How will Pay-per-click, type-in traffic, social media, and valuation affect the domain name industry?

1. Betting solely on pay-per-click type-in traffic is risky. Hundreds of thousands of domains are being snapped up by some of the big players in the domain name industry based mostly on their pay-per-click multiple (paying 5-7 years current earnings). But what will happen to type-in traffic? Will it continue to grow or at least stay level? Will people continue to click on ads found in boring parking pages? At last year’s Domain Name Roundtable in Seattle, ICANN chairman of the board Vint Cerf, while giving his thoughts the future of type-in traffic, suggested that as search gets better the percentage of people that type-in domain names will decrease, but that as the internet community grows there may be a greater absolute number of people using direct navigation.

There are a couple of scenarios here that are not mutually exclusive. It has been predicted by some that click through rates on typical parked pages will decrease due to increased user awareness and even a compelling ad does not guarantee the user will click. This poses a problem for affiliate marketers where their affiliate links will be bypassed by users purchasing a product. The surfer simply feels someone else shouldn’t get a cut of the action for his purchase. There might come a day in which users won’t click on a parked page ad purely because they don’t want to give money to one of these “domain investors” they’ve heard about.

Secondly, people realise how bogus some of the statistics are about direct navigation, in terms of correct stats being misapplied . Marketers reference the conversion rates of direct navigation when they discuss type-in traffic. But most studies on direct navigation define it as bookmark visits in addition to type-in traffic. Bookmarks convert very highly because visitors have been to the site before and thought highly enough of it to bookmark it. Under this definition typing in ‘amazon.com’ also applies to the stats. Actual conversions from type-ins are much lower than bookmarks. Due to the afformentioned, along with the trademark issues faced by some of the most profitable type-in Domain Names, the day of reckoning for big players with trademark domains is quickly approaching.

2. Social media is hard. Some domain name owners are trying to piggy back on so-called social media to make their domains a repeat destination, with Demand Media perhaps being the biggest player in this space. Due to it being founded by an ex-MySpace exec, people are paying attention. But there are a lot of smaller players in this space as well. However, social media is hard and domain quality matters little. Creating a social community on the web requires both work and luck. MySpace (NYSE: NWS) for example started in a niche, got some traction, and then hit a tipping point, but there are hundreds of social communities with arguably a better platform and premise than MySpace that have failed. And simply throwing up thousands of community-ready sites won’t make them successful.

Second, domain quality in Social Media matters less. Consider the following: MySpace.com, Friendster.com, LinkedIn.com. They are memorable and easy to spell, but beyond that there are few requirements for a social media domain - would they have done any better had they been called Space.com, Friends.com, and Connections.com? They would have received some initial type-in traffic, but it takes more than that to create a community.

3. What will happen to domain valuations depends on pay-per-click and how much the value of domains is embraced by the business community at large. But it also depends on exchange rates. It also depends on asset values as a whole, as pointed out by legendary domain investor Frank Schilling.

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