The Issue with Brokerage We Don’t Discuss: Oligopoly or Democracy?

Over the years, I have debated the question of “the brokerage community” with people like Ken Jenny and Sam DeBord. It usually comes in the context of MLS or portals or some such thing, where the claim is that “the brokerage community” demands X, Y and Z… and I end up asking, “Who is this brokerage community you speak of?”

I thought more about this over the weekend, especially since NAR Policy Statement 8.0 is a big topic right now in some circles of real estate, and I think there is an issue here that the industry needs to grapple with. I thought I would think through that issue with all of you and see if we can really get down to the nub of it.

Ultimately, the key question appears to be whether the industry ought to be operated as an oligopoly of a small number of very large companies or be operated as a democracy. There are arguments for both.

Real Life Data

To put this into context, I thought I would use some real data from a real MLS I am familiar with. I have modified the numbers to protect the innocent, but rest assured that these are (at least very much based on) real-world numbers.

Acme MLS (not real name) has 2,400 Participant Brokerages, and 16,000 agent subscribers. The average brokerage has 6.7 agents, 8.2 listings on market, $9 million in Sales Volume, and 45.8 Closed Transactions.

Now, here’s the deal:

I looked at the top 10 largest firms by agent count, then the top 50, then the top 100… and then the bottom 2,200. There’s a reason I chose the bottom 2,200: they all had 10 or fewer agents.

• Top 10 largest brokerages averaged 409 agents, 362 listings, $660 million in Volume, and 2,879 in Transaction Sides.
• The Top 50 brokerages averaged 160 agents, 170 listings, $257 million in Volume, and 1,159 in Transaction Sides.
• The Top 100 averaged 97 agents, 110 listings, $152 million in Volume, and 710 Transaction Sides.
• The Bottom 2,200 averaged 6.7 agents, 8.2 listings, $9 million in Volume, and 46 Transaction Sides.

I think the issue is clear.

If you are the MLS, whose interests matter more to you? The bottom 2,200 brokerages (who make up 91.6% of the total Participants) or the Top 100 (who make up less than 5% of the total Participants)?

Who is the customer?

The Unspoken Tension

This issue lurks in the background of just about every conflict between the MLS/Association and large brokerages. I said as much back in 2013 when Realty Alliance broke the conflict out into the open at CMLS Boise: it’s about governance. It’s about “who shall rule.”

Part of the problem over the past several years, however, has been the political maneuvering by the largest brokerages to adapt the term, “brokerage community” as if to suggest that there is a single organization or viewpoint that represents the perspective of all brokerages. That is rarely, if ever, true. And yet, evoking a “community” is powerful emotionally.

Plus, it isn’t as if there was another side to that linguistic maneuvering.

MLS governance is shot through with this tension, and even those MLSs who have adopted “broker governance” has had to do things like segregate their brokerages into tiers: large, mid-size, small. Such tiers automatically suggest that there is no such thing as a “brokerage community” and yet, the notion persists in our intra-industry dialogue.

So let’s actually discuss the issue.

To me, this is the case of two political systems in conflict: oligopoly or democracy.

Production & Performance (Oligopoly)

One school of thought — and I think this is clearly Ken Jenny’s perspective — is that the productive brokers and agents should be more important than the non-productive. Their opinions should “count more” than the opinions of the thousands of small brokerages. These are the companies who bring in the agent count, who bring in listings, who do the volume.

There is a strong pragmatic streak to this argument. Look at the numbers above. The top 100 brokerages in Acme MLS are the majority or super-majority of the MLS in every way that matters in business: subscribers, listings, volume and transactions.

One could argue convincingly that Acme MLS would cease to exist if the Top 100 brokerages broke off and went somewhere else. For that matter, one could probably argue that Acme MLS would cease to exist if the Top 50 brokerages (half the agents, 43% of the listings, 60% of the volume and over half the transactions) broke off and went somewhere else. The brokerages who are #51-100 might not really matter in comparison.

I think the numbers suggest that the Top 10 would not break the MLS; them leaving would hurt the MLS profoundly, but I don’t believe it would mean the end. Top 50 is a different story, and if you extend out to Top 100, it really isn’t debatable.

This political system would clearly prefer that the elites govern, because the elites have the most at stake and (could be argued) know more, are smarter, and more capable than the non-elites.

But there is also an idealistic dimension to oligopoly, especially in the commercial context: meritocracy. Those whose hard work and talents have resulted in success ought to be rewarded. Furthermore, there is the idea that those who have the most to lose and the most invested in an organization ought to govern that organization.

Lest you think this is some evil scheme, let me point out that the original 13 colonies that made up the United States restricted voting to property owners under the same theory that those who contribute the most and have the most at stake ought to be the ones who make the decisions that affect the whole.

It is also the prevailing theory of corporate governance: larger shareholders have more votes, as they vote their shares. Small shareholders also get to vote their shares, of course, but in reality, it is the large shareholders who control a company.

Every Broker Counts (Democracy)

The converse is the idea that every brokerage, regardless of size, is a duly licensed brokerage who is a Participant and should have equal rights to every other brokerage. This is universal suffrage as practiced by just about every democracy on the planet.

It is also the current dominant form of governance and participation for REALTOR Associations and for MLSs, except for those who do the tiered brokerage governance model. Elections to the Board of Directors, for example, are one-person, one-vote, unless the organization has changed that in its By-Laws. I’m aware of very few who have.

There is a strong idealistic streak to the argument for democracy: just because you’re rich doesn’t make you more important than me. So, just because a broker is large doesn’t make that broker more important than another broker who is small.

There is also a pragmatic argument for democracy in the MLS or Association world: wisdom of crowds. The idea is that small group of people, even if they are experts, often get things wrong more often than a large group of non-experts. From Wikipedia:

The wisdom of the crowd is the collective opinion of a group of individuals rather than that of a single expert. This process, while not new to the Information Age, has been pushed into the mainstream spotlight by social information sites such as Wikipedia, Yahoo! Answers, Quora, Stack Exchange and other web resources that rely on collective human knowledge.[1] An explanation for this phenomenon is that there is idiosyncratic noise associated with each individual judgment, and taking the average over a large number of responses will go some way toward canceling the effect of this noise.[2]

Trial by jury can be understood as at least partly relying on wisdom of the crowd, compared to bench trial which relies on one or a few experts. In politics, sometimes sortition is held as an example of what wisdom of the crowd would look like. Decision-making would happen by a diverse group instead of by a fairly homogenous political group or party. Research within cognitive science has sought to model the relationship between wisdom of the crowd effects and individual cognition.

The idea here is that while the top 10 brokerages may be great at gaining marketshare, recruiting agents, and being successful, they do not necessarily understand the detailed needs of the thousands of small brokerages. As a whole, the MLS or Association would benefit more from the wisdom of crowds of many brokerages, rather than a few.

No Right Answer, Yet A Choice…

There is no right answer here. Nothing about a commercial enterprise — even one as non-profit as a MLS — says that it ought to be a democracy.

Using the numbers above, the top 100 brokerages of Acme MLS are responsible for the vast majority of agents, volume and transactions and over half of the listings. Why should they be told what to do and how to do it by the other 2,300 brokerages who are small and do not contribute as much?

At the same time, it isn’t actually clear that the MLS survives if the bottom 2,300 decide to take their balls and go home either: we’re still talking about 44% of listings and 40% of the agents. That’s a big hit.

Plus, there is something a bit… off-putting about allowing the few to make all of the decisions, isn’t there? Something in our American spirit rebels against the very notion of an oligarchy, even if it appears justified in every way.

So there is no right answer here. Yet, a choice must be made, whether intentionally or unintentionally in a series of small steps and compromises. Either the large brokerages rule, and the small brokerages submit, or the many rule and the few submit. That most of the time, there will be consensus across small and large does not change the fact that the MLS and the Association must decide whether it will be an oligopoly with democratic input, or a democracy with oligarch input.

So, Which Do You Favor?

Oligopoly/Meritocracy or Democracy/Equality?

Why?

-rsh