Zillow Acquired Diverse Solutions: Three Interpretations


So Zillow buys up IDX provider, Diverse Solutions.

First of all, congratulations to Justin LaJoie and the rest of the team at Diverse Solutions, as well as to Spencer Rascoff and the folks over at Zillow. I don’t know what the real motivations behind the acquisition were, but at a minimum, you can say that two great teams of real estate technology people are joining forces.

Second, I don’t have a whole lot of time to devote to deconstructing the Zillow acquisition of Diverse Solutions, but did want to present a quick reaction from three different perspectives: Friendly, Hostile, and Mine. I suspect most people’s response to the acquisition will fall into one of the first two buckets, while a very small minority (of one person perhaps) will fall into the third.

I <3 Zillow Interpretation

The most friendly interpretation of the acquisition is that it is simply Zillow trying to diversify (pun intended) its service offering to agents to sell subscriptions to Zillow. From the Zillow Blog on the deal:

In today’s competitive environment, the real estate community is always looking for the right Internet marketing tools to make sure that a potential buyer is connected with someone selling their home.  For thousands of agents, Zillow and its popular mobile applications make this happen.  Many agents also have their own website, and that’s where Diverse Solutions comes in, providing listings and map functionality, among other services.

The joining of Zillow and Diverse Solutions now provides agents with even more marketing resources.  In the coming months, customers of both organizations will see new and exciting benefits- all designed to help connect home buyers and sellers with the agents and brokers that help to make it all happen.

A few things about this interpretation.

First, if all of the Diverse Solutions IDX websites can be converted into “Powered By Zillow” type of a deal (see, e.g., Yahoo Real Estate), then presumably, Zillow can count all of those page views and visitors in its network for the purpose of ad sales and showing growth. Let’s say Diverse Solutions has 5,000 customers, each with 300 monthly visitors. That’s 1.5 million additional visitors practically overnight for Zillow, and it would vault over Realtor.com in terms of being the largest real estate search engine.

There are potential SEO benefits as well if thousands of agent websites are suddenly linking back to Zillow and having all of the search be powered by Zillow (even if using a different database — the IDX dataset — that Zillow itself can’t use). I’m sure smart engineers could figure out how to make this work for Zillow in its SEO wars.

Second, adding on to that, if Zillow then uses its sales force, marketing channel, and market presence to start promoting Diverse Solutions to its subscribers, there are huge revenue opportunities for Diverse Solutions as well. Let’s say the $7.8m purchase price was 2x revenues; Zillow could easily quadruple Diverse Solutions customer base — pay $7.8m, and then in 2-3 years’ time, book $15m or so in revenues. That’s a good deal for everyone involved.

See, that’s a very innocent interpretation of events. To quote Spencer Rascoff from Twitter, “No reason for anyone to freak out. We come in peace.”

Hostile Interpretation

Then there’s the paranoid, hostile interpretation. I’ve gotten this interpretation from at least three people I’ve spoken to today after the annoucement. It goes something like this:

Zillow plans on becoming the national MLS. The MLS has two critical components: one is the compilation of all the listings on the market, and the second is providing IDX to members. Zillow already has the vast majority of listings on the market, and by acquiring Diverse Solutions, it has the capability to provide IDX to its members… and one day, that IDX will become “ZDX”.

There are a few problems with the hostile interpretation. First is that Zillow does not today have all the listings on the market. Zillow does have a huge amount of listings, but because it relies on syndication channels and direct deals with brokerages and franchises, it does not today have 99.99% coverage. The second is that IDX providers are bound by the terms of IDX licenses. As Michael Wurzer of FBS points out, IDX licenses are typically limited to providing IDX services to a participant:

Diverse has IDX data from quite a few MLSs but their license agreements won’t allow Zillow to use that data for any purpose other than IDX. However, I can imagine quite a few interesting products that can be built on top of IDX data that will blur the lines of what Zillow/Diverse offers their IDX customers. This will be the most interesting development to watch.

As Michael points out, the paranoid interpretation includes the possibility that Zillow now has access to all of the listings in a number of MLSs, through the IDX access that Diverse Solutions has. It could, in theory, use that data in ways that are outside of the IDX license terms. It would be extremely difficult for anyone to check to make sure that Zillow isn’t taking that data and using it in other ways (cough, Zestimates, cough).

The only weakness to that particular paranoid scenario is that Zillow is a public company now. It has deep pockets. All it takes is for one disgruntled employee to blow the whistle if Zillow starts using IDX data in ways it isn’t authorized to do so, and they’re facing huge litigation risks. I don’t know that Spencer and crew would take that kind of a risk, especially since the consumer doesn’t appear to be all that concerned that there are a bunch of questions about the accuracy of Zestimates.

So while the I Hate Zillow interpretation does have some narrative power to it, I don’t quite buy it wholesale, because there are critical missing parts.

My Interpretation

My take is that it’s kind of a blend between both the I Love Zillow and the I Hate Zillow positions.

I think what Zillow did here is to set themselves up strategically for the future, while acquiring an asset that provides a nice ancillary revenue stream. What do I mean?

I’m from the commercial real estate space originally. In commercial, the marketplace for listings is a company called Loopnet (at least, until it was acquired by CoStar). I remember seeing Loopnet grow from a struggling startup into the juggernaut it is today. A critical part of its growth was a product called LoopLink. That was something that allowed commercial brokers and agents to embed a property search on their respective websites. It drove adoption of LoopNet, drove subscriber numbers, and drove broker participation in the early days of Loopnet.

Doesn’t LoopLink sound an awful lot like “IDX Search”?

Based on the popularity of LoopLink in a significant way, Loopnet went from a relatively small company into one of the two most dominant players in online commercial real estate, and was ultimately bought out for $860 million.

I believe that Zillow’s acquisition of Diverse Solutions is to setup the equivalent of LoopLink in residential real estate. The IDX search is the core component of any real estate website, whether broker or agent. By being able to offer an IDX product to all of its agents and broker partners, Zillow positions itself as the Loopnet of residential real estate.

Now, as things stand today, that’s not that big a deal. There is no MLS in commercial real estate; the existence of a company like Loopnet and a product like LoopLink allowed commercial practitioners to offer property search on their websites. In residential, the existence of the MLS means that the value of something like LoopLink is marginal at best.

But Zillow is a very smart, forward-looking organization, headed up by a smart leader in Spencer. Is there any chance they didn’t see the Agent Genius post reporting that some of the largest brokerages in the country are thinking about withdrawing from the whole MLS/NAR structure? Is there some chance that they didn’t see all of the hoopla around Franchise IDX that left some of the biggest companies in real estate absolutely livid? Given that Zillow has relationships with national franchises and with large brokerages, is it unthinkable that perhaps they know more than they are letting on about the mood in the industry?

Is the idea of schism in the industry truly that unthinkable?

If there is such a schism, and some of the largest brokers in the country withdraw from traditional NAR-ruled MLSs, taking a big chunkof all of the listings in a local market with them, all existing IDX providers (who rely on MLS data feeds) are suddenly screwed. A company like Zillow might end up with far more of all the listings on the market at that point, since it gets its listings via syndication feeds, and via one-to-one deals with franchises and brokerages.

In that scenario, Zillow becomes the de factor marketplace for real estate (along with Realtor.com and Trulia). But of the three, only Zillow offers a product that would power broker and agent websites with listing search: Diverse Solutions IDX, which could become ZDX post-schism. That’s a strategic victory of unimaginable magnitude. Whatever Zillow spent on Diverse Solutions will be worthwhile a hundred times over.

If, on the other hand, there is no schism, then Zillow’s spent just a few dollars ($8m isn’t breaking the bank, y’all) to pick up an asset that lets them offer an IDX solution to its subscribers and potential subscribers, leveraging its sales and marketing workforce. Maybe they can offer IDX at a huge discount, as long as the subscriber also subscribes to Zillow Premier Agent. And of course, there could be volume discounts for brokerages who sign up in bulk. At that point, the IDX product doesn’t become a gamechanger, but it does become a nice little sideline business for Zillow, adding a couple million visitors to the Zillow network, helping with SEO, and generating a nice ROI on the $8m investment.

Smart. Very smart.

Zillow doesn’t need to do anything outside of the IDX data license. It doesn’t need to threaten anybody. It doesn’t need to do anything that would expose it to litigation risk. All it has to do is wait and see. Why murder an industry that is so busy committing suicide? Just come in after the fact like a white knight on a snowy stallion and rescue the fragmented parts of the industry from chaos.

So, my take on the acquisition is that Zillow wants to offer a LoopLink-type of a product to residential real estate. Not because it is looking to become a national MLS, or because it wants to screw anybody, but because it is reading the tea leaves of broker sentiment and realizing that there may be an opportunity here no matter what happens. Schism = Big Win; No Schism = Small Win. Either way, it’s a win.

Zillow won’t do anything to drive the MLS out of business or make it irrelevant. But Zillow will take advantage of the situation if others force the MLS into irrelevancy. Purchasing Diverse Solutions is but a part of that positioning, as was purchasing Postlets. Positioning, of course, is a far cry from agitating. It’s the smart play, and it is what I would expect from a smart company like Zillow.

I tip my hat in admiration.

So… which camp do you fall into? I <3 Zillow? I Hate Zillow? Rob Is Nostradamus? Or a different take altogether?


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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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