Some Thoughts on Zillow’s 2011 Results and Howard Hanna (In Which I Declare Peace In Our Time)

That tagline is more meaningful today

Was it just yesterday when I was speculating on Zillow’s recent hiring of Bob Bemis? Why, yes, yes it was. How things change in 24 hours when you live in interesting times. [Editor’s Note: Obviously, you started writing this on the 15th and didn’t finish? Nice managing the deadline, Rob.]

Today, Zillow released their Q4/2011 results, which shows its full year results as well. The numbers are… shall we say… ah… scintillating given the state of the real estate market today? And there’s just so much here that points to the future of real estate, where the battle lines will be drawn, and what the next set of tensions will be.

I warn you now. This will be long and filled with the kind of “paranoid speculation” that makes most insiders guffaw with disbelief… until it happens.

Zillow’s Results for 2011: Oh My!

Here we go from the 8-K:

“The fourth quarter was another excellent one for Zillow, capping off an outstanding year that further strengthens our market leadership position,” said Spencer Rascoff, chief executive officer of Zillow. “Our continued product innovation, particularly on mobile and in expanding the types of services we offer real estate professionals, is fueling our growth and expanding Zillow’s total addressable market. Additionally, our revenue model spans across the Web and mobile, which positions us exceptionally well for further revenue gains from mobile in 2012 and beyond.”

Yeah, I’ll say. Let’s go over the top line summary:

Fourth Quarter 2011 Financial Highlights

  • Total revenue increased 108% to $19.9 million from $9.6 million in the fourth quarter of 2010.
  • Marketplace Revenue increased 169% to $13.7 million from $5.1 million in the fourth quarter of 2010.
  • Display Revenue increased 38% to $6.1 million from $4.5 million in the fourth quarter of 2010.
  • Net income was $0.9 million, up from a net loss of $0.5 million in the fourth quarter of 2010.
  • Adjusted EBITDA was $3.3 million in the fourth quarter of 2011, or 17% of revenue, which was an increase from $1.3 million in the fourth quarter of 2010, or 13% of revenue.

Full Year 2011 Financial Highlights

  • Total revenue increased 117% to $66.1 million from $30.5 million in 2010.
  • Marketplace Revenue increased 219% to $42.2 million from $13.2 million in 2010.
  • Display Revenue increased 38% to $23.9 million from $17.2 million in 2010.
  • Adjusted EBITDA was $11.9 million, representing 18% of revenue, compared to $0.1 million in 2010, representing less than 1% of revenue.

In my post yesterday, I thought that Zillow would end the year with roughly 16,000 Premier Agents. They came in at 15,799 for December of 2011. The growth rate has slowed down, but they still nearly doubled the number of subscribers from 2010.

Note that Marketplace Revenues is nearly double that of Display Revenues. Most people in the real estate industry still think of Zillow as a “media company” or as a “publisher”. Judging by the financials, they are no such thing: they are a subscriber-supported company. The chart that quite a few of my readers need to pay attention is this one here:

     Three Months Ended
December 31,
    Year Ended 
December 31,
     2011     2010     2011     2010  
Percentage of Revenue:         
Marketplace revenue      69     53     64     43
Display revenue      31     47     36     57

A couple of weeks ago, in the midst of the syndication kerfuffle, I wrote that there’s a fly in the syndication ointment, and that it was mobile. Well, Spencer specifically addressed mobile in the 8-K, and the numbers back him up:

Zillow continued its mobile product innovation during the fourth quarter, contributing to traffic and revenue growth. Zillow already operates the most popular platform of mobile real estate applications across iPhone®, iPad®, Android®, BlackBerry® and Windows Phone 7® , and in November 2011 the company launched new mobile real estate applications for Android Tablet and Kindle Fire. In December 2011, homes were viewed on Zillow Mobile nearly 100 million times, or 36 homes per second. In addition, January 2012 was another record month for mobile usage, with 53 homes viewed per second on Zillow Mobile.

Read that highlighted portion again. While brokers, MLS executives, Association board members, and others are struggling with what to do about syndication on the World Wide Web, in the time it took you to read this sentence, some 159 listings were viewed via Zillow’s mobile apps.

Spencer Rascoff, during the Q4 2011 earnings call, said, “Next, there is even less competition in mobile than on the web, due to the highly fragmented nature of the real estate category online. So while we’re the market share leader on the web, we have significantly more market share on mobile.”

That “highly fragmented nature of the real estate category online”? He’s talking about you.

And Then You Have This…

The technology blog GeekWire looked at Zillow’s financial performance, and listened to the earnings report call. And they had this to say:

Historically, Zillow has derived the bulk of its revenue from online advertising, charging real estate agents to gain access to the company’s growing ranks of home buyers and sellers. And while the advertising business won’t be going away anytime soon, Zillow has much bigger ambitions in 2012.

Essentially, it wants to become the place where agents turn to get the tools they need to more effectively do their jobs.

“We are in the midst of a calculated, strategic expansion evolving our agent offering from a one-sized fits all advertising program to become more of a central hub for a variety of marketing and business services,” said CEO Spencer Rascoff in a conference call with analysts during the company’s fourth quarter earnings call Wednesday.

“You can expect to see more evidence of this strategic evolution in the quarters ahead as we expand our CRM platform and other services,” said Rascoff, adding that they plan to investigate possible strategic acquisitions to help bolster the “expanded portfolio of agent-focused tools.”

Later during the call, Rascoff added more details about the new push into real estate services.

“The strategy here is to have many hundreds of thousands of real estate agents using our suite of — mostly free — productivity tools. And then have a smaller portion of them actually paying for services in sort of a freemium model. The strategy is all about shifting from a seller of advertising, which is very finite and sort of monolithic, to a provider of SaaS-based suite of productivity tools of which ads, or lead gen, is part it. But CRM, listing distribution, technology for aiding Web sites; training and other things that agents need to make the most of the Internet and of this technology revolution. That is the direction that we are moving.”

(Emphasis added)

Mmmmm… oh, where to begin….

First of all, I’d like to ask a question: who is the “central hub” for a variety of marketing and business services today? Let us consider all the possibilities:

  • The MLS
  • The Franchise
  • The Broker

Umm… that’s it.

The MLS hasn’t been just a database of listings for sale in quite some time. In fact, most MLSs offer a wide suite of products to its subscribers, often as a “member benefit” and sometimes as a paid premium product. HAR, one of the leaders in the MLS space for pursuing this kind of ‘central hub’ strategy, is an example of the modern MLS. Recent developments like, owned and operated by the influential consulting firm The WAV Group, specifically aims at making the MLS into so much more than just a database of listings.

In 2011, Keller Williams made an enormous investment into “marketing and business services” by launching eEdge. Word was that the program cost millions of dollars for KWRI, for their partners like MarketLeader and DotLoop, and the training and implementation across 80,000 KW agents are still ongoing. Of course every major franchise offers similar products and services, because they too want to be the central hub for marketing and business services.

And brokers both small and large spend a ton of money to offer “marketing and business services” to their agents. Indeed, the quality and quantity of such services are key elements in how brokerages compete in recruiting and retention. Quite a bit of the conflict between brokers and MLS, to take one example, can be traced to this desire to offer products and services to agents. In fact, the decline in the importance of brokerages could be traced partially to the fact that dropping price of technology democratizes access to tools and services. For example, once upon a time, a color laser printer was so expensive that individual agents couldn’t afford to buy one. Today, you can get one for $188.

Depending on how good Zillow’s new CRM platform (the first of many products and services, according to Spencer on the earnings call) is and how it’s priced, all three of the above are going to see an erosion in their value. They have to. It’s the law of competition. The beneficiaries may be the real estate agent and perhaps indirectly consumers, but that is one clear battle line that is now drawn.

Second, both Spencer and Chad Cohen (the CFO) mentioned a staggering number: real estate agents generate $60 billion in commissions, and spend 10% or $6 billion every year marketing both themselves and their clients’ properties. But they both mentioned that online advertising is only a small portion of that number. So one might naturally ask, where is the bulk of that money being spent then?

I’m not aware of any definitive research on the subject, but my gut tells me that most of that $6 billion is spent on “technology tools” such as IDX websites, CRM systems, transaction management, mobile technology, video, virtual tours, photography, social media marketing and the like. If your current business lies in one of these areas, I’d start listening to future Zillow earnings calls carefully if I were you.

Wait, but there’s more!

The Syndication War Is Over; Most Just Don’t Recognize It Yet

And because we live in such interesting times, almost immediately after I posted about Zillow, we get this announcement that Howard Hanna has decided to enter into a strategic partnership with Zillow:

Maybe it’s because Hoby Hanna spoke with such calm authority, but the response to the video is… tame to say the least. Granted, we’re missing some important details, like what Howard Hanna is paying Zillow as part of this strategic partnership, but the key point comes across clearly: Howard Hanna got the concessions it wanted. What are those concessions?

It appears there was just one: don’t send leads to anyone but the listing agent. Perhaps there are details that haven’t been made public, but the main thrust of the partnership is that “all leads in all markets go to the listing agent”, as long as that agent is one of Howard Hanna’s.  There will be no ads on a Howard Hanna listing, no other agents presented to consumers, etc. The inquiry would go directly to the listing agent.

Listen to the passion with which Hoby Hanna talks about how the listing agent is the right person to answer questions from consumers. In that, his view is identical to Jim Abbott of ARG, who took the opposite tack vis-a-vis syndication.

The other “concession” that Hoby mentions is that Zillow agreed it wouldn’t take data about Howard Hanna listings from any other source, in exchange for a clean data feed directly from Howard Hanna. What an unbelievable concession! Provide me with clean, error-free listing data directly from the broker? Ouch, twist my arm, please. I suspect every syndication-target site would love to make that concession with every brokerage in the country.
There are three things to consider here.

Super-Premier Agent?

Thinking about the Howard Hanna deal in the aftermath of the Q4 Zillow earnings release, I have to believe that there is money changing hands here. Both Spencer and Chad spent quite some time discussing the fact that Marketplace Revenues now make up 2/3 of Zillow’s revenues. The bulk of Marketplace Revenues comes from the Premier Agent program.

Well, if you look at what the Premier Agent offering actually is, the real benefits are mostly around being able to advertise on other people’s listings. The “Buyer’s Agent List” and “Showcase Ads” are the top two most valuable items, offered only to Platinum level Premier Agents. The third major benefit — Featured Listings — applies to all three tiers, but at different numbers.

In markets where Howard Hanna is dominant, the value of the Buyer’s Agent List and Showcase Ads has dropped significantly. If more brokerages take up that model, and strike the same deal, then Zillow stands to lose significant numbers of Platinum Premier Agents. Is it conceivable that Zillow agreed to do this without recouping that lost revenues? I suppose it’s possible. But I don’t think so.

And most of the other corporate relationships/partnerships brokerages and franchises strike with Zillow are in the nature of, “We’ll pay for all of our agents to become Premier Agents and provide a direct feed, in exchange for sending all leads to our agents.” At least, the ones I’ve heard about from friends in said brokerages and partnerships. Maybe we can call it “Super-Premier Agent” program.

Or we can call it “Zillow embraces the business model“.

Howard Hanna Is A Big Dog

Jim Abbott of ARG made a huge splash when he posted his announcement video that his brokerage was no longer syndicating to anybody. But fact is, ARG is a small independent with a couple dozen agents and a few dozen listings. Howard Hanna is a Big Dog; it’s the fourth largest brokerage company in the US, with 8,000 agents and many thousands of listings in their markets.

It seems obvious that Zillow would want to cater to a Howard Hanna, or to a HomeServices of America, or a Crye-Leike. Would they really extend the same deal on the same terms to a 10-person firm with 30 or so listings? I seriously doubt it. At least, not at the same price point as Zillow would charge Howard Hanna.

Syndication was always about business. And one of the big dogs just struck what it considers to be a good deal. The other big dogs, if they don’t have that same deal, will be seeking it. The little guys who aren’t extended the same terms, at the same price, are simply going to be at a competitive disadvantage vis-a-vis the big dogs. Their listing agents have to deal with the indignities of having Buyer Agents pegged next to their listings, or Showcase Ads splashed all over them, or both… or they can forego getting the traffic that Zillow generates. Or… they can jump ship over to Howard Hanna and be assured that all leads on their listings would come directly to them.

And now that all of the portals saw what the deal parameters look like, it’s just a matter of time before all of them embrace the business model: you pay a subscription fee, feed us clean data, and we send leads only to you. Yay, peace in our time.

Size matters, and we just saw how the Syndication War would be ended: armistice for the great powers, colonization for everyone else.

The Next Battle Line

So that announcement by Howard Hanna, together with Zillow’s quarterly report, delineates the next battle line: the big dogs vs. the little independents. Portals would gladly give up advertising revenues, if they can offset it with subscription revenues (well, at least Zillow will). The big dogs would gladly do strategic partnership deals with the portals if those deals give them an advantage in recruiting and retaining agents — especially the strong listing agents.

So the conflict is coming, and the trigger will be the issue I’ve been talking about for a while: IDX.

Hoby Hanna says in the video, “We found there’s too much noise in the industry. There’s [sic] too many channels. There’s [sic] too many websites.” True, and most of them never send the inquiry to the listing agent, which Hoby describes as one of the bedrock principles of his brokerage. They’re called IDX websites, and there are hundreds of thousands of them. I’ve spilled enough digital ink on the subject that I won’t repeat the arguments here.

It starts there, but I don’t think that’s where it ends. A natural law of business is “he that hath, gets”. Size confers an advantage, but in recent years, the big brokerages haven’t seen that translate into market dominance. If anything, the industry is even more fragmented than before.

A huge part of that trend was the emergence of technology companies like a Zillow. If the Howard Hanna/Zillow type of deal becomes the norm, however — and I don’t see why it wouldn’t — then the pendulum may swing the other way.

There Can Be No Conclusions Yet

To be fair, it’s very early. The thoughts above are, as is typical with me and this blog, way ahead of schedule. If you’re looking for solid evidence, I don’t have it. (Of course, by the time it becomes obvious, it will usually be too late to do anything about it, so… there is that.)

Will Zillow definitely do this thing or that thing? Who knows? All we know now is that they’ll release a CRM platform of some sort in the near future. But here are my takeaways from the events of yesterday and today:

  • Zillow is not an online publisher; it is a subscription-supported business services company.
  • Zillow’s strategy is very, very smart: leverage the traffic leadership into leadership in the “marketing and business services” area.
  • The Syndication War of 2010-2012 is over.
  • The next battle lines will be around two areas. First, who will be the central hub for real estate productivity? Second, who shall rule the industry: the big brokerages with scale or the small independents?

Those are my thoughts at this point. What are yours?


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Rob Hahn

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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