In the comments to my previous post about MLS making money, Carol Van Gorp wrote something that really made some things click for me. Here’s her comment:
The larger issues is where the profits come from. If an MLS’s profit is out of the pockets of the constituents it serves, then that is wrong. If the profit comes from selling products and services to other people/associations, then that is a different story! (Emphasis mine)
Ladies and gentlemen, we may have isolated the root of all the problems of the MLS. I’ve kind of thought similar things for the past few years, but that word “constituent” brought things into focus. Seriously, I have the best readers in the industry.
Let me lay out the case.
Customers vs. Constituents
Carol wasn’t trying to make a point with her use of the word “constituent”. She was reflecting the understanding and assumptions that are widespread within the real estate industry about the MLS. As far as many of the brokers and agents are concerned, the MLS is government.
Companies do not have constituents. They have customers and stakeholders. Governments, and more precisely, democratic governments have constituents. (Dictatorships have subjects, not constituents.)
Because the MLS grew out of the Association of REALTORS as a member service (and the vast majority remain owned by one or more local Associations), and the Association is a democratic membership organization, it comes as no surprise that the industry thinks of the MLS as one too. In fact, most MLSs that are not simply operated by the local Association are setup in much the same way as the Association is: a very large Board of Directors with annual turnover, where representation of various interests (large brokers, small brokers, appraisers, commercial members, etc.) is a key feature.
In fact, the typical MLS Board looks more like a city council than it does a corporate board. Here is a slide I’ve been using in a number of presentations when talking about MLS governance:
I’ve been using that slide to point out mainly that the government-style of governance leads to extremely slow decision making (by design). But even though I myself used the word “constituent”, I didn’t think through to the next step.
Government Services & Constituents
There are a few unique things about government services.
First, the government is a monopoly, pure and simple. You cannot have two city councils in the same city, nor can you have two county supervisors in the same county. In some cases, we all want the government to be a monopoly as it comes to some kinds of services: policing, court system, the military, etc. In other cases, the government is a monopoly because no one else wants to do what it does: park rangers, operating public schools, paving roads, and so on.
Second, because government services are offered on a monopoly basis (you have no choice as to which road surface to drive on on I-15), they’re not supposed to be trying to maximize revenues. Rather, they’re supposed to try to minimize costs. After all, taxes forcibly taken from working men and women are funding those services.
Third, as a result, government services are always inferior to equivalent services offered by private entities. Best example is private schools, but other examples from health care (Medicaid vs. private insurance) to housing to security abound. Lack of competition coupled to cost as the primary consideration ultimately means whatever services are offered by the government will necessarily be lower quality and less innovative than private sector equivalents.
This more or less describes the state of the MLS in the United States.
The MLS is a local monopoly, not by law but in fact. There is no competition (except in one market that I’m aware of — Atlanta, where a private broker-owned MLS competes with an Association-owned MLS) so no particular need to innovate, to improve services, or to grow. Instead, the primary consideration is cost. Just like government, the directive to the MLS is to provide services at the lowest possible cost.
No wonder that the average broker/agent thinks of herself as a “constituent” rather than as a customer. (You can always substitute the word “member” for “constituent” but the underlying meaning is the same.)
Problem of Constituency
The main issue of constituency is that a constituent affects things only indirectly.
Say your streets are filled with potholes. You go to your city councilman and complain. City councilcritter promises to look into the problem. Nothing changes. You go back and complain; councilcritter promises again. Repeat ad nauseam. On Election Day, you vote for the other candidate running for city council, and hope that the new councilcritter will actually look into the pothole problem for you. If you get sick and tired enough of the pothole problem, you might raise money, organize volunteers and run for city council yourself, thinking that you could do a better job than the councilcritter… until you get there, and you realize you have a lot of constituents who want a lot of things from you.
Constituent is obviously a political term, a political entity. So the price of pissing off a constituent is political: you might not win your next election. But then again, you might. On the flipside, if you’re a constituent, your power to affect change is limited to (1) complaining to the powers that be, (2) voting for someone else, and (3) donating time/money to elect someone else. That’s pretty much it.
Compare that to the power of customers. Piss off a customer, and they simply take their business elsewhere. Their actions directly impact the decision-maker, the policy-maker. And more importantly, even if a business can afford to lose a few unhappy customers and will therefore ignore whatever problem they have, those customers who find a different business who won’t piss them off will have their needs met.
In the MLS context, a broker might be pissed off about something, but his ability to change his situation is limited to constituent work: complaining, voting, etc. If the same broker is pissed off at his website vendor, he can change his situation for the better instantly.
Problem of Monopoly: Stagnation
Today, with changes in technology and consumer behavior, what is truly being brought to the forefront is how the lack of competition in the MLS space has created stagnation.
There are MLSs in this country in 2015 that are running on technology and user experience that would have been embarrassing in the 90’s. But why improve? There’s no real pressure to improve. Sure, members (i.e., constituents) might complain, but it isn’t as if any of them are going to go to another MLS provider.
One of the big “game-changing” innovations on the horizon for the MLS world is the idea of using API’s to deliver and take in data. It hasn’t happened yet, but it’s being seriously discussed by serious people. Fantastic! Welcome to the time when this was the top song of the year:
Flickr launched its API in 2004. Facebook and Twitter launched their API’s in 2006. Since then, the usage of APIs has exploded. Today, you can find random-ass startup companies offering API’s to do something like monitoring forums. But the real estate world is now having a serious discussion about maybe one day potentially implementing data delivery over API’s.
Ten years in the world of technology is not mere stagnation; it’s paralyzation. It’s near-death comatose.
The MLS Is Not Government
If, in fact, the MLS were the government — or at least a quasi-governmental entity, like a public utility — then perhaps stagnation isn’t that big a deal. After all, the DMV has been and remains an experience to be avoided if at all possible, but most states feel no pressure to improve the experience.
I mean, what you gonna do? Refuse to register your vehicle? Not renew your driver’s license?
Thing is, the government is an actual monopoly. No one else can offer to renew your driver’s license for you.
The MLS, however, is not a true monopoly. Its monopoly power sort of grew over time, as a result of its network effect. It may seem unthinkable, or unlikely, but in reality, there isn’t much that prevents someone else from offering the same services — or pieces of those services — as the MLS does. Example?
New listing notification is one. Here in Houston, Zillow has been running radio ads touting its mobile app, telling homebuyers that they can get notifications on their phones when a new listing that matches their criteria pops up, or if there’s a price change, or if a house gets sold. (This is in Houston, an absolutely unique market, where HAR.com remains extremely popular, and HAR has a mobile app that works.)
Meanwhile, the MLS still sends out “New Listing” emails that look like they’re partying like it’s 1999. It’s so bad that W&R Studios released a product CloudStreams to improve new listing notifications. I hope Greg Robertson and crew make a fortune with that product, because it is one the MLS world desperately needs. Still, one wonders if it’s a bit too late for the MLS to get back the monopoly on new listing notifications.
Point is that there isn’t anything that the MLS offers that cannot be offered by some third party. Yes, third parties may not want to mess with things like cooperation and compensation, or deal with the headaches of compliance. But they could.
Solution: Privatization and Competition
It may not seem like it, but I’m actually kind of bullish on the future of the MLS. The MLS remains important, powerful, and valuable to professionals and to consumers alike. Art Carter, the CEO of CRMLS, often states that the MLS is the consumer’s best friend. As a guy who started out in commercial real estate, where the MLS does not exist, I agree with him 110%.
But how to move things forward? Most people in the industry talk products, services, and tactics. And those are all important… at some point… after you have the overall strategic framework set. So let me talk strategy for a moment.
The single most important reform in the MLS world — as it is in the world of government — is privatization. Here’s an article discussing New Jersey’s look at privatizing the DMV, which states in relevant part:
Privatizing industries allows for accurate pricing. When you have an open market working efficiently, a product or service is priced according to its true value. The players in that market work within the constraints of supply and demand and an equilibrium is achieved.
This is in contrast to a non competitive market where one firm decides the price internally. The result of this is skewed incentives and inefficiencies in the system. For example, DMV wait time has a price. Private companies receive feedback from the market, due to competitive pressures, and may realize that wait time is valuable to its customers. They would then work towards reducing wait time to remain profitable. Government run DMV’s don’t have this feedback mechanism.
Zimmer puts this quite well: “A public agency exposed to competition for the first time might be spurred to improve its own performance. Introducing competition helps managers determine their true costs; and promotes innovation, efficiency and greater effectiveness in serving customers’ shifting demands” [Emphasis mine]
We can replace the phrase “a public agency” with “an MLS” and the statement would hold true.
Note that important word in the last paragraph: customers. Privatizing the DMV converts all those “constituents” (whose only recourse is to complain to some elected official) into “customers” (who can take their business elsewhere). Privatizing the MLS would do the same.
Competition between and amongst MLSs would help managers determine true costs, promote innovation, efficiency and greater effectiveness in serving brokers and agents and consumers. An MLS cannot afford to subject its customers to a system that requires Windows if neighboring MLSs would swoop in with better products/services.
Brokers who have been clamoring for consolidation amongst 850 MLS systems would find that consolidation happen naturally, as competitors either win in the marketplace, or buy each other out. Evolution, red of tooth and claw.
The astonishing thing is that many an MLS executive would love, love, LOVE to be able to compete. They know what their customers need, they know what to do, they know how to do it, and they can figure out how to improve products and services while reflecting the true value of those products and services according to market supply and demand. There are some truly smart and talented people toiling away in the MLS world.
In fact, one might ask why anyone would fear competition. Is it because they know they would lose? And if that’s the case, why exactly should brokers and agents and consumers allow losers to provide one of the most important services in real estate to them?
Simple Is Not Easy; But It Is Necessary
As I’ve written before, simple is not easy. Privatization is the simple strategic insight. Converting constituents to customers and introducing competition into the stagnant monopoly of the MLS improves the MLS (those that survive), improves the brokers and agents, and improves the consumer experience.
But boy, it ain’t easy and ain’t gonna be easy. A lot of people will need to be convinced of the need for change, and a lot of rice bowls are at stake. I understand that. I get it. And I’m entirely sympathetic.
At the same time, this reform that will be extremely difficult to pull off is necessary if the MLS is to survive over the long term. Stagnation can only lead to inferior products and services, and as long as the MLS is not a legal monopoly, stagnation will lead to extinction.
We’ll look at some thoughts on how to privatize the MLS in future posts, since this got long already. But as always, I’d love to hear your thoughts on constituents, customers, and competition.