Website and Database Valuation - Intellectual Property

Website and Database Valuation

 (Intellectual Property)

Dr. Roffeh Shani

Introduction

Start-up & software companies, Internet websites, domain names, databases are included in the definition of intellectual property and, as such, can be given a financial value. The valuation of this type of property is an obscure topic that often reaches the Court as part of the legal process or in when there are individuals or groups who have an idea that they wish to sell or raise funding for in order to realize their vision.

In this article I will attempt to shed light on the topic as a whole and thus reduce roomfor errors in order to bring about a realistic and just understanding of the value of Internet systems, domain names, databases, and so on. The chapter will address primarily technical consideration and place a lesser emphasis on legal considerations. Its goal is to present to the readerthe range of variables and circumstances that should be taken into account when attempting to evaluate the value of these types of intellectual property and thus, as noted, to reduce room for error.

I would further note that in light of the multiplicity of variables and circumstances, the scope of this chapter is too limited to include all of them (I will do this in my next book ). However, I will attempt to present as much data as possible to facilitate a better understanding of how to value this type of property.

I would emphasize that this chapter addresses, primarily,the initial valuation of a project.  If the project passes most of the tests presented in this chapter, then it is possible that it justifies an in-depth examination. I would further note that in light of the great differences between technological ventures, it is necessary to examine each project individually and to implement a system of balances based on the parameters that add or reduce weight to the potential investor’s decisions.

The main difficulty with this type of valuation lies in the absence of true information about development potential, the nature and loyalty of clients, the sources and variety of Internet website traffic, and many other variables that I will address later.

As well as these variables we have the componentsthat contribute to the uniqueness of new development, the technology used by the developers, the ability of the technology to withstand harm at all levels, and future options to broaden the product according to market changes. From a different perspective, another difficulty in assessingvalue is that this is an enterprise that is at its beginning and that has yet to yield a return or does not offer proven innovative technologies.

If this is not enough, examination of stock purchase and sale transactions of companies traded on stock exchanges indicates that there is no relationship between the value of the traded stocks and the actual price of the transaction. This difference derives from a broad range of variables.

In my opinion, the gap derives primarily from the valuation of intangible assets whose value does not receive appropriate expression in financial reports. Examples of this include: databases that include a list of clients (primarily their consumption practices, prices, client reliability rankings, and so on), copyrights and patents, licenses and franchises owned by the company and/or sold by the company, consumer dependence  that develops as a part of daily routine, brands, human capital, technological complexity and if it can be duplicated, prestige, including the age of the domain name, and approximatelythree hundred different variables that together create a ‘mosaic’ regarding the valuation of intellectual property.

Alongside these virtual variables there is additional data not all of which is  expressed in financial reports and/or does not reflect its real value; for instance, over valuing in order to gain a controlling interest as opposed to the purchase of some of the stockwithout gaining control, over valuation for the strategic investor, etc.

From a different perspective I would note that enterprises, by their nature, need continuous cash flow and hence the correct and balanced valuation of the venture is of considerable importance. A valuation that is too low may cause sale at a loss and thus considerable dilution at an early stage of the venture, and conversely, a valuation that is too high may create the opposite effect and may indicate that the venture is divorced fromreality and/or the does not understand the business environment in which it operates.

Before I list the more common valuation methods, I would again note that the valuation of intellectual property of companies or ventures is a complex process, with a tremendous volume of variables that demands a considerable investment in market research and comparison to similar transactions, emotional elements, users’ considerations, and future financial data; in other words, not all of the information gathered can be quantified.

Moreover, as a rule, the valuation of the work is not based on one method but on a number of methods each of which may yield different results. I would further note that at the basis of all the methods are processes for the feasibility examinations, the nature of the idea and the technology, the collection of data, market research studies, verification and analysis of collected information, examination of information provided by the owners of the company/venture.

In the physical world four methods for the valuation of companies are taught in business administrationschools. Before I present the methods and variables that must be taken into account before performing an initial valuation, I would note that there exist alternative methods that can be used in the attempt to deal with the valuation of software ventures, Internet websites, domain names, databases, and so on.

On this matter, I would note that the methods examine a limited number of variables while,to my knowledge, the volume of variables is tremendous and hence lacking. However, I will refer to this matter later. The following are the ‘traditional’ methods accepted in the market.

Assets Value Method

            This is a simple method intended primarily for companies with real assets that can be evaluated. This method balances between the economic value of the company’s assets and the market situation and the entirety of the company’s commitments.

            On the matter of assets defined as intellectual property such as a product in the development process, databases (client/recorded user databases), Internet websites, and so on, which perhaps can be translated into income, I would note that the method does not have a real way to quantify these data as a part of the constellation of balances. The method of the valuation of the assets indicates the performance of a comparison with similar ventures in the market and their value on the basis of the number of visitors to the website and the ability to translate the volume of the visitors into revenue.

            On this matter I would note that in light of the fact that visitors to a website are often motivated by emotional variables and preferences that cannot be measured by tools recognized in the method, this method, as mentioned, is deficient. However, as previously mentioned I will address this topic at length later.

Discounted Cash Flow (DCF)

            The method is based on the assumption that this is a ‘live’ business that produces positive cash flows. Therefore, the value is calculated as the expected discounted cash flow. The method performs a correlation between the company’s cash flow including future estimates of future expected cash flows, and the deduction of the company’s debts and liabilities through the use of different financial predictions, such as revenues and expenses, development costs, marketing, sales, and so on.

            In my opinion, in light of the fact that these are ‘live’ databases, and the fact that there are infinite fluctuations in the Internet market in general, and constantly appearing technological changes and new systems, this method is controversial as it is not possible to measure predictions over time and hence this parameter is deficient. In other words, the method is not commensurate with the data required for the purpose of the valuations for technology and Internet companies.

The Duplication Method

            This method calculates a comparative measure between companies and ventures from the same field. The measure is based by the multiplication of similarities to other companies, by referencing the same unique parameters for the evaluated company.

            The method is based on the relation between the value and the parameters presented in financial reports. For instance, the scope of sales indicates the worth, correlation between equity and the capital, and so on.

            From a technical perspective, it is necessary to build a series of multipliers with a known value for companiesin the same industry, for instance, multiplier of sales, multiplier of operating profit, multiplier of equity, and so on. From the data obtained a mean is created, then use is made of the target company’s parameters and the value is calculated.

            Alongside these conservative multiplier methods and if this is a comparable business model, there are approximatelyanother 175 technological parameters that can be compared, which I will address at length in my next book. This method requires the allotment of resources and an in-depth analysis of the company / venture, including examination of the definitions of the company’s objectives, its present size, the market situation at which it is aimed, and its growth potential, market forces, and competitor’s ability.

            After all the parameters, and primarily the technological ones,have been collected, a market survey is conducted with the goal of analyzing and comparing the value of competing companies. This data is used to arrive at a company or venture value. In addition, it is necessary to take into account that in start-up companies it is accepted to also perform an evaluation of the multiplier of future flow, alongside an examination of the uniqueness of the technology and the difficulty with duplicating it. On the basis of these parameters and others, the value of the company will be determined. It is necessary to remember that in contrast to a company with an existing cash flow, here this is valuation and hence it is mandatory to take into account the risk element.

            From a different perspective, the valuation of worth based on amultiplier can also be performed in a consumer calculation, namely, a market analysis and an examination of the existing potential for the purchase of a product of this type. For instance (in an extreme case), a drug that is effective against the Ebola virus has tremendous market potential, although in reality there is no comparative data for the execution of the multiplierprocedure.

Real Options ValuationMethod

            This calculation method is intended primarily for new start-up companies and/or ventures that have still not reached the sales stage. This is a method that measures the value of the future product as an option for the realization of sales predictions, relying primarily on the product during the developmental processes, market characteristics, the activity of competing companies and many additional parameters that, similar to themultiplier method, are unique to the world of technology.

            As mentioned, it is harder to determine the value of start-up companies than companies based on an actual cash flow. Hence,considerations that could affect value include business inspiration, vision, understanding of the world of technology, identification of potential, and a search for ground breaking achievements that borders on gambling.

            This can be compared to the valuation of an abstract product, a vision of the future. To understand this, it is first necessary that we be aware of the stages that start-up ventures experience. These are as follows.

            Generally, a start-up company undergoes a number of ‘rounds’ for the  recruitment of capital and financing sources, ranging from pre-seed money, at the initial stage of the idea, to the recruitment of money from venture capital funds and initial public offerings (IPOs) and/or sale of control in the venture.

            The Pre-Seed Stage. This stage is, as previously noted, the first stage in which the entrepreneur invests from his personal money. In this stage the capital is used for the development of the idea, to examine feasibility and enable an in-depth study of the issues involved. This is a stage that usually entails an investment of a few tens of thousands of dollars. In cases where the idea’s originator does not have access to financing, alternative methods of financing are available, for instance, bank loans, government funds for research and development, and so on.

            The Seed Stage. This follows the feasibility check and is the venture’s research stagewhere the first steps in the construction of the business model are taken. In most cases, this requires a significant recruitment of capital to promote the project and the entrepreneur look for serious investors who will, in turn, closely and professionally examineand evaluate the venture.

            This is one of the most dangerous points of investment, since the model is still in its infancy, the idea stage. At this stage investment is for development and not for marketing.

            I would note that there are investors who specialize in this stage of investment where investment ofcapital ranges from hundreds of thousands of dollars to millions of dollars per venture. From the investors perspective, it is necessary to analyze in-depth the feasibility of the venture’s success and to translate the business model into a return on investment(ROI) that is attractive to the investors.

            From a legal perspective, this is one of the most complex topics as the unknown outweighs the known with respect to process performance which makes the valuation process itself a less than exact science.

            The Round or First Financial Round is intended, in most cases, to fund the beginning of manufacturing and sales, after the initial prototype stage (the Seed stage). I would note that although the venture is now at a stage whereit has a final product, it may need further financing for the following reasons:

Continued Research and Development. Although the company has a product ready for marketing, in most cases it is necessary to maintain the advantage over competitors making it essential to continue with the development process and to create a new, improved, more effective version. Another reason is the constant change in the world of technology, a fact that necessitates innovation, improvements, and constant presence.

One prime example are the Microsoft for cellular phone operating systemswhich have changed greatly over the years. In 2003 Microsoft launched its first operating system for mobile phones (WM). The first operating system was called Windows Mobile 2003. Later the company released WM5, WM6, and so on.

In 2010, after Apple (developer of the iPhone mobile phone series) improved its mobile phone operating system, Microsoft smartphone operating systems stocks lost considerable market value. Consequently, that same year, the company reached a decision to completely change the operating system’s structure as well as its image which included the change of the system name to Windows Phone.

The new Windows operating system for cellular phones is called Windows Phone 7 (WP7), and it was launched on February 15, 2010 at the National Congress for Mobile Devices. The new system replaced the older WM6 system. Previous Microsoft operating systems were all related and included improvements and various technological upgrades for previous system versions.

The WM6 system, for instance, was based on the WM5 system, which was based on the WM3 system, and so on. In contrast, the WP7 operating system was a totally new system that replaced all previous hardware and software components with new, innovative technologies.

Consequently, the company’s stocks climbed and Microsoft is working on further changes and improvements, whilst continuing to innovate in order to maintain its position in this market segment.

Another reason can be the result of a relatively long sales process that includes complex marketing processes, recruitment of marketing and sales people, appearances in international conventions and meetings, collaborations, public relations and advertising, and so on.

I have often found that advertising and marketing processes can cost more than the actualmanufacturing processes.  This is a central element contributing to the success or failure of the venture as a whole.

There are otherreasons that it is difficult to impossible to predict, for instance, a sudden recession in target countries, a company that developed a similar and/or more effective product, initial sales in the first stages fail to fund development costs and the venture’s ongoing expenses.

Round B or the Second Financial Round. In most cases, this is early stage working capital financing where companies sell their products but are not yet profitable.

The Third Financial Round. This is intended primarily to finance the extension of business activity for ventures that have succeeded in reaching the balance point between expenses and revenues, or the break-even point. In other words, this is a profitable venture. This is also called mezzanine financing.

The Fourth Financial Round. This is also called bridge financing and is intended primarily for the financing of processes required to float a stock issue when the company ‘goes public’.

Returning to the issue of evaluating a company’s value, as  already mentioned, it is harder to determine the value of start-up companies than of companies withan actual cash flow. Hence, considerations often includebusiness inspiration, vision, understanding of the world of technology, identification of potential, and so on.

This is compared to the valuation of an intangible product. In other words, and in my opinion, the shown so far do not allow the clear ‘quantification’ of the variables and hence investors must examine the feasibility and profitability of an investment based on technological parameters and others that I will address later as well as the tradition ‘gut feeling’ that also play a significant part in any investment decision.

Often the investor chooses to give weight to the venture’s team, to its previous experience and success stories, the ability to promote the venture, and so on. Human capital and success stories are an interesting parameter. Despite what is often said, in my opinion it is possible to ‘quantify’ many variables and thus to abandon the use of ‘approximately’ and to increase the degree of certainty in the venture’s success.

I would note that additional parameters are expressed, for instance, the idea’s uniqueness, its advantages over other solutions, its intellectual value (intellectual property), business partners with influence in a variety of fields, human capital, and so on. All these help increase the potential inherent in the venture, and thus the feasibility of a positive cash flow and may constitute a means  for persuading investors.

Consequently, the following question needs to be asked. What carries more weight and significance – the calculation method or gut feeling?

My perception is that valuation of worth is often biased by sympathy that reigns in the market for a certain company or its area of activity. A prominent example is the launch of new generations of iPhones.  Share pricefluctuate driven by feelings and by partial information that the company provides before the device launched. In other words, to put it in popular terms, a product that achieves extensive media coverage is considered a ‘hot product’ which increases it value and potential for revenues.

Indeed, it is necessary to be cautious about this unestablished method. As mentioned, from the perspective of the investor attempting to value a specific venture thereexists a real difficulty in the valuing of a start-up company or venture for which historical data showonly investments and expenses and no revenues or profits. In such ventures the estimate of predicted revenues is purely speculation, or in other words, the chances of success are not predictable.  It is necessary, therefore, to examine the venture’s vision with especially critical eyes whilst creating a balance between opportunity and risk with the greater weight being placed on the risk. 

I would further note that the more innovative the product a lack of competitors and/or a component that enables a comparative examination in contrast to competitors, so it is necessary to give greater weight to the  equation’s riskcomponent.

As mentioned, it is necessary to remember that the development budget is part of the venture’s overall budget and frequently also constitutes a minor part of its expenses.  The larger part of the budget is devoted to efforts to have the product penetrate the market, to change user’s software preferences and habits, to achieve new standards, whilst continuing to invest in new development, and the adapting the solution for changing markets.

For these reasons, the valuation of intellectual property necessitates an in-depth examination and frequently such examinations indicate that the supposedly innovative idea has existed in the market for many years. If the idea is indeed innovative, then it is necessary to examine all the variables (as stated previously, approximately three hundred variables) that are given different weights according to the type of venture, reason for development, location in the world, manner of application, degree of innovation, marketing components, and so on, which do not receive any expression in the traditional methods of measurement that I presented previously.

We learn from  all that so far stated that ‘traditional’ methods provide partial coverage to physical variables, namely, they cannot solve issues that address the core of technology in cyber space, alongside the examination of technological variables as a whole, for example, issues that address unique ventures that include diverse technological components that have no parallel in the business world. In these situations, the multiplier method, thediscounted cash flow method, and the assets value method cannot be applied.

In other words, the methods do not take into consideration the uniqueness of the idea under development, the added value of a technological product, technological trends that change in cyber space in general and in technological industries in particular and the potential target market.

Examples include the valuation of Instagram at about one billion dollars, although in essence the company has not generated any revenues at all. Another example is the social network Pinterest[1], whose value is estimated today to be about five billion dollars.

Pinterest is inching ever closer to joining the 11-digit club. The online scrapbooking site is now valued at $5 billion after raising a new $200 million round of funding. That brings its valuation nearer to that of cloud storage service Dropbox and alternative rental site Airbnb.

The new money comes from SV Angel, Bessemer, Venture Partners, Fidelity, Andreessen Horowitz, FirstMark Capital, and Valiant Capital Partners—all existing investors. Six months earlier, Pinterest secured a $225 million funding round that gave it a $3.8 billion valuation. To date, the company has raised $764 million through six rounds of funding.

This past September, Pinterest announced that it would begin to roll advertising into its platform through "promoted pins." Much like a sponsored tweet on Twitter, these posts are paid for by advertisers and flagged as such. Pinterest pledged to keep the promotions tasteful, transparent, and relevant in an effort not to antagonize users[2].

Explanation: Pinterest is an Internet company with technology applications for cellular telephones. The development allows for the collection, sharing, and storage of visual data, using different types of search tools. Users can save and share events and resources, including ‘boards’they created such as similar characteristics, participative subjects, birthday parties, vacations, interior design, holidays, and so on. The website was established by Ben Silbermann, Paul Sciarra, and Evan Sharp and is managed by Brew Laboratories[3], which is a small group of entrepreneurs and investors.

In addition, the system enables businesses to create Internet pages for the commercial promotion of the business, the creation of collaborations, referrals, improvement of the website’s search engine ranking, increase of exposure, advanced branding in cyber space, and additional improvements that together create clear preference in favor of the brand that invests time and resources so as to promote its affairs.

Moreover, as part of the process of creating a business page, the system seeks to enterthe page creator’s website address. In addition, the system creates a link through a metadata[4] label that the systemobligates the user to enter intothe website it owns and then the system creates the same label and examines the working order of the website.

On this issue, I would note that in cyber space there considerable importance is attached to the referrals of links from different websites, especially those that engage in the same field, websites with a high ranking in the search engines[5], in the same language, in the same geographic location, and so on.

From this we learn that traditional valuation methods cannot cope with this environment and hence much data that could have been used for the valuation of a venturewas not taken into account at all.

From a different perspective, I would note that there is a correlation between the company’s investment in research and development (R&D) and in the registration of patents for technological products it developed and its value. Similar companies whose business model is not protected, namelycan be duplicated, have a lower value than that of companies with patents.

Indeed, ‘confusion’ prevails in the valuation of technology and Internet companies in particular and of their intellectual property in general. I would further note that some have attempted to deal these issues through a number of approaches to value such companies. In my opinion, these are also deficient but I will still refer to them here.

The first is the cost approach. According to this method, the value of technology and Internet companies will be determined on the basis of the sums that were invested in the development of the technology or the website, namely, the sums that were allotted for research and development, marketing, and so on, up to the time of the valuation.

Then, it is necessary to examinethe cost of establishinga similar venture and to evaluation and comparethe data obtained from calculations of the sums invested and the data obtained from the valuation of the venture’s establishment from its beginning.

In my opinion, this approach is mistaken, and I will explain my statement. The cost approach only  shows what is invested and not the business potential innate in the venture. It is possible that, from an examination of the venture based on its expenses, a series of mistakes that occurred throughout the research and development process will be exposed. Moreover, there is no correlation between marketing ability and future requirements of the product and the research and developmentprocesses.

Then there is the ‘income approach’. As  already mentioned, the value of the company is determined based on the income that it produces. This method is mistaken in two respects. The first is a situation, similar to the cost approach, in which the website or company produce no revenues making it difficult to determine what future revenues can be anticipated from the venture’s activity and/or in light of the fact that the venture has not yet been marketed and hence the company does not enjoy and real revenues.

I would further note that in technological ventures it is difficult, if not impossible to learn from present revenues about predicted revenues, namely, it is necessary to examine the marketing model in-depth, budgets that were invested until now, the feedback that was obtained from users, alongside an in-depth analysis of clients and/or surfers on the website.

Another method is ‘relative valuation’, or in other words, an examination of the value of acquisitions by similar companies active in the same field that is used as the basis for establishing the company’s value.  The main difficulty with this method is finding a venture that constitutes an accurate comparative basis for the company being examined, so that there exists a real be real correlation that will enable the comparison.

In my opinion, it is difficult, if not impossible, to identify an absolute correlation between technology ventures that will make the comparison possible. My statements are based on the fact that it is doubtful whether the company performing the comparison will cooperate in a way that will enable the execution of the comparison, and if only for the reason that it does not want to reveal the uniqueness that gives it a relative advantage.

Moreover, difference technological structures, the age of the domain name, the hosting location, the website language, the handling of variables that promote the system, the size and quality of databases, the quality of the IP address, the uniqueness of the design, the user experience, the advertising campaigns, usage, alongside many additional parameters (as mentioned, about three hundred in number) constitute the difference, and hence it is doubtful whether it is possible to perform a correlation based on a valuation of relative worth.

Another method for the valuation of an Internet website is the measurement of the financial value deriving from the movement of people on a website – the traffic valuation method. To implement this method, it is necessary to promote the website and over time. In addition, it is necessary to examine and analyze the quality of search words that the search engines (Google, Yahoo, Bing, and others) associate with the website. It is further required to examine artificial intelligence systems and the manner in which search engines translate linked parameters and to examine the quality of search words in relation to the users’ understanding.   This may require simulation tests alongside quality tests for the users, search relevance and their ability to provide value to the site and so on.

As well as these tests, it is necessary to examine the cost of promotional advertising for instance, ‘Google AdWords’ per click (CPC – Cost Per Click) for defined search words and hence it is necessary to correlate between the number of users who arrived at a site as the result of a search of specific words, the cost per click, and the number of orders actually placed.

I would note and emphasize that the volume of users by itself does not constitute a measure of value for the examination of a website’s value. An in-depth examination of surfers who entered the website is required, as well as an examination of the surfers’ quality and their behavior whilst on the website, and it is necessary to analyzethe number of surfers and the number of orders actually placed. Moreover, it is necessary to matchissues mentionedin previous sections relating to the measurement of user traffic financial value and to be aware that a lack of parameters reduces the general weight awarded to user quality.

In my opinion, the measurement of the financial value of traffic is but one measure of the three hundred measures that, as a whole, give a financial value to the website or the venture.

The difficulty with the valuation of technology and Internet companies lies in the fact that, for the most part,historical data about the company are sparse and describe a certain stage in the venture’s technological evolution. Alongside these variables, there is a level of uncertainty regarding future growth in comparison to the nature of the technology and to other fields.

If this were not enough, this equation includes the innovation and competitive development of future technologies variables that may significantly shorten the life expectancy/sales expectancy of the product; namely, revenues are only for a set period of time. These facts and many others are expressed common in investors who fear to invest in technology ventures or in investors who suffered heavy losses as a result of optimism and lack of caution.

Hence, the valuation of a technological venture such as an Internet website, database, or any other form of intellectual property, is a difficult and complex task and it is necessary to examine the variables in a different manner from that used to value a company operating in the ‘old economy’. Despite this, I would note that if one or more of the basic principles exists, then it is necessary to maintain them as a basis for valuation. In other words, as long as there is a cash flow, certainty about the rate of growth, and/or elements that link to the physical world, then it is necessary to make use and give added importance to provendata as the basis for the valuation.

To summarize  and before examining the issue in-depth, I would note that on the matter of start-up ventures, databases, and technological systems in general it is necessary to conduct the valuation process in a broad manner. There are variables that have no connection to the accounting world, and hence the measures should be addressed in a way that is different from familiar accounting methods when we attempt to examine the worth of the company in the physical world.

Moreover, because of the changing nature of technologytime has a place of honor and the advanced technology of today is the outdated technology of tomorrow. Hence, time and timing is of great significance and I will examine how to perform the valuation oftechnological ventures.

From the investor’s perspective, the accepted principle is his expectation for a positive cash flow and as fast as possible. Reality has shown that achieving apositive cash flow is a distant dream.  The company must spend considerable money in development and marketing, and so this is not a one-time investment with the aim of obtaining a profit as soon as possible.

From an investor’s broader point of view, I would ask what  is the economic value of an abstract venture? For instance, how did Facebook set the value of Instagram when it decided to purchase the company? The answer clear, it was not possible to rely on one valuation method to determine an economic price that can be quantified at the time of purchase and that Facebook’s considerations included the creation of a competitive advantage over its competitors, alongside the extension of the services and activities offered by the company, while understanding that the life span of  any specific technology is short. Another goal of the purchase was to block competitors from achieving an advantage and gaining obtaining access Facebook’slarge target audience (database) which the company can use to generate future revenues.

These considerations, which constitute a decision making basis for a specific investor, may influence the final value, for example, by increasing its fictitiousvalue or by reducing the weight given a measurement based on tangible data, such as volume of expenses, time and resources that were allocated in favor of research and development and so on. These data will not be taken into account by another investor, and hence another parameter becomes part of the equation, - the investor’s personal measure and opinion.

Before I address the issue of the valuation of Internet websites, domain names, databases, and so onin-depth, I will present an explanation about the structure of the system as a whole.

As mentioned, a website is composed of three main parts. The first is the domain name which I have already addressed inprevious chapters. The secondis the management of referrals and human identification of the domain name (known technically as the DNS) and the third are the website’s files.

DNS is an Internet service with the task of translating a domain name in its human form (letters and numbers) into an IP address (only numbers). The system connects the IP addressto the relevant domain name thus allowing access to website files which can be hosted on a server anywhere in the world.

From a different perspective, it is possible to compare the DNS system to traffic lights controlling the flow of traffic at an intersection.As with the road junction, without the control and direction provided by the DNS service in the virtual world, it would not be possible to access a website or obtain email services from addresses that end with the same domain name.

Returning to the physical world, as part of the process for evaluating property value, it is necessary to examine the ‘intersection and traffic light control system’. This is a component with great significance on the evaluation of the value of an Internet venture.

The last factor is the location of the website’s files,the location of website files in the system’s server, which are managed, for example, by Microsoft’s ISS (Internet Information Server) system[6]. I would emphasize that it is possible that all three are found in the same place. However, it is equally possible that each one of them is found at a different location in the world.

To focus my statements, I would say that the fact that an Internet website ends with the letters co.uk, com, ca or any other suffix does not necessarily indicate that the website is hosted on a server that can be found within the physical borders of the United Kingdom, the United States, or Canada, respectively. Like its predecessors, this data is of considerable significance on the ranking of the website by search engines, and,as a result, isan element of value when we  examine the valuation of an Internet venture.

We learn from that written that when we attempt to provide a value to intellectual property such as an Internet website, it is necessary to take into account the fact that it is possible that we are embarking on a world-encompassing journey accompanied by computer and Internet experts, a journey whichcould includevirtual visits and collection of data from different places around the world.

Initial Valuation of an Internet Website

            In light of my previous statements, I would first like to say that when we perform the valuation of an Internet website, it is necessary to take into consideration that there is a relationship between all the  elements that together create the entire virtual model.

            In cyber space there are billions of Internet websites covering an almost infinite number of fields.  Together, they constitute what could be called a ‘virtual mirror’ of our physical world. Estimates indicate thatevery day some 80,000 new websites are added to the Internet and some 20,000 websites are removed from the Internet. As in any business area, in cyber space there exists a flourishing industry for the sale and purchase of web sites, when often the buyer is unable toevaluate the real worth of the proposed website.

            On this matter, I would note that there are a number of well-known methods for an initial (superficial) valuation that will provide an estimate of the economic value of the website offered for sale. I wouldemphasize that this is purely an outline evaluation and that these methods should not be seen as an in-depth measure that indicates underlying business potential.

            I would further note that this may be compared to the Pre-Seed stage when investors are recruited.  This is, as explained earlier, namely, the feasibility examination stage of intellectual property with a certain value that can be realized, or in other words, future benefit of some type can be derived.

            Explanation. The benefit to the website purchaser lies in the fact that the purchase a number of websites creates an Internet ‘mosaic’of linked sites which leads to an increase in the search engine ranking of thehome website which the owners are interested in promoting and increasing visits to. This is one of the 173 parameters that should be used to promote a website on the Internet (in professional language, SEO)[7].

            Despite the importance of the multiplicity of the inter-linked referring websites, it is necessary to take into account that exact duplication of the site’s content, including the source code, the design, and the technological mechanisms, will achieve the opposite result and the ranking, and hence the value of the website, will be reduced. Moreover, the quality of the contents, the exclusivity of the website over the IP address, its location in the world, the number of webpages stored on the same server, the speed of traffic, the contents that the domain presented in the past – all these and more may constitute a negative measure for the website and a negative measure when attempt to evaluate its worth.

            Many other factors must also be examined: the existence of profit channels, volume of maintenance and operation expenses, a technological structure and the business relations that are behind the user interfaces, the source of the information (whether through the establishment of the website or information that arrived using data transfer technologies ), number of visitors and an in-depth examination of the quality of the visitors, whether there is a forum on the website and, if so, its technological quality, and the quality of the contents, whether the website has a newsletter system (electronic press), how many people are registered for this mailing system, is the website listed on search engines and if so, which engines and an examination of the quality of ranking in each individual search engine and so on. (As previously mentioned, there are about 300 different parameters and sub-parameters that create a mosaic that points to website quality.)

In this chapter I will attempt to provide a number of tools that will enable the execution of an initial examination, so as to examine if this is an Internet system that is worth an in-depth examination to estimate its future viability. I would further note that strategic elements will not be taken into consideration in light of the fact that this is individual data specific to the individual purchaser.

In the first stage, it is required to examine the website’s age (the age of the domain name and the number of years that the domain name directs to the examined website), alongside an examination as to whether there are actual revenues from Internet activity.

On the matter of revenues and subject to the website’s business model, it is necessary to examine revenues from product sales, provision of services, advertising programs, customer reward programs, etc. From the total revenues monthly websitemaintenance costs, such as website hosting services, payments for advertising, payments for information receivedthrough different network service systems (web service[8]), design services, website promotion etc.

It is reasonable to assume that an Internet website that produces revenues will draw potential buyers. In order to obtain an initial estimate, we must calculate the net rate of profit and multiply by 15 (rule of thumb[9]).

From a different perspective, it is possible to examine calculations for the cost of software or website development and project management costs, and examine whether there is a correlation between the multiplier and future business potential, alongside an examination of all issues that could block or hindermarket penetration.

Some maintain that a rule of thumb calculation indicates the need to invest ten work hours for every site screen (software page). In my opinion, this is incorrect for the following reason. As part of the technological systems, it is often  required to develop a components that connect systems through Web Service technologies, are required to manage complex databases, entail stringent information security requirements, necessitate a dynamic design for every user as well as developments that primarily engage in the scope of the technology rather than appearance.

For this reason, it is possible that the calculation method may be misleading in all that pertains to the amount of time required for the development of the system. Despite this, lacking data or knowledge, it is possible to use this method to perform an initial evaluation of project scope.

Further on this matter, my recommendation would be to examine system/website characteristics and, given that there is a correlation between stated characteristics and actual characteristics,it is possible to rely on the scope of development evaluation defined in the specifications. This data requires that we perform another examination to ensure that the characterization document is correct and provides the relevant, required details. For this reason, I chose to go into detail about what is required on this topic. I would note that when defining the hours to be allotted for the project it is necessary to take into consideration the time required for preparing system specification documents as these are an integral part of the development process and must be seen as an inseparable part of the system as a whole. What is required is described as follows:

·         It is necessary to define the document’s goal, to provide an abstract of relative advantages, special emphasesand to present the project in short. It is further required to present an abstract regarding business activities, if such exist. On the topic of project goals, these must be describedfrom the client’s perspective.

·         It is required to provide details on how the proposed solution is perceived including a description of the concept with a detailed explanation as to how, according to the authors, the solution is correct for the client and suits his goals.

Further on this matter, I would note that the team responsible for compiling thespecifications is supposed to include people expert in: system specification, databases, Internet technology, user interface planners and engineers, user interface designers and system designers in general, project manager, etc.

Regarding the solution’s description, it is necessary to include a full description of the components(with their price) in order tocreate a correlation between the client’s and the supplier’s expectations.

·         As a part of the process, it is required that the target audience be examinedas well as definitions and future marketing, adherence to guidelines for the writing of correct code so that search enginewebsite/system promotion will be effective in relation to definitions of search expressions relevant to the business.

·         It is necessary to develop and maintain information security procedures and to characterize the proposed solution on this issue. I would emphasize and note that not meeting the procedures of information security in the specifications, alongside literal compliance on the part of the developers, constitutes negligence. On the topic of information security procedures it is necessary to examine, during the first stage, the development components an individualized manner and then the system as a whole.

·         In addition, it is necessary to examine the integration of third-party solutions (existing technologies sold to a client that can be integrated as a part of the system under license). On this matter it is necessary to examine all proposed solutions, costs, work methods, nature of technology, reducing development hours relative to the purchase of the object[10], future costsand to examine the development of technology and relevance of the product to the foreseeable future.

It is necessary to provide details regarding the valuation of the price involved for this work. It is important to note the cost of use licenses/third-party products if they exist.

·         In addition, it is necessary to describe all site screens, software componentsand systemsin order to examine the systems proper, daily functioning, the user experience, interface design, and so on.

·         It is necessary to develop, maintain and update QA (systemquality assurance before client hand over).

·         It is necessary to examine and carefully adapt development tools and databases. A mistaken choice in this matter may bring about the system’s collapse, its duplication by competitors, loss of revenues, and a list of faults and errors that couldcause losses, and make the project non-viable.

·         It is mandatory to take into consideration instruction, assimilation, and documentation, placement of servers or websitehosting, maintenance and responsibility, repair, definition and limitation of responsibility, maintenance services, telephone support, and so on.

Often, a part of my work, I am exposed to technological systems and Internet websites that were developed without system specifications. In my opinion, this is a mistakesince, lacking specifications, it is difficult to be aware of the development process and previous events relating to the site’s development which, in turn, can lead to many otherwise avoidable mistakes. From a legal perspective, lacking a specifications document, it is necessary to examine which of those involved in the site and its development objected (perhaps in an attempt to save time and money) to developing the document and it is necessary to take into account the fact that the objecting party is a significant factor in the occurrence of the mishap.

After performing an initial valuation and studying the specification document, we then examine a number of additional elements, the first of which is the number of visitors to the website, their uniqueness (unique visitors), and the nature of the traffic.

            Some maintain that traffic data can be obtained from an examinations of the statistics software installed on the website, which allows the execution a search for the number of unique visitors. In my opinion, this data is only partial and it is necessary to identify and analyze user practices, the source of traffic, the times when users visited the website, visitor language, the type of browser used, the times when traffic increased, the source of references to the website, including an analysis of their quality, volume of content provided by users in site forum systems (if such are installed).

            It is further required to examine the number of those subscribing to the mailing list, those who asked to be removed from the mailing list, examinations of personal suitability, returning and repeat clients, user satisfactionstatistics, and so on. I would note that there are more than ninety different parameters that should be examined from statistical data, which constitute a single unit for marketing systems and organic promotion (SEO)[11] on the Internet, which I will address later.

            On the matter of mailing lists, I would note that this is a part of the site database, and a part that has a potential value of thousands of dollars for every 10,000 subscribers. This depends on the quality of the subscribers, their affiliation to a specific business sector, the age of the database, and the integrity of the data, for example, lists of lawyers, physicians, businesses, and so on.

            Further on the matter of websiteforum systems and newsletters, it is necessary to take into consideration that manpower is required to manage these systems,to provide content (news), to answer (in real time) questions raised in the forum etc.  It is necessary, therefore, to take into add the expenses involved to the equation that determines overall costs.

            In addition, it is necessary to examine the structure of the system regarding the exposure of information in the forum to search engines, as this aids in the sites exposure and ranking. If these systems open to search engines, then this can be seen as an advantage which adds economic value to this component.

            Regarding forum systems and their relationship to the site database, if those registered on the forum were required to provide identification details when registering,and if registration included permission to install ‘cookies[12]’ on the user’s computer which will provide details regarding  consumer habits, hobbies, family situation, and so on, data acquired can be extremely valuable in financial terms.  It will allow for the presentation of s site screen, automatically adjusted to the specific user allowing for targeted adverts to be displayed.  This personal data will be stored in the site database and can be used for future marketing operations and will significantly increase the site’s value.

With regard to investment of resources in SEO activities, this will be covered in detail in my next book. Nevertheless, I will describe this topic briefly so that it will be possible to perform an initial valuation of the organic promotion of a website on search engines.

Prior to this, however, I would note that an examination is also required regarding key words that will create a correlation between the website’s content, the nature of the ventureand the search engine, which in the end are supposed to influence the website’s positioning and ranking  in search resultsthat have a direct relationship to search queries. For this purpose, an associative examination is requiredof the words and the expressions that pass in the thoughts of the individual, from the moment he heard about the venture/website.

Next, an examination of a number of search engines is required, namely, how the search word/expression is written and how this effects the website’s position in search results. 

I would note that websites that do not appear at the top of a search engines results list (and at the top of the results page)have little or no economic value. Only those search results that appear at the top of the search results page and are immediately viewable without having to scroll down, have real economic value.

The higher the website is search engine results, so the greater its economic value.This is because the first search results displayed on the results page, and especially the first, will receive from 15% to 40% more traffic than other, less prominentlydisplayed sites.This is true both of Google and other search engines.

Sites displayed in second place can expect a 10% to 25% increase in traffic while the third place site will achieve 5% to 17% more traffic. Fourth place sites will get 3% to 9% more traffic, fifth place 2% to 7% and sixth place sites 1%-4%. Other rankings can expect, at the most a 1% to 3% increase in traffic.These figures refers only to search results on the first page.

I wouldalso note that the percentage of users who do not go to the second page of search results ranges from 90% to 95%.  Thus just 5% of users will access the second page and only 1% will view the third page.

From this we learn that only those sites listed on the first page of a web search have any real financial value and that the scarcity of users who react to other results is one of the reasons why these sites cannot be given a real financial value.To this must be added other elements including whether the site is regularly indexed by search engines, if the site has ever been the victim or perpetrator of spam mail, whether the search engines can access and scan the various site pages, and so on.

It is necessary to understand that the goal of the search engines is to present the most relevant results for all search queries, and hence the need for precision in website definitions and the need to optimize the website to attract better the search engine results. The following is taken from an explanation about Google’s search engine Google[13]:

Check your site is in the Google index

•Do a site: search

When a webmaster tells us that his or her site has fallen out of our search results, we often find that it's still included. To quickly determine whether your site is still in our index, just perform a Google site search for its entire URL. A search for site: google.com, for instance, returns the following results: http://www.google.com/search?num=100&q=site:google.com Note that you shouldn't include a space between the site: operator and your domain name.....

See if your site has been impacted by a manual spam action

•Check the Manual Actions page

While Google relies on our automated systems to crawl, index, and serve web pages, we are also willing to take manual action to protect the quality of our search results. If your site contains spam or is otherwise in violation of our Webmaster Guidelines, we may take manual action on it, including demoting it or even removing it from our search results altogether. If your site’s ranking is impacting by a manual spam action, we’ll tell you about it on the Manual Actions page of Webmaster Tools. (To see this data, you must have added and verified your site.) (To see this data, you must have added and verified your site.)

Make sure Google can find and crawl your site

Crawling is how Googlebot discovers new and updated pages to be added to the Google index. Our crawl process begins with a list of web page URLs, generated from previous crawl processes, and augmented with Sitemap data provided by webmasters. As Googlebot visits each of these websites, it detects links on each page and adds them to its list of pages to crawl. New sites, changes to existing sites, and dead links are noted and used to update the Google index.......

Make sure Google can index your site

Googlebot processes each of the pages it crawls in order to compile a massive index of all the words it sees and their location on each page. In addition, we process information included in key content tags and attributes, such as title tags and alt attributes. Google can process many types of content. However, while we can process HTML, PDF, and Flash files, we have a more difficult time understanding (e.g. crawling and indexing) other rich media formats, such as Silverlight......

Assuming thatthe word or the expression searched for on a search engine returns a link to a web site, subject to the ranking that I mentioned previously, it is necessary to examine the volume of competitors websites and the number of times the site appear in relation to the same expression.

Explanation: It is not given that a website that appeared once on the first page of the search results, will consistently appear at the same level every time the exact same expression is used. An identical search process must be initiated from a number of independent computers connected to different computer networks using different browsers and different operating systems.

Given that search results repeat themselves frequently, we proceed to the next examination: that of the value of a specific expression for a website. For the purpose of this examination, it is possible to use Google’s AdWords[14] system, which defines the price that it charges the client for every click on a link that leads to the website.

On this matter, I would note that in the past, competitors would act in illegallyby executing multiple clicksin links pointing to their competitors in an attempt to exhaust their advertising budget. This resulted in a situation where the ‘attacked’ website’s ads no longer appeared on relevant sites for a period of time and until the budget was refreshed. Today, search engine identification systemsare able to detect whether this is a unique user of the same user executing multiple clicks for whatever reason. If multiple clicks by the same user are detected, the advertiser is charged for only one click..

I would further note that the price Google collects from the advertiser is for the clicking on the link displayed following a search.  The act of ‘clicking’ does not guarantee that any transactions will take place. I would emphasize that global statistics indicates that only 1% of all those who enter a website actually make purchases.From Google’s perspective and in light of the difference in the costs charged for referrals, we learn that the company (Google) analyzed the service that the advertiser provides and performed an adjustment between the advertising website and the price that it charges for the referral.

To put simply, if the advertiser is a college or a law practice, and the service they provide is measured in thousands of dollars or more, the price of the referral will be some tens of dollars.  Conversely, a link to a product whose value is counted in single dollar transactions will range from a few cents to a dollar or more. Another indication that Google examines is users’ behavior, marketmeasures and examinations and analyses of behavior from different angles.

Returning to the issue of word price evaluation it is possible to examine the value of a word/expression that Google charges for referring a client from the search engine by using the AdWords system. Assuming that we succeeded with all the tests, it is necessary to calculate theword/expression’svalue alongside it’s placement in  search results and measure the exposure accordingly, in addition to all the other parameters that we have already mentioned.

I wouldnote that this is solely an initial evaluation and that if we succeed with all the tests we noted previously, then it is necessary to examine in-depth all the parameters that will finally determine the real value of a technological venture. From the material I have already presented, it can be seen that this is not a ‘gut feeling’, but rather an evaluation based on mathematical parameters through which it is possible to examine the venture in realistic terms and in relation to all markets variables.

On the other hand, the seller (the website owner, the person seeking an investor) shows statistical data from different systems that are linked to the website in order to prove why he needs the required investment. On this matter, I would note that it is necessary to examine this data with great caution. These statements are based on the fact that statistics systems rely on data and information that the system/website developers release regarding the systems. Given that this data is essential to the recruitment of potential investors,it is possible that the data will be slanted in the developer’s favor in order to present a positive picture to the investor.

Also,the statistical data provided indicates that the website is an active site and that it will be possible to examine comparative data gathered from search engines in order to perform a comparison between data presented by the seller and data collected independently.

Unlike the physical world, as  already mentioned, cyber space changes, as do marketing methods. A number of years ago, search engines in general and Google in particular developed an artificial intelligence mechanism that creates a correlation between words that searchers write in the search engine and words that are synonymous or have connection to the specific word.

Before I examine how this effects the appraisal of a website’s value, I would note that in Israel this issue has been discussed in the courts as the result of a negative correlation that the system created in connection to a person’s name. On the matter under discussion, there exists an innovative marketing mechanism that enables the creation of connections between search engines and expression definitions thus enabling the search engine to identify and direct the searcher to relevant sites.

Explanation: Following are a number of ways with which it is possible show search engines the relationship between the word or expression and  a specific website.

The first way involves the publication of a direct link to the expressions that we want to promote using anautomatic completion mechanism. These advertisements are shown on websites with a large number of visitors (high traffic volume) and it is necessary to cause these visitors to click on the link. This accomplished by website promoters who tend to offer ‘incentives’ for users who cooperate, for instance, participation in a lottery, gifts, discounts, and so on.

Another method involves a ‘real world’ advertisementsuch as appearing on a radio or television program with large audienceand, as part of the broadcast, to implicitly direct viewers or listeners to search for a relevant term using search engines. Using the same analogy, it is possible to hire the services of a number of students who are geographically situated at various locations around the world (different Internet providers and different IP numbers) and to provide them with search expressions that they will use, in combination with the name of the person or the company, for an internet search. This way shows the search engine that there is a correlation between the name and the other words.

I would emphasize that this,like the Black Hat method[15], this is an illicit methodfor the promotion of websites. If search engines identify an unusual scope of surfing, then this may lead to ‘punishment’, namely the search expressions value in terms of search results will be reduced and return results that are far down in the results table, in an unrealistic position.

As with the radio or television program, it is possible to create media buzz around the search term that the site owner wishes to promote. This requires maintainingregular public relations such as, displaying and presenting relevant information on internet sites and ‘regular’ media.  It is also necessary to maintain maximum viral distribution so that search engines artificial intelligence systems will learn from the network. From a different perspective, I would note that this is one of the cheapest ways to brand and/or change the branding of an existing product.

On the matter of website valuation, the significance of automatic links lays in the significant advantage it gives the user over competitors. This can be compared to appearing on the first page of search results, which will result in 15%-40% increased traffic to the specific website.

In light of the fact that there is a constant struggle to achieve higher rankings in search engine results this method could be preferable.  Subject to the quality of the expression, its relevance to the website, its ranking among other  correlations that the search engine creates, the length of the expression, the number of search engines and local indexes (in different languages) that referencethe expression as well as additional parameters, can have considerable economic value for the venture as a whole.

Further, from the perspective ofcontent, as already mentioned, users tend to search for information or a product through the Internet in cyber space. The role of the website is to give its visitors the information they are looking for. On this matter, I would note that the use of quality content on the website has precise expressions and enables website promotion to the first pages of search results. Put simply, it is necessary to examine the website content, the quality of the texts, the frequency of updates, the range of languages that effect website ranking, alongside additional parameters that constitute a consideration in the matter of valuation.

Returning to the issue of system complexity and the source of data, as mentioned, the degree of their relevance, the innovation, and additional data preserve the place of the website relative to its competitors. For this purpose, there exist content providers whose role is to sell content for websites, namely, are sub-contractors who sell the  material written by content writers. This is a WS technology that is used primarily for the purpose of transferring data between interface systems and Internet websites.

To understand the dimensions of usage, imagine a situation in which the information presented on the leading tourism websites in the world, for example, booking.com, expedia.com, is not up to date. Or take, for example, a website that deals with various sporting events such as horse racing, car racing, tennis, soccer, or any other sport, and presents the results the day after an event.

For this purpose, data transfer technology was developed and information presented on the website is provided by a third party (transparent to the user). The following was taken from Amadeus Web Services[16] (one of the world’s largest content providers in the field of tourism):

Amadeus Web Services is an Application Programming Interface (API) that delivers individual Amadeus functionalities via SOAP/XML messages. Web services allow you to integrate travel-related functionalities into any application you may want to create or may already have, such as a booking engine, Web site, travel agency front-office, corporate self-booking tool or robotic tool.

Amadeus Web Services latest generation technology offers you unparalleled connectivity from a single point of access to the entire range of Amadeus' comprehensive content. It offers you a cost-effective way to build and update your own customized travel booking applications. It's easy to implement and integrate with existing systems, ensuring that you will always be at the cutting-edge of technology.

            On the matter of valuation of worth, it is necessary to take into consideration when performing tests, the dimensions of the development, the number of information suppliers and the integration between them, the cost of maintenance including monthly payments and/or payment derived from the invitations (examination of the agreement with the supplier). Using these variables, it is possible to examine the reputation of the website, whether the website operates in a saturated environment, the degree of the technological and marketing investment, and so on.

             In light this, one of the main questions that arises is: How is it possible to evaluate the website’s degree of exposure in the search engines?How is it possible to examine the volume of the traffic in an objective manner? Following are a number of ways to do this:

·         Google Page Rank (PR): The page ranking system of Google’s search engine is the most common method used to measure website quality. The system divides websites into ranking groups 0-10.  The higher the ranking, the greater the websites exposure.

I would note that a ranking 10 is rare with 7-9 generally being the highest rank.  A ranking of 5-6 indicates that the site is seen by Google as being a quality website, 3-4 is the average for websites, 0-2 is under-average and therefore not a realistic  candidate for the construction of a link for this topic.

To perform the examination, go the Google search engine. At the bottom of the page look for the PageRank link, type in the address of the website you want to examineand see the result. This is an initial estimate for the number of links that refer to the website and their quality.

Despite that said, I would note that it is necessary not to rely just on this examination tool as many websites obtain a high ranking, which can be misleading on the matter of evaluation of the real value of the website.

·         Alexa[17] is another examination tool that should be used. This describes the degree of the website’s exposure according to the number of related entries.

Unlike the PR value of the Google search engine, Alexa ranks the website list into groups. Websites with the highest level of exposure, such as Google, Facebook, Twitter, are at the top. Unlike the Google ranking system, with Alexa the low ranking is the most popular. In other words, websites ranked under K10 are considered more viewed; a ranking of K10 to K30 are the highest viewing percentages. Websites with a ranking up to K100 have a respectable traffic and under this the websites are considered as having misleading traffic.

The system provides a toolbar[18]that can be installed on the computer. The toolbar constitutes an integral part of browsing in a website and with provides in a simple and friendly mannerinformation about the website’s traffic. The following was taken from the Alexa website regarding estimation of system traffic.

Alexa's traffic estimates are based on data from our global traffic panel, which is a sample of millions of Internet users using one of over 25,000 different browser extensions. In addition, we gather much of our traffic data from direct sources in the form of sites that have chosen to install the Alexa script on their site and certify their metrics. However, site owners can always choose to keep their certified metrics private.

Our global traffic rank is a measure of how a website is doing relative to all other sites on the web over the past 3 months. The rank is calculated using a proprietary methodology that combines a site's estimated average of daily unique visitors and its estimated number of page views over the past 3 months. We provide a similar country-specific ranking, which is a measurement of how a website ranks in a particular country relative to other sites over the past month.

My recommendation is to integrate Google’s and Alexa’s examination tools.

·         CustomRank.com. is an examination engine that provides a service that combines a number of checks from different examination systems, simultaneously. The following is a list of the systems that it collects and presents: Alexa, mozRank, mozTrust, and so on. In addition, the website presents measures such as loading time, domain registration date, listed in DMOZ[19], and performs comparisons and unique average indexes.

·         MozTrust and MozRank are technological tools that were developed by SEOmoz[20], which constitute a useful measure for website promoters. The system acts in direct analogy to the website situation, as the number of links entering the website is a source with a higher ranking, the points are higher.

Explanation: The nature of links is a broad topic of its own. In this matter, I would note that the greater the similarity of content between the referring website and the examined website, so the ranking index increases. I would further note that this is a long list of additional parameters that indicate the nature of the referring website. To summarize, the system creates a correlation between the nature of the referring websites and the links themselves and thus determines ranking.

On the matter of website valuation, I would note that in my opinion this is one of the best parameters, which indicates the quality of the website. The following was taken from the system website:

MozTrust is Moz's global link trust score. It is similar to MozRank, but rather than measuring link popularity, it measures link trust. Receiving links from sources with inherent trust—such as the homepages of major university websites or certain government web pages—is a strong trust endorsement.

How is MozTrust Scored?

MozTrust

We determine MozTrust by calculating link “distance” between a given page and a seeded trust source on the Internet. Think of this like six degrees of separation: The closer you are linked to a trusted website, the more trust you have, yourself.

We score MozTrust on a logarithmic scale between 0 and 10. Thus, it's much easier to improve from a MozTrust of 3 to 4 than it is to improve from 8 to 9.

How can MozTrust be improved?

MozTrust can be improved by getting links from other sites with high MozTrust such as government institutions and universities.

·         These systems are joined by Google Trends and Google AdWords, which are primarily tools for the examination of keyword traffic and comparison between the numbers of websites searched for. I would note that these systems can perform comparisons between a number of websites over time and with regard to the valuation of the website value these are effective and useful tools.

Another topic that we must examine is the venture’s development language and the degree of financial investment required so as to continue its development. It is also necessity to examine employee salary costs (the developer, project manager, etc.) in the development environment, design variables, and so on. I refer to these variables as the lifecycle of the Internet website (the venture).

            Before I examine this matter in-depth, I would note that the main variables are changes in activity (growth, innovation), technological developments, changes in related systems such as WS systems, changes in the environment, changes in the structure of the Internet, speed of traffic, non-adjustment to new tax requirements, merger or acquisition, issues relating to information security, information encryption methods, development time for innovative systems as opposed to the time required for continuing the development of older systems, the ability of the database to include a large number of records, alongside technological innovations in the field, the ability to integrate systems with applications in the cellular environment, the ability to handle a large volume of user traffic and the extension of activity to a number of additional countries, etc.

            In order that it will be possible to answer all the questions, it is necessary to examine the system specifications so as to define whether the venture indeed meets the needs of the organization and the goals of the system. It is necessary to examine the definitions of business processes in the automation components and to identify system constraintsin terms of schedule, budget, manpower, priorities, etc.

            In addition, it is required to examine existing solutions, to analysis of possible courses of action, alternatives, extension or change of existing software, possibilities for outside development (software companies), purchase of off-the-shelf software and customization for the needs of the organization / the website. These variables have great importance with regard to the valuation of the venture’s worth. I would also note that if the project is economically viable at a specific time and given that the lifespan of the project is doubtful, it is necessary to significantly reduce the value of the venture. (This is true after an in-depth examination of the costs of the venture – benefit/profit and with regard to the effects ofinnovation in the venture alongside an examination of the variables as a whole.)

            The lifecycle of the venture is, in many cases, also linked to the cellular environment, and raises the question as to whether existing technology can provide Internet information for this environment? The cellular device is perhaps the most used and widespread communications devicein the world, and so, when we examine the value of the Internet venture, it is necessary to give weight to the question as to whether the application also supports this environment.

            On this matter, I would note that at first glance there would appear to be a similarity between websites and cellular applications. An adjustment is required subject to a number of variables, for example, different target audiences (age, geographic location, family situation, sexual preferences, health situation, socioeconomic situation, etc.), and available budget, the aim of the application, and its required attributes.

            In order that it will be possible to understand the differences between a cellular website and an application and also the economic significance with regard to valuation, it is necessary to learn about the advantages of the mobile Internet website as opposed to an  application and to understand the differences between the two.

            In general, I would note that the Internet website built for cellular devices is similar fundamentally to any other website using HTML pages which are linked to a domain name, including all the required definitions and linked to the Internet using one of the known methods. The main characteristics that differentiate acellular Internet website computer specific Internet website with a standard sized screen is the fact that the cellular website configuration is defined for a small screen, including the components that support the touch screen interface.

            Like every Internet website, cellular websites present textual content, data, pictures, and video. In addition, they can combine unique traits of mobile devices such as mapping location (GPS) or integration of telephone conversation directly from the website through the use of applications such as Skype or a regular telephone.

            Unlike an Internet website, applications are small programs downloaded from an Internet website or from a server provided by the service provider.  The applications (or apps) are installed on the cellular devices. Unlike an Internet website, the application is shown on a specific interface. The application can receive content and data from the Internet in a way similar to the website, namely, the supply of the data and information is on a regular basis, as long as there is an accessible connection to the supplier, through the Internet network.

            Regarding the question as to whether the value of a cellular application is greater than that of a cellular website or the reverse, inorder to reach a decision it is necessary to examine which of the alternatives meets more closely the goals of the venture. If the venture involves interactive games or an application that uses global positioning technology (GPS) in photographic devices, sending short messages, or a push notifications service, then it is safe to assume that an application is the correct option. If the venture merely presents content, then an Internet website is the correct option.

            From the perspective of business potential, I would note that it is possible to measure the traffic coming from cellular interfaces. In light of the multiplicity of cellular devices in the world, this is a development that has great importance regarding the valuation of the venture’s worth. On the issue of which of the aforementioned factors constitutes greater value for the venture as a whole, I would note that beyond that already written, in my opinion there is greater priority to the development of an application.  To explain.

            Unlike a cellular Internet website that is viewed by a user after he has searched for specific information with asearch engine, the application is used by a client who has a subscription and every application automaticallyconnects the client and the core system.In other words, this is not a random user, but a regular user with characteristics that can be learned from their use of the application as well as additional data learnedwhen the user registered to use the app.  Thereforethe value of application users is higher than that of cellular website users.

            As previously noted, one of the reasons for the establishment of a cellular Internet network lies in marketing goals. If this is the reason, then a cellular Internet website is preferable to the development of an application and it is possible that, for different reasons, it is necessary to develop both. Moreover, cellular Internet websites are accessible regularly for all users with a browser installed automatically as a part of the manufacturer’s operating system, unlike an application that requires the user to perform a process of identification, downloading, and installation before using the application.

            Additionally Internet websites by their very nature can be displayed and used on all cellular devices, while applications require a unique version for each type of cellular device. Another consideration is the fact that the cellular Internet website is updated by its owners independently of the device owner, while to update an application it is necessary to have the cooperation of the device owner.

            One of the important variables regarding the valuation of the venture involving cellular Internet websites is the fact that Internet websites cannot be erased by the user while,generally, the average shelf life of a cellular application after download is short.

            In addition, the maintenance of Internet websites is significantly cheaper than that of Internet applications and this must ben take into account when consideringfuture costs. In other words, the investment required for the maintenance of a cellular Internet website is negligible as opposed the costs involved in maintaining applications that includes support, development of upgrades, testing systems, solving compatibility problems and ongoing continuous development. These variables are significantly more expensive than the maintenance of a cellular Internet website.

            Hence, the following question arises regarding valuation of the worth. In whichcases is it preferable to develop an application? In response to this question I would suggest that despite the many advantages embodied in the cellular Internet, there is a definite numerical advantage to the use of applications. The following is a list of some of the more effective actions that can be implemented using an application:

·         Performance of complex calculations and/or production of reports. A technological application is preferable. It is possible to create a quick and simple interaction using the development of a designated application for the required calculations.  This will hasten the speed of the response as well its effectiveness andthe user’s experience.

Moreover, in a situation in which access to the Internet is not available and so, also, access to the cellular website, the application will continue to function, and data will be saved until communications are restored and it can be transferred to the main server.

·         In interactive games which require regular interaction with the remote server (through the Internet), an application is a wise choice

·         Adaptation to the individual user (prevent approach worldwide). If the client will be using the application continuously and regularly, it is possible to adapt theapplication’s user interface to meet the needs/desires of the client. Whilst it is true that this function is now available on some websites, the most effective and friendliest way is through an application system.

·         Native code[21] or a native application is a specific application that uses software and hardware components that are an integral part of the operating system. This includes camera component, GPS, SMS or MMS systems etc.

Although Internet websites are also known to use these components, the most rapid and effective way to implement them is through application interfaces.

To summarize whether a cellular application or an Internet website is preferable, it is necessary to examine the development target inorder to reach a decision on the matter of the economic value as a part of the venture as a whole.

As mentioned, if development goals are for marketing purposes or to provide content and presence in the cellular world, alongside the making possible involvement user involvementand interaction and identification on search engines, then the website is the realistic choice. Conversely, if the development goal is to create interactive communications with groups of regular users or to create an application for data processing, then a cellular application is the correct choice.

Often I have seen cases in which the initiator or developer of an idea is forced to sell the venture during its initial stages (for reasons of his own);this requires that the value of the website be assed whist it is still under development.  In this situation, we must examine system characterization, design, database, business plan, competitors, and vision – namely, the situation is similar to the situation that exists after the venture has been developed.

Despite this, it is necessary to reduce development costs and time. Conversely, it is necessary to examine the possibility that competitors will advance the launch of their venture, and the possiblefuture economic significance of a competitor when the site is launched.  To offset this, development costs must be reduced which leads to a rise in risk.

One of the prominent advantages of the Internet and the cyber space is the ability to virally disseminate information in different forms, including software development and cellular applications. Consequently, many ventures were built based on a model that provided a service and/or sale of a business model such as gambling systems, virtual casinos, tourist systems, and so on.

To evaluate the worth of these systems, it is necessary to conduct an examination of the business model, the scope of development, how information is supplied to buyers, numbers of employees, the investment required to ensure the system runs continuously(this is true also content input), and ability to develop the business model, alongside the many variables that exist in the cybernetic environment in general.

From a different perspective, I would note that until now we have engaged in the ‘nice’ side of the venture. As part of the initial examination process, it is necessary to examine the history of the website, which includesan examination of blacklists, data about other websites that was hosted on the same IP address, negative responses in forums and response interfaces of different clients, and so on.

To explain. Blacklists are lists that collect the names of users, email addresses, and IP addresses of serial offenders in cyberc space, with the purpose of limiting or blocking their access to a service or resource through the Internet.

Internet and cellular providers are generally responsible for the collection and documentation of these lists, as well as informationsecurity companies and/or defense systems and anti-virus systemsmanufacturers. The lists are update on a regular basis and systems are updated about potential offenders.

The appearance of the IP address, the email address linked to the domain name, the user name, or any analogy that links the website and one of the blacklists, suggests that the website (whether intentionally or not) took part in immoral or hostile activity in cyber space.

This fact necessarily reduces the site’s ranking in search engines, and, in our issue, it is necessary to examine the possibility of rebranding that includes a change of the domain name and IP address to new ones. Moreover, it is necessary, as already mentioned, to examine client response systems in the attempt to track the source of the damage and discover its scope and whether the damage can be ‘repaired’ or, a stated, rebranding is necessary.

I would emphasize that if one of the previously mentioned factors appears in one of the blacklists, then it is necessary to be very suspicious of the venture as a whole and it is necessary to significantly reduce the value of the package presented for sale.

Initial Valuation for a Domain Name

            At the beginning of my statements in this section, I would emphasize that the component with the most influence on thevalue of the domain name is the volume of traffic and not the domain name itself. Nevertheless, I would note that a short name with a direct analogy to the site’s purpose,significantly helps increase awareness of the site amongst consumers and the sites potential audience.  This should be taken into account when considering the site’s value. 

            In order to discuss the issues regarding the valuation of domain names, it is necessary to begin with an in-depth explanation to show complex this issue is.

            As previously mentioned, the domain name is the website address as typed into the browser’s top line (address bar) for instance cnn.com or facebook.com. As well as the main domain name, there are derivatives of domain name, known as a subdomain in professional jargon[22].

            Moreover, domain names are not acquired as property in the usual sense of the word.  This is not a one-time payment that grants possession of property (the domain name) forever but rather an annual payment that the domain names registrar has set, subject to an agreement signed by the domain name renter on his first day of rental. I would note that if the annual rental payment is not paid, the domain name is ‘released’ and can be rented by anybody.

I would further note that there is global uniformity regarding the issue of domain names. The following explains the topic of domain namesand appears in the Israeli Internet Associationwebsite, section 2[23]:

A domain name is the name recorder in the database of the registrar and in the global domain name system (DNS). The allotment of a domain name gives its holder the right of use, for the period of the registration, as a part of the service of the decryption of domain names that the registrar provides. The domain name is not subject to intellectual rights and therefore it does not have ‘owners’.

            The structure of the domain name is constructed so that the first part is in essence a collection of letters and/or numbers (it is also possible to combine them) followed bya period (full stop). What follows the period indicates the domains affiliation (gov = government, org = organization etc) or geographic region (UK = United Kingdom, IL – Israel). The following paragraph explains.

            The endings of domain names are divided into groups. The first group are suffixes related to the countries and/or organizations related to countries, for example, ac, edu, gov, and so on. I would further note that aside from the United States, following this are there are letters that affiliate the domain name to the country, for instance, UK, IL, ca, de. These domain names cannot be registered for everybody, namely, proof of affiliation is necessary so that it will be possible to register the domain name with the country suffix.

            In the second level there is a group of domain names open to all, namely, anybody or company can purchase a domain name with a suffix of any type and there is no limitation of geographic location, place of company registry, gender affiliation, field of occupation, and/or other limitation.

            I would further note that a process of identification is not needed to acquire a domain name.Namely, it is possible to register any domain name with a fictitiousname and/or the name of another company, even if there is no connection between the registering factor and the company.

            On the matter of the valuation of worth, I would note that the fact that the domain name is registered with a fictitious name or any company’s name does not concern us at the present time and that the process of the transfer of ownership is transparent site promotion systems.

            From a different perspective, I would note that there are many domain name registries in the world and that, as mentioned, any person or company can register a domain name with any register, regardless of the geographic location of the person or organization requesting registration. For instance, a person who lives in Panama can register a domain name with the godaddy.com[24]registry (a domain name registry and Internet services company that was originally located in the United States) and, if he wishes, the domain name can be registered with the suffix co.uk, which indicates an affiliation with the United Kingdom, or with any other suffix from the second level of domain names that do not indicate affiliation to a geographic region, for instance the ending lawyer, club, and so on.

            In other words, a relationship does not necessarily exist between the domain name and the content of the website and/or a relationship between the domain name and the geographic location of the registrar and/or the geographic location where the website is hosted and/or any other relationship.

            On the matter of the valuation of the worth, the location of the domain names registrar or the fact that the domain name is registered to the name of an existing company or a fictitious company is of no importance. The importance lays in DNS[25]referrals, the relationship between the IP address and the place we are interested in marketing, namely, variables that primarily influence the website itself and not the value of the domain name.

            On the matter of sub-domains, I would note that since, in most cases, the sub-domain is not marketed independently and is an inseparable part of the main domain name, it has little or no value. I would note, however, that this is subject to an examination of the business model, namely if this is a marketing system that promotes sub-websites in a separate manner from other subdomains and/or the main domain name, then it is possible that could have some value. This necessitates an in-depth examination of the business model and, subject to all other variables, an examination regarding resources that were invested separately until now in marketing processes.

            Another element in the group is the subdirectory folder[26]. The following explainsthe differences between the subdirectory folder and the subdomain.

·         The reference of the search engines as a separate website and not as an internal page as a part of the website. The most widespread difference between the subdomain and the subdirectory is that the search engine sees the subdomain as a separate website while in the subdirectory model the search engines address what is presented as a part of the main website.

·         On the matter of search results relevance, as mentioned, the subdomain is considered by the search engines to be a separate website and not an internal page on the website and hence it is easier to promote it independently in the search results.

·         On the matter of website content I would note that since the subdomain is a separate website the addition of content will not strengthen the main website as one unit, while the addition of content to the subdirectory is interpreted by the search engines as addition of content to the entire website.

Further on the issue of contribution the content to the website, I would note that it is necessary to take pains about the uniformity of the content, namely, the more focused the website on a specific field, so it will be considered more relevant in the search results. Therefore, if it is decided to use a subdirectory and not a subdomain, it is necessary to ensure uniformity of contentso that it matches the main website. This is different from the issue of the subdomain, namely, there is no importance to the correlation between content written in the main website and content in the subdomain website.

·         On the topic of the strength of links onpages stored in the subdirectory versus those found in the subdomain website, I would say that it would appear that a link from a subdomain website to the main website will be considered by the search engines as an outside link of value, while in the case of a subdirectory (internal page) the link will be considered an internal link of significantly inferior value than an external link.

On this issue, the following appears in the Webmaster Central Blog[27]:

What's the difference between using subdomains and subdirectories? When it comes to Google, there aren't major differences between the two, so when you're making that decision, do what works for you and your visitors. Following PubCon, our very own Matt Cutts outlined many of the key issues in a post on his personal blog. In addition to those considerations, if you use Webmaster Tools (which we hope you do!), keep in mind that you'll automatically be verified for deeper subdirectories of any sites you've verified, but subdomains need to be verified separately.

Matt Cutts[28], Gadgets, Google, and SEO said:

My personal preference on subdomains vs. subdirectories is that I usually prefer the convenience of subdirectories for most of my content. A subdomain can be useful to separate out content that is completely different. Google uses subdomains for distinct products such news.google.com or maps.google.com, for example. If you’re a newer webmaster or SEO, I’d recommend using subdirectories until you start to feel pretty confident with the architecture of your site. At that point, you’ll be better equipped to make the right decision for your own site.

                The work does not end here. The Internet website is composed of three primary parts. The first is, as already mentioned, the domain name. The second is referral management and the human identification of the domain name otherwise referred to as DNS, which I have already described, and the third part are the website’s files.

            The DNS is, as mentioned previously, an Internet service thattranslatesthe domain name from a form understandable by people (letters and numbers) into IP addresses (just numerals). In essence, this is a system that can perform links between IP addresses and domain names, and thus locate the precise position where website files are hosted on a hosting server anywhere in the world.

            From a different perspective it is possible to compare the DNS system to a traffic light. In other words, lacking direction in the virtual world it will not be possible to access and view a website or obtain email services at addresses that end with the same domain name.

            Returning to the valuation of the domain name’s worth, as part of the process of overall site valuation, it is required to examine the position of the DNS server and the number of places where its definitions were changed as many changes allow us to gain a better understanding of domain name history.

            The last is the location of website files, namely the place where the Internet website is defined in the system server, which is managed, for example,by Microsoft’sInternet Information Server (IIS)[29]. I would emphasize that it is likely that the three are found in the same location but it is also possible each one of them is at a different location in the world.

            To focus my statements, I would say that the fact that a website ends with the letters co.uk, co.il, ca or any other ending does not necessarily indicate that the website is hosted on a server within the physical boundaries of the United Kingdom, the State of Israel, or Canada, respectively.

            Further on this topic, I would note that great weight should be given to what was mentioned previously regarding the initial valuation of a website and not to the fact that the domain name is short. I would further note that given the lack of an Internet website to which the domain name refers, the age of the name is meaningless.

            To put it simply, the status of a domain name registered a decade ago but that never pointed to any website, is the same that of a domain name just now acquired.

            Another issue regarding the domain name is the referral of the domain or in professional jargon the redirect[30]. As mentioned in the explanation, some are forbidden according to the guidelines of the Google search engine: the following was written by Google on the topic of code 301[31] that performs an action intended to misleadsearch engines.

Change page URLs with 301 redirects:

If you need to change the URL of a page as it is shown in search engine results, we recommend that you use a server-side 301 redirect. This is the best way to ensure that users and search engines are directed to the correct page. The 301 status code means that a page has permanently moved to a new location.

301 redirects are particularly useful in the following circumstances:

•You've moved your site to a new domain, and you want to make the transition as seamless as possible.

•People access your site through several different URLs. If, for example, your home page can be reached in multiple ways - for instance, http://example.com/home, http://home.example.com, or http://www.example.com - it's a good idea to pick one of those URLs as your preferred (canonical) destination, and use 301 redirects to send traffic from the other URLs to your preferred URL. You can also use Webmaster Tools to set your preferred domain.

•You're merging two websites and want to make sure that links to outdated URLs are redirected to the correct pages.

To implement a 301 redirect for websites that are hosted on servers running Apache, you'll need access to your server's .htaccess file. (If you're not sure about your access or your server software, check with your webhoster.) For more information, consult the Apache .htaccess Tutorial and the Apache URL Rewriting Guide. If your site is hosted on a server running other software, check with your hoster for more details.

I would emphasize and note that in my opinion a domain that performs a redirect action as mentioned should not be seen as an element with economic significance when examining all considerations relating to the evaluation of a of domain name’s monetary value. Hence, on the matter of the valuation of the initial worth for the domain name, the emphasis is on the value of the website and less on that of the domain name.

From a different perspective, I would note that it is required to examine the domain name’s branding. If money and resources are invested in branding, it is possible that the value will rise and will even surpass the value of the website itself. For instance, the Coca-Cola brand constitutes 55% of the value of the company; the IBM brand is worth about 20% of the value of the company; Microsoft is worth about 20%, and Intel is worth about 22% of the value of the company. These data have direct implications on the domain name, and hence in these situations it is necessary to examine the value of the domain name as deriving from the brand itself.

Another way to examine the value of the domain name is through the use of technological instruments that examine similar domain names that were sold in the past. In my opinion, this does not teach anything thing about the domain name, its present situation, its past, and the information behind it.

Moreover, the fact that the history of the domain name indicates about one million views of the website in the past two years does not necessarily attribute value to the benefit of the domain name but more to the website itself. Again, I would note that this holds true assuming that this is not a brand and if so, it is necessary to examine the value of the brand and that the brand name is derived from the brand itself.

There are many topics from which it is possible to learn about the initial valuation of domain names. In my opinion, the topics mentioned previously provide an initial valuation that is at least reasonable. However, if suspicions or imprecisions regarding the initial value of the domain name arise, then it is necessary to perform a correlation between the data obtained from the website’s initial valuation by cross-checking the data to the value of the database, if this exists.

In my next book, Intellectual Property Valuation and the Start-up Idea – Between Technology and Law, I will describe at length the issue of valuations and will examine the range of variables through which it is possible to reach an orderly decision on the real value of the domain name.

Initial Valuation for the Database

            When we attemptto examine the value of the database, it is necessary to discoverits origin, data collection methods, the period over which data has been collected, to what extent to database links point tocompeting websites or businesses, the age of the databaserecords, how often are they updatesupdated and is this a regular process, the depth of linked information, definitions of business affiliation (DNS), types of records regarding future channels and an examination of technological survivability, and additional variables that together determine the quality and worth of the database.

            In this sectionI will address the initial valuation and that, as with the examination of a website and domain name, it is necessary to examine the issues in-depth so as to determine the degree of their generalizability. I would further note that it is possiblethat a database does not link to anyInternet website and is, in fact, a database that is part of an organization orcompany’s  CRM[32]or ERP[33] system.

            Following is a recap of commercial models in cyber space that constitute a derivative for the type of database found behind the business model.

·         B2B (business to business): Commerce and/or interaction via technological systems between businesses through the Internet or cyber space.

·         B2C (business to customer): Service providers or Internet stores that sell their merchandiseto the end client.

·         C2C (customer to customer): The sale and/or supply of services directly between end users.

·         EC (electronic connection): Activity between public organizations such as academic institutions and/or governmental institutions and inter-organizational communication through the Internet that seeks to increase efficiency and reduce the operating costs of companies and organizations.

In addition, it is necessary to take into consideration that it is possiblethat the database, if divorced or detached from its business or organizational framework, lacks real worth. This is a situation in which the business model, product, or service is unique and/or provides a regional service. In other words, lacking the local environment, the database lacks value. This is true also for a database in a local languagewith a limited audience and market

Moreover, it is also necessary to take into account that valuation is often a subjective issue. The value of the database for one business organization may be worth twice as much as for another business organization. These are situations in which the main considerations involve; hindering competitors, increasing share volume, acquisitions for tax purposes (negative orpositive), elimination of environmental problems, and so on. As previously mentioned, this is not an economic examination of the database but rather refers to environmental variables, alongside long-term business considerations.

Another way of examining the worth of the database is therevenue model.  This is similar or evenpart of the discounted cash flow method. In my opinion, this is a short-term method, deficient in a technological environment, ignoring variables that are difficult if notimpossible to measure in achanging environment, and hence my recommendation would beto examine the cash flows, only if there are no alternative methods.

I would note that in today’s world it is easy and simple to collect records and establish databases about different sectorsof society and the world in general. In my opinion, this is would be a database of little or no value.  As already mentioned, itis possible to establish a database about lawyers, accountants, physicians, and so on at a reasonable cost. The importance of the database lies in that it allows us to evaluate thequality of the records rather than the collection method. In other words, the fact that a record showsthat the individualis a physician or alawyer does not provide information about his socioeconomic situation, his consumption habits, the environments where he lives and from which he draws his knowledge and experience, and whether he is actively engaged in his profession.

In other words, assuming that this is a legal database, its sole use is for the dissemination of news or advertisements that may be of interest to the individual.  This requires that the estimated value of the database be reduced. 

From a different perspective, I wouldnote that in my opinion when the database includes more records that cover a larger range of data such as data that indicate the person’s economic situation, consumption habits, business practices, age, education, and so on, the value of the database rises significantly.

In our matter, it is first necessary to examine the type of database, and hence it is necessary to examine the sections that I spoke of previously. I would further note that there are many databases relating toareas that originally did not fit these definitions. Despite this I contend that, at the end of the process, the buyer of a database (assuming that this is a business purchase) will link the information to one of the aforementioned definitions making it necessary to do perform the examinationahead of time.

From a different perspective, it is necessary to examine the database lifespan, for instance, if we are interested in a database of women who will could be expected to givebirth in the coming years, then age becomes a factor and we will be interested in the age range of 25 to 40. Another example is if the buyer is a company that produces games for young children aged two to six years.It is reasonable to assume that a database created about six years ago and which contains only the original data, will be worthless tothis manufacturer.

In other words, after we linked the database to one of the base possibilities (subject to the definition of the buyer’s purpose) it is necessary to examine the database’s degree of relevance. Assuming we have assessed the database’s relevance, we can now examine the other factors.

Moreover, assuming that the database is linkedto an Internet website, it is necessary to examine the activity of the records, namely, whether these are records that have shown movement, access or change since their original inclusion in the database.  If this is the case, this would indicate that the records relate to users with value.

After we have reached a conclusion regarding the user’s degree of activity/relevance, we next move on to an initial, in-depth examination that will provide us informationregarding the database’s nature. To focus on the nature of the records, it is necessary to examine the scopeof the actions performed by the users themselves. To illustrate this, I will examine databases that were collected bycredit card companies. In the Western world, about 75% of the population uses credit cards regularly, and the scope of information collected bythose companies includes: socioeconomic status as deriving from the scope of purchases, types of purchases, vacationhabits (flight class, number of flights a year, destinations, type of car rented by the user), alongside weekly/monthly/annual consumption of fuel, travel routes, and derivatives fromthe use of the card on the road,bank credit rankings, health, age, number of children and grandchildren, insurances, and so on.

            To illustrate my statements, look at the advertisements that appear at the bottom of the monthly account statement that you receive from yourcredit card company. Already at first glance you will seethat there is a correlation between the advertisements and dealsoffered to you and your routine consumption habits, age, health situation, residential area, and so on.

To put it simply, this is an accurate, up to date database from which it is possible to extract specific,current information about the individual. In our matter, as the information is the wider the scope and the more current the information, so the value of the database rises.

Another example through which it is possible to learn about the nature of the venture or the business is the database that collects information about user purchases on the Internet. Imagine how simple and easy it is to collect data about browsing habits online, purchases, analysis of information for example on social websites such as Facebook, Twitter, Instagram, and so on.

Correct analysis of the information enables the performance of marketing referrals withinthe framework of social networks.  This is one of the reasons for the high value of social ventures in general.

For example, at the beginning of the chapter I mentioned the social network Pinterest, which is valuated today at around five billion dollars.This is a company that uses and providesInternet and technological applications for cellular phones and that has developed a technology for the collection, sharing, and storage of visual data. Users can save and share events and resources, including ‘virtual pin-boards’ they created, similar characteristics, shared topics, birthdays, vacations, interior designs, holidays and so on.

From that written we learn that the value of acompany is necessarily derived from the fact that the information presented is based on a data collection and analysis system, and that the databases covers a wide range and scope and contains considerable information about the users. This is different from a database that presents information about different types of professional groups, but lacks scopewhich makes it worthless for the world of investments.

Another example is the Internet website or Internet Archivesystem, or the Wayback Machine[34]which maintains ahistorical Internetdatabase containing some about 450 billion Internet pages.

I have often seen a transaction in which the purchase is of the database and not the company itself. At the end of the purchase process the acquired company is assimilated into the purchasing company. This is a matter of routine in the world of technology, and hence when we examine the initial worth of the database (given that this is a sale of the database itself rather than the company)after we have examined all the variables mentioned previously, the scopeof the database is the main measure that will determine itsreal worth.

From a different perspective, I would note that there is not necessarily a correlation between the fact that the system or the website produces revenues and the worth of the database. It is necessary to take into account all the considerations, and given that we succeeded in the initial base tests regarding the value of the database it is possible to approach an in-depth examination of its real worth.

Dr. Roffeh Shani, Adv

International Law Expert in Cyber crime and Digital evidence.

Litigation - Israel attorney.

Mobile +972-52-3078833

Direct:  +972-3-908-0934

Fax:       +972-3-908-0939

Web :   www.roffeh.com

---

[1] https://www.pinterest.com

[2]http://www.forbes.com/sites/jjcolao/2013/05/08/why-is-pinterest-a-2-5-billion-company-an-early-investor-explains/

[3]Cold Brew Labs, Inc. builds social commerce applications. The company was incorporated in 2008 and is based in San Francisco, California. Their first product is the social networking site Pinterest.

[4] Metadata is the html label that includes information of a certain type. The metadata serves for the description of a record, its characteristics, information on ongoing management, and for the purpose of retrieval of information and preservation of the records.

[5] The topic of the ranking and quality of the directing links, since this is a topic of a broad scope, will be addressed in my next book.

[6] See this term in the chapter of the Terms and Definitions.

[7] Search Engine Optimization is the constellation of actions undertaken so as to maximize the traffic that reaches the Internet from the natural results of the search using search engines.

[8] Web service: The Internet service technology is used primarily for the purpose of the transfer of data between the systems interfaces and Internet websites. These interfaces are based on technologies with a common denominator alongside authorizations of information security for Internet software platforms, such as XML and HTTP. The objective of the technology is to integrate software and information components, in real-time for the sides.

[9] A rule that does not presume to be completely accurate or reliable in every case.

[10] Object is a software code installed on the computer, at an Internet website, or in software, constituting a value, including an identifying reference with technological significance. As aforementioned, an object can be a variable, function, or data structure. With the appearance of object-oriented technological systems, the expression ‘object’ assumed additional meaning relating to the certain appearance of a division that constitutes, as aforementioned, a part of the software or an Internet website.

[11] Search engine optimization (SEO) is a collection of methods for the improvement of the position of the Internet website in the search results of the search engines.

[12] A cookie is a small file that includes a chain of letters and digits, used generally to verify the user’s data and for follow-up and storage of information about the surfer on the Internet website. The chain is created on the Internet website, which conveys the file through the browser and saves it on the user’s computer’s memory. The chain creates a relationship with the website each time the surfer connects to the Internet website via the browser.

[13]https://support.google.com/webmasters/answer/34444?hl=en

[14] Adwords is the main advertisement system of Google (paid advertising). The search results appear in the first three places at the beginning of the page and in the background of a light color shaded in gray or cream. In addition, the search results appear in the left or the right column (subject to the computer language). The following appears at the home page of Google (in Hebrew): “Pay only for the results of the visitors to your website, registering to Google Adwords is free. You pay only when somebody presses the advertisement to visit your website or to call you. In other words, you pay when your advertising works.”

http://www.google.co.il/adwords/start/?channel=ha&sourceid=awo&subid=il-en-ha-aw-bkha0~53209445095&gclid=CMGZkIjj4sECFfHKtAodSU4ACg

[15] The Black Hat promotion methods – The goal of the method is to ‘bomb’ the search engines to a certain extent so as to create a false presentation on the matter, namely, to deceive the search engines to rapidly climb to a high ranking. The search engines combat these methods, primarily for the following reasons: creation of a false presentation, namely websites that are not relevant to the search queries that appear in high places harms the browsing experience, etc. I will note that these websites that are promoted using improper methods may be disqualified by the search engines. This means that when improper promotion is identified, the search engine will stop presenting the website pages and in extreme cases website owners will be forced to move it to another domain and even to store it with another server (search engines identify the IP address of the website).

[16] http://www.amadeus.com

[17] http://www.alexa.com/

[18] http://www.alexa.com/toolbar

[19] Dmoz is an Internet guide for Internet resources that classifies websites according to areas. Unlike large technological systems, the classification is undertaken by a person and not by robots crawling the Internet.

[20] http://moz.com/learn/seo/moztrust

[21] “Native code is computer programming (code) that is compiled to run with a particular processor (such as an Intel x86-class processor) and its set of instructions. If the same program is run on a computer with a different processor, software can be provided so that the computer emulates the original processor. In this case, the original program runs in "emulation mode" on the new processor and almost certainly more slowly than in native mode on the original processor. (The program can be rewritten and recompiled so that it runs on the new processor in native mode.)” http://searchsoa.techtarget.com/definition/native-code

[22] The subdomain is an ‘inferior’ domain name and with the lack of the main domain name the action of the ‘inferior’ domain name ceases automatically. The definition of the inferior domain name enables organizations, institutions, and Internet website owners to extend the domain names under their possession into different divisions and tasks. For instance, in academic institutions it is customary to allot a subdomain for every faculty, so that the domain name of New York University is www.nyu.edu, while the subdomain name of the School of Law at New York University is www.law.nyu.edu.

[23]http://www.isoc.org.il/domain_heb/il-domain-rules.html

[24] http://godaddy.com

[25] The Domain Name System (DNS) is an Internet service that translates the domain name into the IP address. In essence, the main goal of the service is to personify the machine language in that the DNS service creates the correlation between the IP address of the domain name that the user visited. The data are saved in the DNS servers and published among them, throughout the world, so that any user, from any geographic place can view all the websites that were uploaded to the cybernetic space.

[26] The subdirectory is a directory that is found in another directory. It is possible to use a term similar to the description of a directory under another directory in the user interface. Take the following example: www.cnn.com/EUROPE, in other words, the word Europe is the subdirectory of the main domain name.

[27]http://googlewebmastercentral.blogspot.co.il/2008/01/feeling-lucky-at-pubcon.html

[28]https://www.mattcutts.com/blog/subdomains-and-subdirectories/

[29] See this term in the chapter of Terms and Definitions.

[30] Redirect is the reference of the domain name to another Internet page or website. I will note that there are many uses of referrals of this type. Some are prohibited by guidelines of the Google search engine, for instance, code 301 that performs a misleading action in search engines, namely causes the engine to ‘think’ that this is another website and thus to improve the position in the ranking.

[31]https://support.google.com/webmasters/answer/93633?hl=en

[32] CRM – customer relationship management – is a software program for the management of a database of clients of the company. This is a work method that increases the efficiency of the company activity, including documentation of the client and improvement of the service.

[33] ERP – enterprise resource planning – is a system that incorporates all the functionality required for the management of the business/company into one computerization system. It can provide an answer to the organization’s needs as a whole.

[34]https://archive.org/web/