The Motley Fool

Is Investing in Chinese Cybersquatting Profitable?

People who buy domains to resell them for a profit are known as “domain investors” in polite company, and “cybersquatters” in much less polite terms. They both own domains that a business entity wants to use, and they’re both accused of holding domain names ransom and getting in the way of good business. Given the high-profile cases adjudicated in China over cybersquatting, investors should carefully investigate these high-risk investments.

Domain Investors vs. Cybersquatters

Domain investors argue that they treat domain names like real estate, buying and/or developing domain names in the hope that they will be bought in the future, at a cost that reimburses investors for their time and effort. This group of investors claims that its work is legitimate, because it’s putting effort into identifying brands and responding to market needs. In some ways, they are pure capitalists in this market. They figure out what it needs or wants, spend money to monopolize that resource, and then sell it to others who want/need those “assets.”

Cybersquatters are famous for buying domains that have the same names as famous businesses or people. They also purchase common misspellings of a brand’s name. Cybersquatters in mainland China have been able to sell registered Chinese domains to foreign companies that have their trademarked and/or copyrighted term(s) in the Chinese domain name.

Profitability

Selling Chinese domain versions of foreign companies’ trademarked and/or copyrighted terms used to make cybersquatters lots of money.

However, as China’s intellectual property laws have continued to develop and received increased enforcement, the Chinese government has become less tolerant of blatant cybersquatting. In fact, the Chinese government has released guidelines that indicate what kinds of evidence must be presented to its dispute resolution boards before its courts will take action against alleged cybersquatters.

Investment Opportunities or Scams: Legal Loophole Opportunities

The Chinese language has different character combinations that can produce the same pronunciation of brands’ names, their products’ names, brands’ nicknames, and their trademarks’ names.  Also, China requires that brands’ names and symbols be registered trademarks and copyrights in Chinese before they receive government protection.

Chinese businesses have rushed to register domains that are the same as, similar to, or refer to popular foreign companies, brands, and products. The businesses hope that when these foreign companies/brands enter the Chinese market, they will be forced to buy the registered domains from their Chinese owners at steep prices.

Factors to Consider Before Investing

Return on Investment (ROI)

As an investor, your job is to decide whether any company can offer you a good return on investment (ROI). In this particular case, “domain investors” carry a great deal of risk that may affect how you calculate those return opportunities.

Liquidity

Domain names are not easily sold. They do not have any historical value, nor any future value based on the performance of an industry or company. In fact, appraisers of domain names are infamous for overvaluing them. Since domains are bought based on buyers’ guesses that they’ll fetch a decent price, and sold for what people are willing to pay for them, they are by nature high-risk investments.

Nature of Investment

It is generally not possible to know when a domain name will be in high demand, who will want to buy it, and when it will be purchased. Thus, if you are going to invest in a company that buys and sells domain names, consider it as a long-term investment. A few of the company’s domain names may get purchased for a high price. But others will be sold at breakeven or a loss, and a significant number may never be sold at all. Nevertheless, the company hoping to sell those names must regularly pay to register them and maintain them.

Legality

Whether you call it “domain investing” or “cybersquatting” depends on your perspective on this industry. There seem to be differences between the two groups, but at the end of the day, both involve companies that buy and register domains to sell them to some other business that wants or needs those domains for commercial reasons.

If a court or dispute resolution committee decides that the domain holder is a cybersquatter and has broken the law, it won’t enjoy a big payday. But if the domain holder is held to be acting lawfully, it might score a good or amazingly profitable payday, depending on how badly the buyer wants that domain name.

For the record, some notable companies that fought Chinese cybersquatters and won are Tencent(SEHK: 0700), eBay(NASDAQ: EBAY), DreamWorks Animation, and Clydesdale Bank. Moreover, brand-name luxury companies like Gucci, Burberry(LON: BRBY), and Christian Dior(EPA: CDI) are currently fighting alleged Chinese cybersquatters. International companies are clearly willing to fight to defend their brands against cybersquatters. In some cases, they’re winning.

In short . . .

Domain investing is a high-risk investment that can pay off handsomely. Given the vagaries of the Chinese language and how foreign brands and products are referred to in China, this cottage industry has enjoyed considerable profits. However, as the Chinese government clamps down on cybersquatting, the opportunities for guaranteed payoffs from these brand-name ransoms have begun to decrease.

As an investor, consider your risk tolerance and whether you are looking for a long-term investment. If you are okay with both, research the companies that are buying and selling domains. Specific factors to weigh when you decide include the liquidity of your investment and – most importantly – the legality of the companies’ operations.

*******************************************************************************

Want to know more about the Hong Kong market?

There are lots of myths that could stop us from being successful investors. In Hong Kong, we might have the impression that people generally get rich by buying property. But is real estate the best-performing asset class?

We’ve recently published a Special FREE Report on the Hong Kong Market: The 4 Rules for Winning in the Stock Market: A Foolish Guide for Hong Kong Investors.

We highly encourage you to download a free copy right now—click here now!

Stay tuned for the latest from Motley Fool Hong Kong by following us on Twitter @motleyfoolhk. & liking us on Facebook 

Disclosure: Alisa Hopkins doesn't own any shares of companies mentioned. Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance.