Zillow, The Industry, and Reading the Tea Leaves

SONY DSCThis is one of those posts I write from time to time to figure out what I think about an issue. For now, that issue is trying to discern the possible direction of the residential real estate industry in the U.S. If you’re an agent and only care about something that will have a direct, immediate impact on your day to day business, I’d skip this post and go read this and this instead.

Basically, what I’m wondering is if the bull case for Zillow — that it will someday be worth $50 billion, as its largest investor has suggested — has any basis in logic. There are a whole lot of very smart Wall Street folks who think that Caledonia and others are simply out of their minds. A lot of brokers, agents, and industry folks would agree. If I had a nickel for every time I read or was told, “Zillow is worthless without our data”, I could retire now and buy that ranch I’ve been wanting ever since moving to Texas.

So for this post, I’m going to look at what has to happen in order for Zillow to be worth $50 billion at some point in the future. This doesn’t necessarily mean that I am bullish on Zillow. (And I own zero shares of Zillow or any of its competitors, unless one of my funds owns it without my knowing about it.) I’m doing this because trying to make the bullish case for Zillow results in some really interesting thoughts/observations about the industry as a whole.

Let’s do this, then.

As of Today…

We have to start with where things are today. And frankly, as of this writing, the bull case for Zillow is extremely difficult to justify.

The biggest issue is that Zillow’s revenues are almost entirely dependent on its buy-side business (y’know, the “three headed monster” where agents are advertised on someone else’s listing?). While Zillow has been growing both subscriber count and ARPU (Average Revenue Per User) at a healthy, aggressive pace the last few years, the question is whether Zillow can keep it up, and what the TAM (Total Addressable Market) is.

TAM Question

NAR has just over a million members; there may be another million non-REALTOR licensees out there, but quite a lot of them are not active, work for builders, have a license for investment purposes, etc. etc. For all intents and purposes, if you’re an active agent hustling for business, you’re probably a REALTOR.

Out of that million, how many are possible advertisers on Zillow? The average NAR member does roughly six transactions per year, and the median price of homes in America was $200K in January of 2015, according to NAR. Assuming a 2.5% commission per side, and a 70/30 split with the broker, the average NAR member who is producing is making $21,000 per year. If you took a $10/hr job slinging lattes or mowing lawns, you make $20,000 per year (50 weeks).

The “average NAR member” is not buying ads on Zillow. Well, most industry folks think and have thought for decades that 20% of agents make 80% of the revenues. So what about the top 200K REALTORS? As far as I know, no one knows, but… let’s assume they did 80% of the transactions, so that’s roughly 4 million out of the 5 million (give or take, though it’s been in the 4.6 million to 4.8 million range the last year or so) in annual home sales in America, or 8 million sides. If 200K REALTORS did 8 million sides, that’s 40 transactions per agent, or $140,000 in annual post-split income.

Quite a few of this Top 20% are going to be strong listing agents, and we all know by now how they and their brokers feel about some other agent’s face on their listings. Are they buying leads off Zillow by the thousands, and spending thousands of dollars a month to do it? I have no idea, but I’m leaning against it. So really, we’re looking at the producing agents, who make a good income, who are more buyer-oriented, and willing to pay Zillow for buyer leads, as those generate a strong ROI for them.

Well, as of December 2014, Zillow (sans Trulia) had 62,305 Premier Agents paying an average of $359 per month. Now add in Trulia’s 79,254 subscribers paying $209 per month. Clearly, there’s overlap between Zillow and Trulia’s subscriber base, as an agent advertising on one site and getting a ROI may advertise on the other as well. But let’s say the overlap is some 50% of Trulia’s larger number. Now we’re looking at basically 100K subscribers across the Zillow Group.

This really starts to feel like saturation. That’s half of the 200K “producing” REALTORS.

Plus, Grant Simmons’s comment on the “Obvious, With Numbers” post seems correct to me:

Ad dollars may follow eyeballs, but ultimately leadgen based revenue programs are also a function of lead quality, immediacy and consistency.

Then You Have Pissed Off Listing Agents

By now, anyone reading this fully understands the anger, frustration, and dislike from the listing agents and listing brokers on any other agents showing up on their listings, so I’m not going to go into that in depth. Suffice to say, people be pissed.

That dissatisfaction with the buyer leadgen model of Zillow has led to all sorts of things, from brokers refusing to syndicate to Zillow, the Broker Public Portal initiative, to companies signing group deals with Zillow to ensure that only their listing agents show up on their listings. (See, e.g., Realogy.)

Zillow bears, like Citron Research and PAA Research, have already noted the inventory problems that arise from these “exclusive” deals with brokerage, especially large ones like Realogy. That trend appears unlikely to reverse itself; more and more brokerages want to ensure that only their listing agent appears on the listing, and even if they have to pay Zillow, they’d rather do that than allow random buyer agents to get leads off of one of their listings.

In theory, as inventory of “buyer leads” shrinks, price might go up as more buy-side agents bid on fewer non-exclusive impressions… but I don’t know if that’s a “bull case” for Zillow in any way, shape or form.

All of the initiatives under way today, from Fair Display Guidelines, to Broker Portal, to Upstream, to individual brokers investing in websites (e.g., Realogy with HomesForSale.com), etc. etc. are all motivated in some way by the resistance of the industry to the buyer lead-gen business model of Zillow.

The MLS Exists

I had a conversation recently with an analyst who follows Zillow for one of the big Wall Street banks. His view was that all these big investors in U.S. online real estate — Caledonia, James Packer, Rupert Murdoch, etc. — were coming from Australia, where REA has been so successful. But he pointed out that other countries do not have the MLS infrastructure that the U.S. has.

The impact of the MLS is that as far as the seller is concerned, the buyer comes from the MLS. Yes, the buyer might have seen the house on Zillow, then contacted one of the three agents, who then goes into the MLS, sets up the buyer on an email drip, shows the buyer a bunch of houses — including the one he inquired about — and then eventually does a deal. So unless the listing agent is keeping very careful track of the flow from Top of Funnel (where the buyer saw the house on Zillow) to the closing table — and it’s unlikely that the listing agent can do that, unless the buyer lead came into the listing agent, who then sent it to a team member — as far as the seller is concerned, the buyer came from the MLS, represented by a buyer agent.

So the Wall Street analyst simply wasn’t convinced that Zillow and Realtor.com will ever get the kind of traction that other websites in other countries got.

As of today, I have to agree with him. As long as the MLS exists in its current form, it’s truly unclear how things change except for the worse if you’re Zillow.

So, What Has To Happen?

Given the above, what has to happen for the Aussies to be right? For Zillow to be a $50 billion company, and for Move to be the major growth driver for News Corp?

My first assumption is that everyone involved is ultimately rational. Spencer and crew are very, very smart people, and so are the investors who have poured billions into Zillow, not to mention Rupert Murdoch and his team that put a billion dollar bet on Move. I have to believe that every single one of those people recognizes the challenges and problems. If I, a random blogger, can figure out the saturation issues, then surely all of those people have as well.

[Unless I need to draw a distinction, every time I write “Zillow” from here on out, I mean “Zillow, Realtor.com, and any other online portal.”]

1. Zillow Has to Transition Away from Buy-Side Lead-Gen to Sell-Side Advertising

The most obvious, to me, is that for Zillow to be successful, it has to transition away from its current dominant business model of selling impressions to buy-side agents on listings of other agents towards a model in which the listing agent/broker pays to advertise on Zillow.

This is not exactly an easy pivot.

For starters, this sell-side advertising has long been the core model for Realtor.com, with its “Showcase Listings” product. And brokers and agents out there have long despised the Showcase product for a variety of reasons, some justified and some insane. The “Showcase” concept is that the basic listing is stripped down and unattractive, much like the basic listing in the Yellow Pages (remember those dead-tree things that would land on your front yard?), while the “Showcase” includes more photos, more description, more stuffzorz that makes the house more appealing to buyers who are searching for properties. Showcase would also push homes up the search results pages, which pisses off a lot of brokers. (See, e.g., Fair Display Guidelines.)

The pivot has to be something else, something different.

2. Zillow Likely Has to Move Towards Shared-Risk Pricing Strategy of Some Sort

The TAM issue leads to real questions about how much Zillow can grow revenues. If the universe of potential advertisers becomes (A) current customer, (B) former customers who decided to stop because of lack of ROI, and (C) brand new agents… then Zillow has a major problem. Group (C) is not normally producing, and asking them to invest huge dollars up front for either leads or advertising is… well, it’s a hard sell. Increasing price could drive some of the A group into the B group, as the ROI from Zillow becomes unattractive due to higher price.

At the heart of the problem is the unique compensation structure of the real estate business: agents get paid only upon closing. So for any agent, even the most productive, to lay out hundreds or thousands of dollars to Zillow for the possibility to making big money down the line is… not all that appealing.

The obvious “shared-risk” pricing is the referral model that has been around for decades, and is currently practiced by “paper brokerage portals” like ZipRealty, Estately, and others. But we also know that many a brokerage and national franchise company has flat out said that if Zillow goes down that path, they are at war. (In order to earn a referral from a licensed real estate agent, one needs a real estate license; that would make Zillow a “brokerage” in competition with existing brokerages and franchises.)

I don’t see that being the path, because, again, Zillow and its investors are rational people. They understand that going down the referral path is to declare open war on the industry, and they presumably have zero desire to do that.

A better “shared risk” strategy is likely something more like Google’s Adwords, or similar “cost-per-action” type of deal, but one where the upside to Zillow is far larger compared to the “write us a check for a monthly subscription” deal, in order to compensate it for taking the risk. For example, maybe it’s something like “Flat Fee Price of $X for Zillow Premier, or $5 per inquiry sent” or some such.

However it’s done, Zillow should be looking to tie pricing to agent success more closely (and simply talking up 10x ROI for average subscribers is probably not good enough, since that still requires the broker/agent to come out of pocket first) without going down the referral model road.

3. Consumer Mindshare

Both of these are entirely possible if Zillow can successfully change consumer behavior and consumer expectation. In fact, I think those are possible to any significant degree only if Zillow can change consumer expectations.

This need to dominate consumer mind-share, to be the brand for real estate in the way that Google is the brand for search or Apple is the brand for smartphones or Glock is the brand for polymer pistols, explains Zillow’s continued and significant investment into brand marketing.

We may be close to this point already by some accounts, but if consumers (especially home sellers) start to equate Zillow with “real estate search”, then they will expect that every agent will not only market their homes on Zillow, but do it effectively. I’m already hearing that some agents go into listing presentations and discuss how their marketing on Zillow is heads-and-shoulders better than competitors who spend no time and no money on Zillow.

The back-and-forth within the industry these days (and for the past few years) is around the question of whether the industry should provide listings to Zillow, and if so, who should provide the listings, under what terms and conditions. The dust-up between Listhub, Zillow, and Trulia and the resulting news release after news release about this MLS and that MLS and this other national franchise company joining Zillow as a “partner” all revolve around these who/how/what questions.

All of those become moot if we get to the point where home sellers simply expect that their homes will be marketed — and marketed “professionally” on Zillow — the same way travelers simply expect that their hotel rooms will have clean sheets on the bed.

4. Devaluation of Buyer Agency

I was speaking with a broker who is also a board member and past president of a major Association out West recently, and he brought up something really interesting. His practice encompasses significant amounts of property management, so he’s deep into leasing.

He observed that in leasing today, the tenant-rep agent provides essentially zero value. The dynamics are, obviously, different. Landlords never negotiate the rent, according to him. There are no real “repair requests” or some such. Basically, a tenant sees the property, makes an application, the leasing agent does the credit check, background check, etc. and if he passes, writes up the lease (i.e., fills in the form). The tenant’s agent doesn’t even open the door if it’s an apartment building.

So his concern is that the same dynamic will eventually work its way to sales. Most of the technologies that have come into real estate are buyer-side technologies: property search, IDX, portals like Zillow, neighborhood info, email gateways, and so on and so forth. Now that the Internet has put information in the hands of the buyer, and technology continues to make the transaction more and more efficient, he thinks that buyer agents will eventually reach the same level of usefulness as a tenant rep agent.

I think he’s on to something. The growth of agent teams in recent years is creating a real two-tier system between people who are primarily listing agents and people who are primarily buyer agents. And there’s no question from a business standpoint who has the power and earns the money. There may even be some questions as to the fiduciary independence of a buyer’s agent who gets all her business from the team leader listing agent. in fact, Fair Display Guidelines, KW’s “Your Listing, Your Lead”, and other related movements strongly suggest that buyer agents are at best second-class citizens.

Keep in mind that buyer agency itself is a relatively new phenomenon (1990’s, not the 1890’s), and one that was created not to provide elevated levels of service to buyers, but to decrease legal liability for brokers who were dealing with all sorts of issues from sub-agency.

As the industry continues to change, and technology continues to enable the ancient law of “He that hath, gets,” the devaluation of buyer agency is not only possible, but likely.

5. The MLS Becomes the Conduit to the Marketplace

This is probably the most interesting, yet most debatable, proposition.

As long as the MLS remains the marketplace for homes, the actual place that buyers come from in the perception of the seller, Zillow’s growth potential is limited. Therefore, for Zillow to become a $50 billion company, that has to change, and the MLS has to become a conduit (or the conduit) to the actual marketplace.

As it happens, there is a bit of precedent there, and it’s one that the industry has been talking about for a while: what happened to travel. Pre-Internet, SABRE (and similar computer systems) was in effect the marketplace for airline tickets. Of course, only professional travel agents had access to SABRE, and consumers would call a travel agent to book a ticket. Post-Internet, SABRE has morphed into something closer to a conduit to the Internet, which has become the actual marketplace where travelers go to buy tickets.

The classic over-panic of “what’s happened to travel agents will happen to real estate agents” has been effectively countered by the observation that there’s a world of difference between buying a $600 ticket to California, and a $600,000 house in California.

What has not been much addressed, however, is whether what’s happened to SABRE can happen to the MLS.

One of the hottest topics in the industry today is whether the MLS should undertake “direct syndication” — pioneered by Kipp Cooper of North Alabama MLS. The immediate cause is Zillow’s decision to terminate its agreement with Listhub, which makes Listhub not all that useful since Zillow now operates the top two web destinations for buyers. There are lots of good arguments for why the MLS should do this, but what I’m interested in right now is that the MLS and its brokers and its subscribers view a core function of the MLS to be to get listings onto the websites where buyers go.

The most extreme example of this new idea — that a core mission of the MLS is to get listings in front of buyers — is the Broker Public Portal project. That in turn grew out of new rules passed by NAR in last year’s meetings that creating, operating, and marketing a public-facing website of the MLS is a “basic service” which can be included in the must-pay subscription fees of the MLS.

Add on to this picture the ongoing issues with “off-MLS listings” or “pre-marketing” or “pocket listings” or whatever name you want to give to the practice of listing agents putting listings onto the Internet before they put it in the MLS, and I’m not certain that we haven’t already passed the tipping point of the MLS becoming the conduit to the real marketplace.

Weaving the Web

Now layer on the other four factors above.

The devaluation of buyer agency is underway. Listing brokers and listing agents insist that all inquiries, all leads on a listing ought to go to the listing broker/agent. Growth of agent teams means that those leads get distributed to buyer agents on the team.

Buyers have already shown that they prefer to start searching for a house on Zillow. The massive (and effective) brand marketing by Zillow has to be making inroads into the minds of sellers. Agents are starting to differentiate themselves to homeowners based on how good they are on Zillow. How much longer before sellers start expecting and demanding that their homes be on Zillow? Or even more, how much longer before sellers start expecting and demanding that their homes be showcased on Zillow, and marketed effectively and professionally on the websites where buyers are?

As I see it, we’re not actually that far away from the Internet, from Zillow, becoming the real marketplace for properties. The MLS’s most important function in that world is to be the data-checked, accurate, and timely conduit to Zillow.

At that point in the evolution of the industry, Zillow can make the pivot away from relying so much on buy-side business, to growing out its listing-side advertising model. It may be one that is a shared-risk type of approach, where the agent/broker isn’t shelling out as much money up-front, but paying a larger premium on the backend, upon some success metric. But it will be one driven by all of these factors.

The Ultimate Win

The final step, the ultimate win, the sign that everything has permanently changed in the American real estate landscape, is when Zillow works hand-in-glove with the brokers and agents to convince the home seller to pay for advertising.

Lost in much of the pooh-pooh’ing of Australia’s experience with online real estate, lost in the focus on monthly fees that are thousands of dollars to advertise a single house, is the fact that oftentimes, it is the seller who is footing the bill for advertising his home on REA.

It also makes economic sense, even though the culture of American home sellers hasn’t gotten there fully. If I’m selling a $1 million home, and I’m already looking at paying $60,000 just in commission costs, why not another $5,000 to make sure I get as many buyers laying eyes on my house? The difference between getting my asking price, or getting 98% of my asking price, is $20,000. If spending $5,000 for some “super premium listing enhancement package” on Zillow gives me confidence that I’ll get my asking price, is it not economically rational to do so?

After all, home sellers today are routinely forking out hundreds, if not thousands, of dollars on staging their homes. In some cases, they’re spending thousands, if not tens of thousands, or dollars on actual repairs and upgrades to the home, because the expected return from those repairs and upgrades outweigh the costs involved. And oh by the way, there are zero guarantees that any of those repairs, upgrades, new paint, or staging will result in a higher sale price — just like there’s no guarantee that spending money on Zillow will result in a higher price, or faster closings. But that’s Marketing 101 for ya.

Messara’s statement that advertising dollars follow eyeballs was interpreted to mean that brokers and agents will pay more for them. I actually think the statement should be interpreted to mean that the home seller will pay more for those eyeballs. The actual seller, after all, is the person who owns the property, not the broker or agent.

That’s the ultimate win. Because the industry will gladly write Zillow a check for $10,000 to advertise a luxury home, as long as the homeowner is willing to pay that $10,000 tab. That $50 billion valuation is not crazy then, is it? Now the TAM isn’t the 200,000 producing REALTORS, but the roughly 87 million homeowners in the United States.

A Nod to the Bears

Having spent this time writing (i.e., thinking about) the above, I have to give a nod to the Zillow bears:

That’s an awful lot of fundamental change that has to happen to justify the optimism of the bulls.

The whole “devaluation of buyer agency” and the “off-MLS listings” and all that may be a symptom of the hot seller’s market we find ourselves in today. The minute that the housing market turns bearish (and there are some hints on the horizon there), all that will go right out the window and we’ll be back to business as usual.

American home sellers may prove totally resistant to paying for marketing, expecting that to be their due right for the 6% in commissions they have to pay out at closing. The MLS may undergo a revolution and refuse to become a conduit. Brokerages might launch a portal that is a truly effective competitor to Zillow, Trulia, and Realtor.com (see, e.g., Redfin) and decrease their reliance on the portals. Hell, who knows? We might have Federal intervention at some point that upsets the entire apple cart.

So the bears may be playing the smart bet. When there are so many If’s and Could-Be’s and That Has to Change’s in a business plan… well, the smart play might be to bet against it. I actually take no position on that question here, since that wasn’t the focus of the thought exercise.


As a think-out-loud piece, I guess I do arrive at a few conclusions from all of this. In order for Zillow to be a $50 billion company, and for Move to be a multi-billion dollar a year revenue source for News Corp, some things have to happen:

  • Zillow must pivot to the sell-side at some point.
  • That pivot is impossible without dominant consumer mindshare, enough to change seller expectations and demands.
  • The devaluation of buyer agency must continue.
  • The MLS must transition from being the marketplace for homes to being the trusted conduit to the marketplace for homes.

And ultimately, if Zillow’s power continues to grow, such that it can command extraordinary price increases, the seller must become willing to foot the costs of that advertising one way or another.

Whether that makes you a bear or a bull on Zillow (and all other online real estate companies) depends on your, not my, take. Thanks for taking this journey with me.


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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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