Midyear Reports: On the Franchise IDX Decision

This post, and this series of reports and opinions from NAR Mid-Year 2011, brought to you by:

[UPDATED Friday 5/13; see end of post]

Yesterday, I reported on the decision of the MLS Policy Committee to suspend the Franchise IDX rule and refer it to a new working group for revision by the Annual Convention in November. In this edition of the Midyear Reports, I speculate on the implications of the decision and go into more detail about what happened.

The Debate

Due to the poor Internet connectivity in the room, I was unable to live-blog the discussion as I had hoped. Instead, I took notes.

The anti-Franchise IDX group made three main arguments throughout the whole debate:

1. The Franchise IDX policy makes MLS data available to non-participants who are not “operators” (this term would include appraisers, mortgage brokers, and others who might use MLS data to “operate” their real-estate related business).
2. Franchise IDX policy might be in violation of the real estate laws of 38 states, and force liability onto the brokers.
3. The Franchise IDX policy creates unfair competition.

Of the three, the first is the most important. It is the point of differentiation between the Pro- and Anti- forces that cannot be resolved; they may compromise, but there is no way to square that circle.

The pro-Franchise IDX group made what I thought were mostly procedural arguments. That isn’t to say they were weak arguments: process is an important part of any decision. Plus, they made one pro-consumer argument:

1. The Franchise IDX policy wasn’t sprung on anyone; it spent 18 months in various working group discussions, with more than ample time for comment and opposition; for opponents to ask to have it repealed is more than a little irresponsible.
2. The various franchisors have spent a lot of time, money, and labor in the past few months, relying on the Policy in good faith. To simply rescind it would be unfair and create undue costs to the franchises.
3. Allowing franchisors to put IDX in the search results page, with links to the local IDX-compliant brokerage website, provides a better user experience for consumers.

The clear unspoken warning from both Keller Williams and Realogy was that simply repealing the Franchise IDX would likely lead to litigation.

It came to light that a meeting was held between the Pro and Anti groups, as well as the MLS Policy Committee members, to try and broker a deal prior the official Committee meeting. Apparently, the Anti group was offered the same ability to index IDX as the franchisors had, as well as an “opt-out” provision for brokers who did not want franchises indexing their listings via IDX, and wording added that the policy must conform to the local state laws and regulations. That offer was rejected.

The sticking point was the first point: that the MLS cannot make its data available to non-participants. That point was part of the larger theme of the week so far: power. Brokerages are reasserting themselves in a way I personally haven’t seen in quite some time. In fact, a number of points echoed some of the discussion around listing syndication: broker control, the cost and effort to acquire listings and listing data, and aggregators (including the franchisors) sending leads to someone not the listing broker.

The Anti- group made the point over and over again that during the 2006 Congressional hearing on the real estate industry, NAR made a big point about how the MLS is not a public utility because only participants had access to the data, and that participants were cooperating and collaborating with each other to benefit themselves. (To be found as a “public utility” would place dramatically different anti-trust burdens on the MLS.) To them, allowing Franchises, who are not participants in the MLS, such direct access to MLS data would destroy that distinction, make the MLS subject to further anti-trust investigations, and ruin the basis for the brokers cooperating with each other.

The point was made time and again by speakers against the Franchise IDX policy that the reason why they participate in IDX is because they expect to get something back out of it from the other participants. For example, my notes show that Joe Horning of Realty Alliance, and the President of Shorewest Realtors, said very clearly that “expanding the policy is not the solution; repeal is the only solution”. He also said that they were shocked when the policy was adopted, that they were told brokers wanted the policy, but that every single broker he’s spoken to (including franchisees) wants the policy rescinded. Some quotes (as best as I can tell from the notes):

• “This data is curated by us, it has value, and it brings us liabilities. This policy gives away our data without our consent.”
• “In no way shape or form is a franchisor a participant or a listing broker. There is no offer of cooperation and compensation. Franchisors bring nothing to the table. I have yet to hear what their (franchise) right to the data is”.
• “The data is the asset of the broker and the MLS; we’ve all spent millions of dollars on our websites. Part of it is to compete with Trulia and Zillow. Those guys get their data by broker opt-in. Broker choose to participate.”
• “I see this as a watershed moment; we can support the broker participation, or support third parties. Rescind the policy; protect the brokers, the agents, the MLS, and the Association.”

Does that sound like someone who’s looking to compromise?

In response, Alex Perriello, the CEO of Realogy Franchise Group, makes an important point (on which the real disagreement rests): making a big deal that the Franchisor is not a “participant” is a “distinction without a difference.” All of the franchisees are participants; all of the agents are participants. Furthermore, Alex pointed out that NAR has already allowed “recognized search engines” to index IDX listings.

Alex also raised the anti-trust issue: he said that to repeal the rule would limit consumer access to data, and disadvantage buyers and sellers, and that the government might look at that action in a negative, anti-competitive light. He mentioned this consumer access to listings and data quite a bit.

He went on to point out that Realogy is happy to consider refinements to the rule — for example, dealing with the state law issue — and to broaden it to cover marketing networks and regional brokerage sites, such as Realty Alliance, Leading RE, and others. But to repeal the rule after an 18-month process was followed, and the franchises had relied in good faith would be unfair.

The Bombshell

The single biggest surprise to me, however, was the bombshell dropped by Bob Moline, the President and COO of HomeServices of America, the second largest brokerage in the country, which happens to be owned by Warren Buffet. He was speaking against the policy, when he suggested that if the Franchise IDX policy is not rescinded, HomeServices of America would consider withdrawing from the MLS entirely and creating its own private nationwide MLS. Since the policy in question is a NAR policy governing MLS’s that take their policies from the NAR, the obvious implication is that HomeServices of America (or at least its MLS) would not be a part of NAR.

He spent quite a bit of time praising NAR, talking about how much HomeServices of America values NAR, values being a REALTOR, values the education, the Code of Ethics, and the political work that NAR does. But he said that the glue that holds the NAR together is the MLS. He stated that many members of NAR are members simply because they want MLS access. He said HomeServices gets approached quite often about creating a private national MLS. They have always said no, because they believe in supporting NAR. But “we’re going to have to look at doing that if we can’t control our data.” Of course, he said they really didn’t want to do anything like that, they love NAR, etc. etc. but the threat was crystal clear.

As Usher might say, O.M.G!

Policy Suspended, Time Bought

As reported, the final result after all the debate, was that the Franchise IDX policy was not repealed outright but suspended until Annual Convention in November. A new working group would be created, tasked to review the policy.

The final vote to suspend may have been influenced by an issue of parliamentary procedure: the Board of Directors did not have “prior notice” that this issue of repealing the policy would be brought before them. That would require a 2/3 majority vote, whereas a vote simply to “suspend” the rule only requires a majority vote.

Because the decision was a suspension rather than a repeal, if no action is taken at Annual, the Franchise IDX policy would be reinstated in full. (Of course, Annual could decide to suspend it again, and kick the can down the road.) However, the impact of the suspension is that the Franchises who have implemented the IDX program must take down those webpages/websites immediately. It is unclear whether they would tolerate yet another suspension in November, given the investment they’ve made to date, and the benefits they were starting to see. (Century 21 showed a double-digit increase in conversion rates on its website after rolling out Franchise IDX, for example.)

The question is what happens between now and then.

My personal opinion is that if the Anti- folks are serious about their opposition to the principle of “protect the broker, protect the MLS”, then compromise is impossible. The Pro- group had already proposed broadening the rule to allow companies like Realty Alliance, Leading RE, and HomeServices of America to do the same thing. It had offered to change the wording to accommodate state law issues. It had already offered to allow an “opt-out” provision. Those offers were already rejected by the Anti- group, and they’ve taken the position, as articulated by Joe Horning, that expansion is not a solution.

Speaking to a couple of executives from the Anti- side of the fence, I got the distinct feeling that while they were putting the best spin on the suspension as they could, they were not afraid to go to the mattresses if they did not get what they want, which is repeal. At the same time, I did not get the feeling that they thought NAR would repeal the policy, especially given the strong opposition to outright repeal from the major franchises, the possibility of litigation, and the fact that the process was followed scrupulously.

So I assume that they would push for repeal between now and November, but prepare for the “nuclear option”: secession. The three entities mentioned — Realty Alliance, Home Services of America, and Leading Real Estate Companies of the World — represent some of the largest brokerages in the country. HomeServices is #2, of course, but Long & Foster, Weichert, Crye-Leike, Prudential Fox & Roach, Michael Saunders, and others are also brokerages that could be involved. These are not a bunch of tiny independents talking secession; these are some of the largest brokerages in the country with hundreds of thousands of REALTORS.

Oh, By The Way…

Did I mention that tomorrow morning, there will be a vote by the NAR Board of Directors on a somewhat controversial issue of the REALTOR Party Political Survival Initiative?

As I wrote before, could any residual unhappiness over that vote link up with potential unhappiness from the Franchise IDX issue? I think so.

I thought the Saturday vote would be interesting before I came to Mid-Year. After the MLS Policy Committee Meeting, I can’t wait to see what happens.

UPDATE! BREAKING NEWS

[Friday, May 13] I just heard from a person who is in a position to know that at the Board of Directors meeting tomorrow, the Executive Committee will make a motion to modify the MLS Policy Committee’s recommendation to suspend the Franchise IDX rule. This means that the Franchise IDX rule will stay in effect while the working group works towards a recommendation for Annual, allowing the franchises to continue operating their franchise websites in their current form. Further, I was told that the Executive Committee motion would contain a provision allowing brokers to opt-out of the Franchise IDX feed.

Chances are, this issue is going to be overshadowed by the RPPSI issue tomorrow, but nonetheless, I am now expecting further fireworks.

-rsh