During the early years of the Internet, there was furious competition for Web site domain names, accompanied by lawsuits and huge sums paid for well-known names. Last year the buying and selling of Web site domains amounted to a $77 million enterprise, says a recent study by Sedo.com, an international company that offers domain transfer and escrow services. At any given time, Sedo lists 12 million to 15 million domains for sale, says Chief Operating Officer Jeremiah Johnston, who runs the firm’s Boston office. He spoke recently to Smart Answers columnist Karen E. Klein about the domain market and how entrepreneurs can acquire, improve, and sell domains. Edited excerpts of their conversation follow.

Is the buying and selling of Web site domain names a viable business?

The days of the Internet pioneers who grabbed one-word, fantastic domains are largely over. Now, it’s a matter of recognizing opportunities and making shrewd decisions. But the buying and selling of domain names has remained one of the few bright spots during the global downturn. There are almost 174 million domain names worldwide and an annual growth rate of 30% over the last five years.

Do domain names automatically increase in value over time?

Online property typically increases in value over time, particularly generic or descriptive domains that have the enduring, evergreen quality that drives traffic. Similar to traditional real estate, if you invest in the right virtual property, and hold on to it for a while, you will likely see a solid ROI. However, by developing a lackluster Web site into a money-making portal, entrepreneurs and small businesses will not only be making a profit, but they’ll be making a business. They can put equity and worth into a ramshackle Web site and “flip” it for profit some time down the road.

What should individuals look for in domain names?

Look for domains that are generic, category-defining, and short, with one or two words. If you think about all the niches, verticals, and hobbies, the possibilities are infinite. Look for domains in categories where you have some knowledge and think about whether a particular domain is something you’d search for or type into a browser.

What else should entrepreneurs keep in mind?

Remember that domains are more than just dot-coms. The alternative extensions and foreign country domains, like .uk, are very popular despite the continued dominance of .com. Also, prices are significantly lower—maybe three to four times less—for the .tv, .net, .info, or .biz extensions, and they can help a business stand out and provide search engine optimization benefits.

What kind of price range are we talking about?

You hear stories about seven-figure deals, like vodka.com selling for $3 million. But the average price for a domain is under $2,000. If you coin a domain name and nobody else has ever thought of it, you can register it for about $10 annually. (You can check WhoIs to see if a domain name has already been registered.)

Why are there so many domains that sit empty or have no original content on them?

People buy domains and keep them because there’s not much cost associated with them. If they can make even a trickle of income from advertising, that offsets the annual fee, if nothing else. But there are also some really good domains, like sneakers.com, that naturally get hundreds of thousands of unique visitors a month. If you have a domain that gathers anywhere near that kind of traffic, you’ve got a money-making machine.

How much traffic do you need to make good money with a domain name?

It depends on what the going price is for the ads you have on the site.

If you are advertising cheap consumer goods, you’ll need a higher degree of traffic to make any real money. If your site is specialized in an industry where one sales lead is worth a lot, you could have substantially fewer visitors but still make a profit.

One of the nice things about Web sites is that you can analyze the traffic you’re getting. If it turns out that 70% of your visitors are coming from Canada, you’d adjust your content and advertising to take advantage of that.

What kinds of things should entrepreneurs consider if they’re in the market for a domain?

Of course they’ll want to know how much traffic it gets and what kind of search engine ranking it has. Check out the seller and see if that person is the original site registrant. You want to know if the site has changed hands many times and what was on the site in the past, which you can find out at Archive.org. If a site was used for something bad in the past, such as to infringe on somebody’s trademark, you don’t want to be associated with that.

You want to find a site that suits you and your long-term goals. It’s fairly easy to evaluate interest and site loyalty without having to do a lot of extensive research. Sites that offer products or direct services tend to be more profitable, since you aren’t solely relying on advertisers for your ROI.

What should you do with a domain once you purchase it?

Determine what you can do within your budget to improve the Web site and add value to the real estate. Define the Web site’s identity. If you can create a recurring audience by offering content in addition to advertisements, that gives you more valuable traffic quality.

For instance, some people own domains based around a sport that they know, so they put up content, photos, and updates to make the site dynamic.

How are domain sales prices evaluated?

Anything you can do to improve the domain adds value, so if you hold it for several years, if you increase the search engine ranking, if you develop content and audience, that’s all cash-flow positive. If you do nothing more than place advertisements on the site and rely on natural traffic to generate ‘click-thru’ revenue, you’d evaluate what you make annually and sell it for a multiple of that annual revenue.