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Renting out Web names garners big bucks

Nick Koustas is a landlord of sorts on the Web, leasing out popular generic domain names to companies willing to pay big bucks to hold the names for a limited amount of time.

Nick Koustas' father has been in the real estate business for years, so it's only natural that he would follow in his footsteps--but with a dot-com twist.

Koustas has become a landlord of sorts on the Web by leasing out popular generic domain names to companies willing to pay big bucks to hold the names for a limited amount of time. And unlike landlords, who have to fix leaky faucets or faulty foundations, Koustas' business is relatively low-cost: All he has to do is pay a $35 yearly fee to keep the domain names running.

"It's a great business because there is no overhead and they pay me a monthly amount," said Koustas, who said that years ago he "realized the direct correlation between the domain name and the real estate market."

Buying and selling generic domain names used to be a hugely lucrative business. In late 1999, at the height of the dot-com heyday, Business.com sold for $7.5 million. However, the prices of domain names have dropped steadily in recent months, as many companies have failed to create businesses out of generic names. Some companies have been holding fire sales on domain names in the hopes of clearing just a few thousand dollars--still a tidy profit compared with the $35 or so a year it costs to register a domain.

Koustas himself used to be a cybersquatter. He registered a few trademarked names, but then turned them over when companies including the major record labels and Weight Watchers went after him. Instead, he decided to concentrate on generic names and in 1996, the Denver-based businessman turned to one of the few profit-making sectors of the Web--porn--and registered Smut.com.

"I never wanted to sell it," Koustas said. "There aren't many short, concise adult names that are generic and can be marketed in public."

The porn industry has been ground zero for heated disputes over domains. Last year, a judge ruled that one of the most popular domain names ever, Sex.com, was stolen from its original owner. The judge also ordered Stephen Michael Cohen to pay Gary Kremen $65 million for usurping the name and holding it for several years. However, Cohen has fled, and Kremen is offering $50,000 for information leading to his capture.

Since he registered Smut.com, Koustas has gotten offers as high as $2 million to sell the domain name but figured he could make even more money by leasing it. It turned out he was right.

Koustas has been leasing the name for several years and recently signed a deal with Xpays, a major porn company, to rent Smut.com for the next 20 years. He wouldn't disclose the terms, but did say his leasing model so far has garnered more than a million dollars, and this agreement is worth substantially more than that--a sum paid in the form of a monthly fee plus a percentage of revenues. Xpays confirmed the agreement but wouldn't comment on it.

Domain names like Smut.com and Sex.com owe their value to the fact that thousands of people will type in the name without going through a search engine or other promotional mechanism. And "the best traffic you can get is type-in traffic," Koustas said, because there's no cost to attract customers.

Koustas also leases the misspellings of Lasvagas.com and Vagas.com to an offshore casino.

The leasing of domain names already exists, but it seems to be a more popular practice among companies leasing to consumers, not vice versa. For example, some companies lease domain names containing popular surnames, allowing people who weren't quick enough to secure their-last-name.com a chance at a little slice of personalized cyber real estate.

Other companies let people lease domain names containing professions, so Web surfers can have a specifically tailored e-mail address. Some of the sites charge consumers as much as $20 per year, but others are free.

Many people don't see much application of a lucrative leasing model beyond the porn world.

"The leasing really is going to be limited to the rare case when the generic name is so valuable someone is willing to rent it," said intellectual property lawyer Sally Abel of Fenwick & West in Palo Alto, Calif. "Outside of the porn area, I don't see it really generating revenue."

Abel said it's unlikely such leasing will take off. "I don't see it being a cottage industry in the same way that the selling of domain names became a cottage industry or being a registrar is now a cottage industry," she said.

Registrar Antony Van Couvering of NameEngine said leasing is a risky move on the part of the company that rents the name.

"If you're branding something, and you only have the brand for a short time, what's the point of promoting it?" Van Couvering said. "All of the value would go to the lessor."

The move to lease names comes as a slew of new top-level domains are in the process of going online. However, many of the new domain names could be out of circulation before they ever hit the market. Many registrars are allowing trademark holders to come forward and assert their rights over certain domain names, and some companies are trying to claim generic terms--an attempt that could work without very careful oversight by the companies doling out the names.

For example, companies have claimed rights to domains such as Sex.info and Computers.info. And DuPont is trying to grab Science.info. If companies succeed in nabbing such generic domain names during the supposed special period for intellectual property holders, then very few new Web address will be available later.