Given that Zillow is much in the news of late, and a number of you have asked what I thought about all of the various thingamajigs in the air, I figured, rather than a series of posts on particular topics, I’d just knock them all out in one sitting. I don’t find most of the news all that earth shattering, but do have some thoughts on a few of the issues confronting Spencer Rascoff and his team.
So this post will be more rambling than usual, but hopefully chock full o’ goodness in bite-sized chunks. You’ve been warned.
The Zillow IPO, Generally
I think volumes will be written about the IPO, and until the management has been through the ringer on analyst calls, various roadshow meetings, and opinions from various financial dudes start appearing, there’s not a whole lot to say except for “Good Luck!” This does not strike me as a good market to be doing an IPO for a company in the real estate vertical, with housing seemingly poised to go into the tank for a second dip in the pool of misery.
As the WSJ asks, whether investors would go for a company with just $30m in revenues that hasn’t turned a profit yet is the big question. It seemed to me that the Journal was skeptical. An op/ed piece (a blogpost?) in CNN/Money’s Fortune.com was positively savage:
What I’m angry about is that Zillow might have been something that it hasn’t turned out to be. The process of buying or selling a house hasn’t changed at all since they arrived on the scene. The only thing that’s happened is that someone else is taking another piece of the action. If you want a piece of that action, go ahead and buy. But there are better ways to bet on real estate than that.
I don’t know why the writer — a Duff McDonald — is angry at all. Maybe Spencer Rascoff ran over his dog with his car by accident? Or Sara Bonert ignored him at a conference or something. But the dude needs to chill out. I quoted that paragraph, however, because the S-1 does reveal something profound: Zillow is not an innovation play, not in 2011. It won’t disrupt anything, much less “blow that [real estate] cabal to smithereens” (McDonald’s phrase, not mine).
Which makes Zillow just a smaller, less diversified, less entrenched Move, Inc. without some of its advantages, and without some of its disadvantages.
Zillow’s Growth is in Subscriptions and Lead Sales (aka, Marketplace)
Other sites, like AdWeek picked up on the fact that Zillow’s revenues might have gone up, but mortgage lead generation (via the Marketplace) is looking like the real growth center:
In 2008 the company began offering Zillow Mortgage Marketplace, a subscription-based product connecting borrowers with lenders. In 2009, Zillow earned 22 percent of its revenues from the marketplace and 78 percent on display advertising. Last year the chunk earned on display dropped to 57 percent; marketplace revenues more than doubled. That ratio is likely to continue to shift away from display.
And as Zillow’s own S-1 explains, Marketplace revenues grew by 49%, 65% and 74% respectively in 2008, 2009 and 2010. In 2009, Marketplace revenues (i.e., subscription fees) was a mere $4m, while Advertising revenues was $13.6m; in 2010, those numbers were, respectively, $13.2m and $17.2m — 238% growth vs. 27% growth. I hope whoever is in charge of their Marketplace sales & marketing got a gargantuan bonus.
Two thoughts about this trend.
First, there are quite a few people who are not real happy about how the Zillow Premier Agent program works. Listing agents and brokers in particular think Zillow sending leads to an agent who has nothing to do with the house being shown is not too cool. This is one of the things driving the whole anti-syndication wave of the moment.
For example, you can read this quite detailed study (polemic?) by Clareity Consulting on syndication to real estate portals. Money graf viz Zillow:
Trulia, YAHOO!, Zillow and others would claim that their ad treatments are no different from the standard industry practices of “cooperation and compensation” and IDX display, where someone other than the listing broker works with a buyer and where competing brokers advertise the listing broker’s properties. However, as noted above, closer examination suggests that consumers often are not aware that their inquiries are being directed to someone other than the listing agent. And the user experiences on these sites often actively disadvantage the listing agents. Moreover, the IDX infrastructure is specifically designed to help brokers provide permission for their counterparts to advertise their listings (with prominent attribution for the listing broker). Many publishers would be hard pressed to argue that the listing brokers have knowingly granted permission for third-parties to advertise and capture leads on their listings, and the treatments on Trulia, YAHOO!, and Zillow are in no way comparable to typical IDX display rules. [Emphasis in original]
This issue ain’t gonna go away anytime soon, and by the time the dust settles, the result is quite unlikely to help Zillow.
Second, we know that Realtor.com will move (!) into this space with its mortgage matching product. No doubt, other sites like Trulia will attempt to do the same. Can Zillow really keep up the triple-digit growth in subscription revenues once they face real competition? Who knows. Time will tell.
I for one would like to find out exactly how much of the revenues and growth in Marketplace came from mortgage and how much came from real estate brokers & agents. I’m sure that will come out during the management roadshows and analyst phone calls.
(As an aside, now that Zillow is making more money from lead generation and subscriptions… the guy who has to be pulling his hair out is Louis Cammarosano of Homegain.com. For years now, Homegain was dismissed as a has-been lead-gen site compared to the new, fresh, innovative consumer-centric “smash-the-machine” techies at Zillow. Well, I don’t know what else you might call the 238%-annual-growth subscription business, but “consumer-centric” is not one of those things.)
Why Raise Money Now?
One curious thing, which I think could hurt Zillow’s chances at a successful IPO: why raise the money? Thanks to the whole first dotcom craze of the 00’s, many people think of IPO as the ultimate goal of a business: “go public, and make millions!” is the attitude. But that’s simply not true; factually, a public offering simply means a company raises money by selling shares to the public markets. In theory, a company raises money to do stuff with it, rather than just buy fancy cars for executives or swank office furniture. Hence, the “Use of Proceeds” section of the S-1:
The principal purposes of this offering and the concurrent private placement are to increase our financial flexibility, increase our visibility in the marketplace and, with respect to this offering, create a public market for our Class A common stock. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for these proceeds. However, we currently intend to use these proceeds primarily for general corporate purposes, including working capital, sales and marketing activities, general and administrative matters and capital expenditures. We may also use a portion of these proceeds for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments.
Maybe this is boilerplate that every tech company wanting to go public puts into the S-1, but if I were a fund manager, I wouldn’t put a dime into Zillow based on this. Because reading between the lines, all I see is, “Our VC’s wanna get paid, please”.
I mean, Zillow’s raised $87m to date, and not made a dollar in profits yet. With $87m in funding, it managed $30m in revenues. Despite the brave claims of being “the leading real estate information marketplace”, whatever that means, Zillow is still #2 behind Realtor.com. And Move has a new executive team in place who are a bunch of impressive people — Steve Berkowitz and Scott Boecker are the two new guys who impressed the hell outta me. They’re not exactly sitting around playing Angry Birds 24×7.
And the real estate market is going to tank again. Why raise money now? Maybe there’s an investor presentation we haven’t seen yet where Zillow lays out its grand ambitious plans, and lets us know why they need another $51m on top of the $87m already raised… but this smells to me like a cash-out play by the investors, before the market crashes even harder. Maybe they know something the rest of us don’t?
Zillow, The Living Database, and Syndication Brouhaha
A number of recent news items can go in this bucket, because, in a sense, this issue goes to the heart of what Zillow is and wants to be.
First, you’ve read my puzzlement over the Postlets acquisition, since I thought Zillow is going to make MLS’s very nervous with that.
Second, you may have seen all the buzz around Syndication Bill of Rights and the more-or-less open war that certain thought leaders have declared against listing syndication. Clareity for one, quoted above, and WAV Group for another (an example study) are two influential companies that argue strongly for eliminating or restricting syndication. And it is no accident that the Council of MLS is currently having Clareity conduct a survey on syndication as I write this post, and will be doing a one-day Listing Syndication Workshop at NAR Mid-Year in May. (I assume that workshop will not be a “how to syndicate your listings to Zillow” session.)
Third, given these two points, consider this language from the S-1:
Living Database of Homes
Our dynamic and comprehensive living database includes detailed information on more than 100 million U.S. homes, or most U.S. homes, and includes homes for sale, for rent and recently sold, as well as properties not currently on the market. This database is central to the value we provide to consumers and real estate and mortgage professionals. It contains extensive information that users can search, through an easy-to-use interface, to identify, analyze and compare homes. Our database is relevant to a broad range of users, including buyers, sellers, renters, homeowners, real estate agents and other real estate professionals. It includes information such as:
- Property facts: Zestimate and its corresponding value range, number of bedrooms, number of bathrooms, square footage, lot size, assessed tax value and property type such as single-family, condominium, apartment, multifamily, manufactured home or land.
- Listing information: price, price history and reductions, dollars per square foot, days on the market, listing type (such as for sale by agent, for sale by owner, foreclosures, new construction, rentals and Make Me Move homes) open houses, property photos and estimated monthly payment.
- Purchase and sale data: prior sales information and recent sales nearby.
We synthesize data from hundreds of automated feeds, representing information from tens of thousands of public and private sources. Applying extensive computer analytics to the data, we transform it into information that is accessible, understandable and useful.
We refer to the database as “living” because the information is continually updated by the combination of our proprietary algorithms, synthesis of third-party data from hundreds of sources, and through improvements by us and, importantly, by our community of users. User-generated content from owners, agents and others enriches our database with photos and additional property information. For example, individuals and businesses that use Zillow have updated information on more than 27 million homes in our database and added more than 50 million home photos, creating exclusive home profiles available nowhere else. [Emphasis added]
Now, if you were the CEO of a MLS, or the owner of a large brokerage operation, would this language make you feel (a) more in control over the listing data that you create, or (b) less in control over the data, or (c) suddenly sick to your stomach?
Doesn’t the language above make it perfectly clear that all of the listings on its website are Zillow’s listings? That they comprise this “dynamic and comprehensive living database” which Zillow lists as one of its most important competitive advantages? That the brokers and agents who send Zillow listings are creating “user-generated content” to be stored in Zillow’s living database, as part of Zillow’s intellectual property?
Who owns the data about 123 Main Street, Anytown, USA in Zillow’s database? Is it the listing broker who entered it into his MLS, and caused it to be syndicated to Zillow? Is it the MLS who sent it? Is it Zillow in whose database a copy of this information resides?
3. Materials You Provide; Account Use; Privacy. For materials you post or otherwise provide to Zillow or in connection with the Services (your “Submission”), you grant Zillow an irrevocable, perpetual, worldwide license to (a) use, copy, distribute, transmit, publicly display, publicly perform, reproduce, edit, modify, and translate your Submission, in connection with the Services or in any other media, and (b) sublicense these rights, to the maximum extent permitted by applicable law. Zillow will not pay you for your Submission. Zillow may remove your Submission at any time. For each Submission, you represent that you have all rights necessary to grant Zillow the rights in this paragraph and that the Submission complies with Section 2(a) above. [Emphasis added]
The layman’s translation: “Thanks for the data; we own it now.” Now that you’ve sent the data to Zillow, you can demand that they take it down, but they don’t have to. You granted an irrevocable, perpetual, worldwide license. Sorry!
Most of us on the data side of the industry have known about this, and have warned brokers and MLs’s about it, for years. And they don’t care. It’s one of Victor Lund’s pet peeves, actually. Ask him about it next time you see him at an event, and bring popcorn.
Random Concluding Questions
This has gotten far too long for a rambling post about all things Zillow. I’m sure we’ll be revisiting one or more of these issues and questions in the future, so let me conclude with this thought.
Now that I’ve read the S-1, and have been struck by just how much subscription-based revenues have grown for Zillow, and by just how much Zillow itself emphasizes its “living database”… someone wanna explain to me why Zillow is not a MLS?
If the Realty Alliance and LeadingRE’s fight against Franchise IDX goes badly at NAR Mid-Year… what exactly would they be losing by going to Zillow and using it as their networks’ “multiple listing service”?
Okay, that’s a cornucopia of goodness for thought and discussion, and opportunities to point out the numerous ways in which I am wrong and mistaken. I welcome your thoughts, as always.