On Rupert Murdoch Buying Realtor.com (Part 1)

By now, I’m sure any reader of mine knows that we have seen the second major blockbuster deal in the digital real estate space, with Rupert Murdoch’s News Corp agreeing to buy Move, Inc., the operator of Realtor.com, Top Producer, Tiger Leads, ListHub, and other brands. It’s an all-cash offer of $21 per share, which comes to $950 million as of this writing.

There are all sorts of interesting things to think about and wonder about here, and I’m writing this post in large part to understand my own thinking about this deal. Quite frankly, this is very different from Zillow buying Trulia — they’re both portals, in the same business, and they’re getting bigger. This is a media company that has significant digital real estate operations (2/3 owner of REA, the Australian near-monopoly on online real estate ) buying a U.S. portal.

So I put “Part 1” above, because I rather think there may be multiple parts to this one. Let’s get into it.

The Known Knowns

So first, let’s look at what we know about this transaction, what’s been publicly reported.

• News Corp press release (Move did not issue its own press release)
• Conference call with Analysts
• Presentation used in the analyst conference call
• Inman News Story (with lots of links that are interesting)
• Inman News: Why NAR Gave Its Blessing (this one provides some additional detail)

I just linked those because it’s entirely too unwieldy to quote those. I will quote from them as necessary, but really, if you’re interested in this issue, you probably should check out all of those yourself.

So what do we know beyond the bare facts?

The Synergy

We know that News Corp, Move, and NAR all see tremendous cross-platform synergy with this acquisition. Bob Goldberg, CEO of RIN, and the SVP of NAR said in one Inman article that while the Zillow-Trulia deal was additive; the News-Move deal has a multiplier effect.

The idea is that News Corp can really boost Realtor.com by promoting it on all of its other media channels. From the press release:

• Broadened reach for Move through News Corp’s robust platform including WSJ Digital Network (approximately 500 million average monthly page views) and News America Marketing (nearly 74 million households)

And in the conference call, Robert Thomson, the CEO of News Corp, mentioned things like “supercharging” the marketing for Realtor.com. At one point, he was asked about whether Wall St. should expect immediate lift from these cross-platform marketing deals, and said that yes, people should expect immediate impact once the deal is inked. Asked whether News Corp plans to increase the marketing budget incrementally, he stated that actually, News Corp planned to change the marketing “fundamentally”.

All in all, the overriding theme is that there is this huge synergy of marketing and advertising between News Corp’s other assets and Move. Mentioned specifically a number of times are Wall Street Journal, MarketWatch, New York Post, and News America Marketing.

NAR is certainly excited about the cross-platform opportunities, as we saw above. Steve Brown was quoted by Inman News as saying this deal “will help shape the future of real estate”, and of course, we have the Bob Goldberg quote as well.

“That’s Not A Knife; THIS Is A Knife” – AKA, the REA Factor

Also mentioned a number of times, particularly in the conference call, was the involvement of REA — which owns realestate.co.au website — in the deal. Not only is REA scheduled to be a 20% owner in the new Move, Thomson made it perfectly clear that he sees a lot of synergy between REA and Move.

My impression from the call is that the News Corp teams sees REA coming into Move in a pretty big way, and teaching the Americans a thing or two about running a highly profitable online real estate operation. REA, after, is often cited by guys like Spencer Rascoff and Pete Flint for its revenue prowess: its average revenue per user is over $1,200 per month, for example. And it utterly dominates the online real estate scene in Australia. Thomson specifically mentioned things like technology, marketing, and industry knowledge as things that REA would bring to the table.

And oh yeah, by the way, REA would learn a thing or two from the “competitive American market” that it might use to help its Australian operations.

Overall, I wouldn’t be all that surprised given the hints that Thomson was dropping if Steve Berkowitz isn’t out the door soon after the closing and replaced by some senior guy from REA. I’m sure everyone involved would deny such a thing, and that may not be the plan at all, but it’s the impression one gets from the effusive praise for REA from Thomson.

The Operating Agreement

Critical to the deal is the exclusive and perpetual NAR Operating Agreement. Indeed, as far as I can tell, the entire deal is contingent on the new Move being able to replicate it almost entirely.

I spoke with Celeste Starchild, GM of ListHub, earlier today and this was one of the things I asked about. Because the single biggest barrier to acquiring Move, I felt, was the NAR Operating Agreement that restricted Move’s ability to innovate for so long. Well, two things about the Operating Agreement.

First, Celeste said that NAR was fully supporting the deal, and that the Operating Agreement — which is not assignable by Move — would be replicated, more or less. The one unknown was the governance arrangement, since there was virtually zero chance that Rupert Murdoch would agree to have a NAR seat on the News Corp Board of Directors. But apart from that, Celeste said that there was already agreement between News Corp and NAR as to the “new” Operating Agreement, including the ability for NAR to have veto power over certain operational decisions. o.0

Second, Inman News reported on some of the governance changes:

As part of the deal, all members of Move’s eight-member board of directors have agreed to resign, including NAR’s current board representative Catherine Whatley. NAR will instead have two seats on the company’s nine-member advisory board.

“It will be a different type of approach because it’s advisory in nature, but items and issues that impact realtor.com will certainly be worked through and discussed with that advisory board,” Goldberg said.

The realtor.com operating agreement will be modified “a little bit” as a result of the deal, he said, but declined to disclose those changes. Still, he said the changes made to the agreement last year were more “substantial” and gave Move and realtor.com more flexibility to be more competitive, which helped make Move “more attractive” to companies like News Corp.

NAR and Realtors will still have a say in how realtor.com is run, Goldberg said, with its seats on the advisory board. RIN staff will also stay in place to take member feedback and work collaboratively with the operator. The operating agreement also continues to require NAR approval in regards to advertising changes.

I suppose we won’t know the full details until the deal is consummated and the new Operating Agreement is executed to know what the changes are. I suppose we really ought to file this one under “Known Unknowns”…

Speaking of which…

Known Unknowns: The Listhub Factor

What we do not know, and because no one could possibly know just yet, is whether the deal as structured currently would survive regulatory scrutiny.

An “additive” deal combining two online portals is undergoing review by the Federal Trade Commission to make sure there aren’t anti-competitive issues here. Is it possible that a “multiplier” deal in which a foreign media company takes over one of the largest portals in the U.S., which is also the “official website” of the near-monopoly National Association of REALTORS, would escape FTC scrutiny? I sort of doubt it.

And my money is on Listhub being the center of that scrutiny.

Recall for a moment that Listhub recently acquired Point2’s U.S. syndication rights from Yardi. I wrote about that here. Note further that News Corp pointedly boasted about acquiring Listhub along with Realtor.com, while not mentioning other brands, like Top Producer and Tiger Leads. Thomson, on the call, talked about Listhub controlling 90% of all listings in the U.S., and supplying both Zillow and Trulia with the majority of their listings.

I think it quite likely, then, that the FTC would look askance at a deal in which News Corp buys Move, while getting in bed with NAR, who controls most of the 800+ MLSs in the country, who in turn supply both Realtor.com and Listhub with the kinds of data feeds that Zillow and Trulia are spending millions of dollars and years of effort in “Industry Relations” to try to acquire. In fact, I wouldn’t be surprised if the FTC required that Move spin off or sell off Listhub to some third party in order for the deal to go forward.

Celeste’s view is that the anti-trust concerns are overblown. To be fair, it isn’t as if Zillow and Trulia both haven’t crushed Realtor.com in terms of consumer traffic growth in the last few years, even though Move owned Listhub during that entire time. And Celeste mentioned that with Listhub’s new platform improvements (due sometime in 2015), all of the publisher websites (that would be Zillow and Trulia) would get updates within minutes just like Realtor.com does, instead of every six hours.

I appreciate her views, of course, but frankly, I don’t buy it. And I doubt the regulators over at the FTC are gonna buy it either.

One of the points that Celeste brought up, for example, was that Realtor.com which gets its listings updated every few minutes directly from the MLS does not get its data from Listhub. The two are separate entities, with separate technology, and separate data teams. She said that the new ListHub platform is scheduled for release sometime in 2015 or so, but at this time, the technology simply cannot handle the faster updates, incremental updates, etc. etc.

Thing is… Move has owned Listhub for a few years now. And a few years ago, Realtor.com had that faster update technology in place. Presumably, the smart guys and gals at Listhub knew that they needed to improve their technology platform to increase data accuracy and timeliness.

So what stopped Move from giving Listhub the data technology it was using for Realtor.com to get the super-fast, frequent updates? Could it possibly be that doing so would have undermined the competitive advantage that Realtor.com had over Trulia and Zillow? The same competitive advantage that has led to the whole #AccuracyMatters sloganeering and marketing campaign of Realtor.com today, and the same competitive advantage prominently mentioned by Rob Thomson in his conference call?

However you dice it, I can’t see regulators looking at that cozy relationship between one listing portal, which happens to have a perpetual, exclusive license with the national organization with a near-monopoly grip on MLSs, that also happens to own the one and only data pipeline for real estate listings, and thinking “Yeah, that seems like perfect competition to us”.

Known Unknown: Mortgages

Another of the “known unknowns” here is the mortgage market. Rob Thomson on the call specifically called out the $13 billion mortgage advertising market, as well as the rentals market, as two that they will be pushing into in a major way. He acknowledged that Move had started trying some stuff there, but basically said it wasn’t enough. I suppose the idea is that with REA’s expertise and with News Corp’s piles of cash, and News Corp’s relationships with the finance world via Dow Jones, the new Realtor.com will quickly become a major player in online mortgages the way Zillow has become with the Mortgage Marketplace.

Trouble is… many brokerages and franchises — especially the larger ones — make most of their money from affiliated businesses. Mortgage is one of the most important of these affiliated businesses. I’ve been in meetings where brokers will admit that they run the real estate brokerage business as a loss leader to generate affiliated business where they make all their money.

These major brokerages and franchises can do absolutely zilch about Zillow’s mortgage marketplace. They can’t do squat about LendingTree or Quicken Loans or whoever else. Because they’re all private companies not beholden to anyone else.

But Realtor.com? Under the NAR Operating Agreement that will be modified, but will preserve some element of control for NAR? Are these major companies really going to just go along with their own Association’s official website building out a mortgage business?

There’s so much we don’t know yet, but let’s list a few:

1. Will NAR allow Realtor.com to build out a real mortgage leads business?
2. Will the major brokerages and major franchises allow NAR to support such an effort?
3. Assuming that NAR tells Realtor.com “Nyet” on mortgages, or demands “Realtor-centric” concessions that rip the guts out from any rational business model, will News Corp go along with that? Or will they tell NAR to go pound sand?
4. If the former, then News Corp’s investment is suddenly fairly limited; if the latter… lawsuit?

For that matter, suppose the brokerages and franchises go to NAR and demand that they put a stop to the Realtor.com expansion into mortgages. And NAR tells them no; we’ve seen it happen before with Franchise IDX, with broker AVM, and other issues. We’ve seen the biggest brokers and biggest companies send very pointed warnings towards NAR, talking about things like re-examining the three-way agreement (in which the local, state and National Associations share dues and membership).

If NAR cannot actually control Realtor.com — because they’re just on the advisory board now — and the Operating Agreement doesn’t provide them enough power to control Realtor.com… how do these large companies react? No one knows.

Next Part…

I have to stop here, because I’m super busy with a big report I’m writing for a client. Plus, I need to sort through more information and more details. I think I’ll focus a bit on the “marketing boost” side of the equation, but I’m open to topics/questions from my readers. If there’s something you’re curious about, let me know. I may not have the answers, but I’ll give it my best to research things and come up with an opinion at the very least.

-rsh