I just had a fascinating conversation with Victor Lund of WAV Group who is spearheading the Broker Public Portal effort. We discussed a variety of topics from governance to equity to internal politics, shape of the industry, competitiveness, Zillow, Trulia, brokerages, etc. etc. It was awesome, and my thanks to Victor for making the time.
One thing that really struck me in the chat, and what I thought I’d write about, is just how much of a Adam Smith worshipping capitalist pig I am. I believe in the social benefits of private interests, the efficiency of the profit motive in bringing wonderful products and services to the world, and in short, that greed is good.
Now, in everything that follows, one caveat: Victor was not representing his own opinions, but reflecting the opinions and thoughts of the brokers and MLSs involved in the BPP conversation, as he should be, when he’s leading the PR and communications effort for the BPP organizing effort. So do not attribute anything here to Victor personally. 🙂
The Current Structure of BPP Explained
As of this writing, the thinking behind the BPP corporate structure is that it will be structured more-or-less as a non-profit. Shares in the company cannot be sold, and no dividends will ever be paid. Should a company leave the BPP, and it has shares, it surrenders them back to the company without compensation.
Apparently, this is at the advice of top anti-trust attorneys, because the #1 concern whenever real estate brokers and MLS folks get together is avoiding anti-trust scrutiny. Thing is, while I’ve never practiced anti-trust law, there’s something fishy about tying the capital structure to anti-trust concerns. The two are not related, as far as I know.
NAR was sued by the DOJ for anti-trust violations, and that’s a nonprofit. Various MLS’s throughout the years get sued for anti-trust violations, and not one is a for-profit company. Meanwhile, Zillow and Trulia just went through months of anti-trust analysis and got the deal approved. Clearly those two companies are for-profit entities.
Maybe I misunderstood Victor, and the two are not related. Perhaps the anti-trust concerns drive the governance components, while the capital structure is driven by other reasons. One such reason is the feeling amongst brokers that really, at the end of the day, no one has the right to get rich off of listings other than the listing broker and the listing agent. That’s one reason why brokerages don’t necessarily want the local MLS becoming a for-profit entity making money. So the BPP falls in the same sort of bucket: it should not make money from the listings of its “members”.
Motivation Explained
That leads directly into the question of motivation. Why do brokerages and MLSs want to do BPP so badly?
In a word, as Victor put it, they want alternatives.
As he explained it to me, the beliefs of brokerages go something like this:
- Syndication is not necessary for business. Firms like Shorewest and Crye-Leike who have pulled out of syndication have seen their business increase.
- Nonetheless, brokerages find that they have to keep syndicating for competitive reasons: if they stop syndicating, a competitor will go to the home seller and offer to “advertise their properties on top portals”. That affects the brokerage’s listing agent, which in turn could affect recruiting and retention.
- This is the case because sellers do not understand where buyers actually come from. Victor cited two stats from a large firm, which shows that sign calls produce eight times the number of leads from portals, and brokerage websites produce five times the number.
- Therefore, the cost of syndication — paying to enhance listings — is extraneous cost to brokerages, but one they have to keep paying because competing brokerages don’t see the light, or don’t care.
- That cost is rapidly rising, and with the Zillow-Trulia merger and the Move acquisition by News Corp, the cost will skyrocket in future years.
- By providing an alternative to these paid-advertising portals, BPP will save the brokerages and their agents a ton of money. That’s the financial benefit of participation, so gains from equity, shareholder value, etc. etc. are all unnecessary.
More I think about it, more I feel that this set of motivations has deep issues.
Problems With Motivation
The core problem here is that different brokerages, and even different agents, have differing views on value of the portals. The brokerages that are gung-ho about BPP think portals are worthless, so all of the money spent is a waste. Obviously, the brokerages that are gung-ho about Zillow think otherwise.
One solution, as suggested by the reasoning above, is to undertake a massive consumer education campaign so that sellers understand that it’s no real advantage to have your home marketed on Zillow, since most buyers come from brokerage websites, MLS, and sign calls. Trouble is, such consumer education marketing would cost not just tens or hundreds of millions, but potentially billions or tens of billions of dollars over a long, sustained period of time. Another problem is that the one organization (NAR) that potentially could take on that kind of advertising/marketing/education to consumers, is in bed with a portal owned by Rupert Murdoch. One assumes that if NAR starts running TV ads talking about how home sellers get no value from portals, the relationship between News Corp and NAR would go south very quickly. So this path ain’t gonna work.
So if you can’t control consumer demand, then the only other way is to control supply. It’s kinda like the drug war problem. It’s too expensive and too difficult to get consumers to see the light. So maybe these brokerages can get other brokers and agents to see the light, and ultimately, decrease the flow of drugs listings and advertising dollars at the source.
The issue is a classic Prisoner’s Dilemma, or ensuring compliance by others. It’s the exact same logic that unions face with respect to workers who cross the picket line. The minute one brokerage breaks and crosses the picket line (so to speak), everyone else is disadvantaged.
And… as you might imagine, any sort of scheme that seeks to punish or discourage such “line crossing” falls smack in the middle of the anti-trust laws, no matter what the capital structure of BPP.
I’m sorry, but I simply can’t see any of this working if the motivations involved revolve around “if only they could see the light!” type of a thing. I have a better approach.
The Capitalist Pig Approach to Solving Problems
Fundamentally, I think in any business venture, the most important motivation has always been, is today, always will be, and furthermore must be, the profit motive.
As Gordon Gekko says, “Greed is good.”
As Adam Smith observed:
The rich…are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society…
All of the finest real estate agents I know, who truly provide an amazing customer experience, who go the extra mile to provide service, build relationships, and help families with their American Dream do it for money. And they are phenomenally successful, making millions of dollars for themselves, their families, their team members, and their brokerage. That they are motivated by greed, by financial gain, does not neutralize the fact that they are providing a social good and leaving behind happy, delighted customers.
The same applies everywhere and anywhere. Advanced medicine, energy, the Internet, the lightbulb, this computer I’m writing this on, the food I ate this morning — every wonderful necessity and comfort of life were developed, improved, and distributed by greedy people seeking financial gain. Greed works. Greed is good.
(Of course, greed is never the only motivation for the best of us. But let’s face it: ain’t none of us running a charity in real estate, doing transactions for free.)
Applying Greed Is Good to BPP
From that perspective, if it were up to me, I would change the BPP model fundamentally. I think it’s the only way such a project can be made to work.
Ownership must be financially meaningful.
The initial startup funding mentioned is $15 million. Those companies that invest the money should see a return on their investment, commensurate with the level of risk they’ve taken. This is basic investment 101. If Realogy puts in $5 million, and Joe’s BBQ & Real Estate Brokerage puts in $500, Realogy should have 10,000 times the number of shares that Joe has.
Furthermore, the earlier rounds get more upside, because they’re taking the bigger risk.
The argument against this is that due to internal politics of the industry, if big money brokerages own most of the equity, the smaller brokerages won’t participate. Same with MLSs; if the large MLSs own far more equity (and therefore have more “control”), then the smaller MLSs won’t participate.
I think this is simply untrue, as far as brokerages go.
First, if the logic of the brokerage motivations above — that the financial gain of BPP comes from having an alternative to Zillow, thereby keeping prices of online advertising lower — then brokerages will participate without regard to equity. Either the value of BPP is there, or it is not. Either the small brokerage will see his Zillow invoice go down by 50%, or it will not. If the former, it’s down with BPP. If the latter, then equity doesn’t matter one little bit.
Second, we already have instances in the industry where smaller brokerages participate in MLSs that are owned by large brokerages, who reap most of the financial rewards (as they took the financial risks). Northwest MLS is broker-owned, principally by three large brokerages. FMLS in Atlanta is broker-owned, principally by several large brokerages. Neither have seen defections by smaller brokerages. As long as the entity delivers what it promises to, “equity” doesn’t much matter.
But for those companies that really put their money where their mouth is on BPP, they need to be incentivized to stick with it and keep it going.
Aside: What Does Success Mean?
Before we go much further, one thing to clarify here is what “success” for BPP means. Let’s assume from the motivations above that the principal goal is not “make a ton of money” but “become a lower-cost alternative to portals”.
The only way for BPP to be an alternative to the portals is to be a player for online real estate. Unfortunately, given the nature of Internet companies, that usually means being #1 or #2. In this case, let’s imagine that online real estate is similar to travel, where there can be a few meaningful players (Travelocity, Expedia, Orbitz, Kayak, etc. all exist). On that basis, BPP has to be at least fourth, but most likely third. In all of the HearItDirect panels I’ve been part of and have seen, only five websites ever get mentioned more than once: Zillow, Trulia, Realtor.com, Redfin, and Craig’s List.
If BPP is going to be a player, it needs to replace one of those five. Well, Craig’s List ain’t happening, period, end of story. Redfin is a brokerage, and not selling leads to other brokerages, so it isn’t a “portal”. Therefore, for BPP to be a player, it has to supplant Realtor.com as the #3 online destination.
That’s about a 40 million monthly unique visitors proposition. If BPP can’t get there, then there’s little point. It won’t be an alternative to the portals, and won’t achieve any of the goals that the brokerages and MLSs involved with BPP want.
Back to Greed
So if we start from the premise that BPP needs to be at least the #3 website in real estate, and we assume that it actually gets there, then it’s worth over $1 billion. (That’s what News Corp paid for Move.) Given the lack of revenue sources (Fair Display Guidelines, remember?) maybe it’s worth less. But we’re still talking about enormous amount of money.
For those big companies who have the kind of money to invest into BPP, the prospect of their $15 million turning into $500 million may be worth the risk. The ongoing revenue model for BPP right now is dues assessment on MLS members (plus some limited display advertising). The large MLSs that will provide the bulk of operating revenues may find the prospect of a huge payday worth the trouble.
If not, then what’s the point? If “ownership” has no financial value, no market for shares, no dividends, nothing at all… why would any company remain engaged with this project over the long haul?
Greed Is Good… For Recruiting
Another point which I’ve made to Victor, and one that he agreed was a valid point, is that without a for-profit structure, it becomes impossible to recruit the best of the best that BPP will need to be competitive. No disrespect to the tech folks working at MLSs around the country, but not one of them would turn down Facebook if it came calling with offers of stock options that could make them millionaires.
Starting with the most important position, the CEO, how are you getting the talent to compete against Spencer Rascoff, Paul Levine, and Ryan O’Hara without some prospect of serious personal gain for that individual? “We’ll pay a great salary, and have great benefits” goes only so far against “You can make $50 million when we go IPO”.
Without the right people, you cannot compete. And without the right incentives, you cannot get the right people. Greed works.
The Bottom Line
This is getting too long. Here’s the bottom line:
Were this up to me, I would advise the 2-3 large brokerages/franchises and the 2-3 large MLSs who have the financial resources to skip over the “initial interest-gauging stage” with the collectivist mindset of the Association/MLS world. Go directly to seed funding. Write $1 million checks each, for equal founder shares.
Get the attorneys to draft a set of by-laws and data usage contracts/agreements that avoids anti-trust concerns while keeping Fair Display Guidelines in place, but as a for-profit whose shares are meaningful. If they can’t do that, then they’re not very good attorneys now, are they?
Launch the company and site, with the right initial team. Then allow others, from brokerages large and small, to MLSs to Associations, to individuals, to invest in BPP in future B, C, D rounds. Take venture funding if offered on right terms; refuse it if it isn’t.
Then try to compete with the portals, to create the alternative that the founding companies want to see. Those are execution and operations issues, and either the team succeeds or it doesn’t.
That’s how I would do this, because Greed Works. Greed is good. And Greed leads to all kinds of social good, benefits to society, to brokers, agents, buyers and sellers everywhere.
If you’re seriously interested in the details of how something like this might work, drop me a line. I understand fully the difficulty of REALTOR politics, the “way things have always been done” in the industry, and all of that. But I also understand corporate strategy, and how things will and will not work.
-rsh
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