Entrepreneurs profit from internet domain loophole

Entrepreneurs have been taking advantage of a five-day grace period to sample millions of domain names, keeping the relative few that might generate advertising revenues and dropping the rest before paying.

The grace period was originally designed to rectify legitimate mistakes, such as registrants mistyping the domain name they are about to buy.

But with computer automation and a burgeoning online advertising market, entrepreneurs have turned the return policy into a loophole for generating big bucks. It's akin to buying new clothes on a charge card only to return them for a full refund after wearing them to a big party.

Experts believe spammers and scam artists are also starting to use the grace period as a source of free, disposable web addresses. With up tosix million names tied up at any given time through a practice known as domain name tasting, individuals and businesses are having even greater difficulty finding good names, particularly in the already-crowded ".com" space.

"The system really doesn't work to the advantage of people who have legitimate reasons for wanting names," said Frederick Felman, chief marketing officer with MarkMonitor, a brand-protection firm. "It allows people with criminal or speculative intent to dominate."

Entrepreneurs acquire taste for domain names

Cybersquatting has been around for more than a decade, and scores of entrepreneurs have made thousands and even millions of dollars reselling names they had bought for as little as $6 each. With tasting,entrepreneurs generally aren't grabbing names to resell but to generate traffic andonline advertising revenue.

The internet's key oversight agency for domain names, the Internet Corporation for Assigned Names and Numbers (ICANN), has for years required operators of major web suffixes such as ".com" to refund cancellations within five days. Tasting became more practical about two years ago when automation allowed newly available ".com" names to go live almost immediately, providing an additional half-day for sampling.

The loophole works this way: Speculators write software to automatically register hundreds or thousands of names. Some are variants of trademarks or generic keywords that internet users are likely to type — or mistype. Others are names grabbed after their original owners fail to renew. During the grace period, the entrepreneur puts up a web page featuring keyword search ads and receives a commission on each ad clicked.

Services like Google Inc.'s AdSense for Domains and Yahoo Inc.'s Domain Match help large domain name owners set them up, even as the search companies officially oppose abuses in tasting.

Addresses likely to generate more than the $6 annual cost of a domain name are kept — not a high threshold given how lucrative search advertising is these days. The rest are thrown back into the pool on the fourth or fifth day, only to be grabbed by another group of domain name tasters.

Practice leaves sour taste forreal customers

But because the process is automated — the names are grabbed as soon as they are let go — legitimate registrants barely have a chance, according to Jay Westerdal, president of Name Intelligence Inc., a company that analyzes domain name patterns.

The practice has spiked, with an average tasting of 1.2 millionnames each day in December, compared with 7,200 two years earlier, according to data from Name Intelligence. Legitimate registrations made uptwo per cent of the registrations at the end of 2006, down from about half in 2004.

In an e-mail statement, one company that engages in tasting, Wang Lee Domains, said the practice was "perfectly legal" and brings "customers to the companies that advertise."

Operators of the ".org" database have tried to strike back, winning approval in November to charge a restocking fee.But VeriSign Inc., which runs ".com" and ".net," has not publicly backed one. The oversight agency ICANN said it was still studying the extent of the problem.

Understanding ramifications encouraged

Critics of the system say VeriSign and ICANN both benefit from the thousands of names that are tasted and kept, collecting fees proportional to the number of names sold.

"The risk is you don't want to necessarily move too fast or have a knee-jerk reaction without understanding the ramification," said Michael Denning, general manager with VeriSign's Digital Brand Management Services, which encourages companies to register additional domain names before tasters can get to them.

The practice, meanwhile, shows no signs of waning.

A newer variant, sometimes called "kiting," involves the same company reregistering the same name every fourth or fifth day to hang onto it in perpetuity, without ever paying for it.Anti-spam experts also suggest that spammers and scam artists are turning to the loophole to register new names every couple of days to avoid detection.

"We see them using hundreds and hundreds of domains, and even at $5 a domain, that's costing them thousands of dollars, which they probably don't want to be losing," said Matt Sergeant, senior anti-spam technologist at MessageLabs Ltd.