name. Stay tuned!