Ben Thompson at Stratechery is a great read, and he really does get my gears turning. Today’s email/post is particularly interesting as it raises some questions as to what a platform actually is and what it might look like in real estate going forward.
Consider this a “big think” post in which I try to think through some issues out loud.
For years, I’ve been suggesting that there is a race on for the Iron Throne in real estate: to become The Platform for real estate. I even wrote a Red Dot paper on the subject, and thought at the time that Zillow, Redfin, Opendoor, Realogy, and Compass were all contending. Now, post-pandemic, it feels as if there is only one contender left: Zillow.
Nonetheless, reading the Stratechery post, I realized there are some real questions left as to what that Platform actually looks like and how it might actually work. So let’s get into thinking through things.
Platforms in a Aggregator World
Let’s start by summarizing (hopefully with a degree of fidelity to Thompson’s points) the Stratechery post.
First, Thompson points out that traditional retail served two main functions: discovery and distribution. You go to Target to see what’s available for sale, then you by that new shampoo or cat food or whatever. He then says that on the Internet, those two are split: “Facebook is the top-of-funnel for discovery, while Amazon dominates search-driven distribution.”
He then talks about Shopify, which he calls an important company in making the non-Amazon value-chain work, because while Google and Facebook collect customers (top of funnel, as Aggregators), it “provides the infrastructure for merchants to actually sell things online.” That makes Shopify a Platform, not an Aggregator.
He then talks about Shopify Fulfillment Network and writes:
One particularly clever component of the Shopify Fulfillment Network is that the same templates a merchant uses to customize their website also translate seamlessly to custom packaging; when you receive a package from a Shopify merchant — the goal is two days, anywhere in the world — it appears as if it came from that merchant, not from Shopify. That’s part and parcel of being a platform: you win when those on your platform win, even if customers never even know you exist. [Emphasis added.]
So Thompson opposes Shopify’s moves to do customer acquisition:
However, suggesting that Shopify take responsibility for directly acquiring customers (as opposed to building tools to help merchants do so) is not only out of step with Shopify’s position in the value chain, but there is also no particularly good reason to believe that Shopify will be any better at this than their merchants. What Facebook is capable of in terms of customer acquisition is not trivial — that is precisely why they are able to charge a premium for it. [Emphasis added]
He concludes that Platforms such as Shopify, which enable independent merchants to sell online, cannot and should not compete with Aggregators: “You are not going to beat Facebook at their own game.”
Instead, he thinks Shopify should invest into logistics and fulfillment, to give independent merchants on Shopify a chance to compete against Amazon, which owns the best (one of the best, if we think about Walmart?) fulfillment and logistics operations in the world:
First, this is a service that no merchant can build on its own; it is a perfect example of how a platform can create something for an ecosystem that would not exist otherwise. Moreover, this is specifically what is needed to fulfill the promise I laid out last year, of Shopify as an Amazon competitor, not because users choose to go to Shopify, but because they have no reason to know that Shopify exists.
Second, this is a service that Facebook Shops is going to make more valuable, not less: all of those merchants increasing sales thanks to Facebook Checkout still need to ship their things, and there is zero chance that Facebook ever integrates into the real world.
Third, this is a service no one else is going to build. Yes, it is very difficult to build fulfillment centers and develop robots and employ lots of workers, but within that difficulty is an escape from competition, i.e. a far more reliable way to make sustainable profits in the long run.
It makes all the sense in the world. The online world has been carved up: Google, Amazon, Apple, Facebook and others dominate in a way that is difficult to comprehend, never mind overcome. As Thompson puts it:
In this view, the upside of building in the real world is rooted in just how difficult it is; given that we have reached The End of the Beginning, it may be the highest upside available.
Fulfillment and Logistics in Real Estate
What got my gears turning is to apply Thompson’s insights into the world of real estate, rather than e-commerce. That forces me to think about fulfillment and logistics for housing, rather than for a widget. What does “fulfillment and logistics” actually look like today?
Let’s see if we can’t walk through the entire “typical” transaction. I’m going to arbitrarily break this up into two phases: Discovery and Distribution.
Phase 1: Discovery
- Consumer decides to buy a house, due to life events.
- Search commences, takes as long as it takes, and is done mostly online.
- Consumer narrows down the search enough to warrant “getting serious.”
- Buyer contacts a real estate agent, either through an online source like Zillow or through offline referrals and such.
- In the post-COVID era, the buyer must get pre-qualified at this stage if he’s to be taken seriously. (This was happening before COVID, but the pandemic accelerated this trend.)
- Having pre-qualified, and knowing the budget, real estate agent works with the buyer to narrow down homes. Critically, this step involves physical showings (unless we’re talking about investors who don’t need to walk through their future home, but let’s leave those out for our analysis).
- This is also where the agent can add value by providing advice to the buyer on
- Buyer decides on a house, instructs the agent to make an offer.
Phase 2: Distribution
- The offer is accepted, after some back-and-forth, and the contract is signed.
- Buyer submit an application for a mortgage.
- Simultaneously, buyer or his agent arranges for inspection.
- Agent contacts closing companies (title, escrow, etc.) to begin the paperwork.
- After a great deal of paperwork coupled to an experience that ranges from merely annoying to excruciatingly painful (see, e.g., mortgage), more negotiation, and more paperwork, the buyer gets the “Clear to close” approval from everybody.
- There is a closing, which often involves a notary (or an attorney), wet signatures, and the handing over of keys.
- The relevant government office records the deed transfer along with the mortgage. The buyer now officially owns the new home.
As any seasoned broker or agent knows, there are a thousand variations in between these steps, but I think that’s a pretty decent outline of how a real estate transaction goes.
With that said, let’s look at the rough analogies for the Aggregators and the Platforms in real estate today.
Aggregators: Zillow, and Everyone Else
I think it’s fair to say that the battle of Aggregators in real estate is effectively over. Zillow has won that war pretty handily. This chart comes from Mike DelPrete:
It’s not close. Even as competitors “catch up” to Zillow, we’re still at 2.8X the next closest competitor, Realtor.com.
Nonetheless, it isn’t as if the other aggregators have no traffic, so we can say that in the Discovery phase, the Aggregators are completely and utterly dominant. So looking at the Discovery phase of real estate, we get something like this:
Phase 1: Discovery
- Consumer decides to buy a house, due to life events.
- Search commences, takes as long as it takes, and is done mostly online. — Aggregators
- Consumer narrows down the search enough to warrant “getting serious.” — Aggregators
Most of the heavy lifting in Discovery is done at this point. By this point, the buyer has spent weeks or months looking on various websites, sitting on the couch surfing various apps (Zillow, Redfin, Realtor.com), looking at hundreds of photos and so on. In the pandemic era, the buyer might be doing a lot of 3D tours and such (pre-recorded, of course) as well.
If they are relocating, the buyer has also done a bunch of neighborhood research, looked at city-data.com, looked at schools, crime stats, whatever.
I think this is roughly similar to the purchase process for consumers on larger purchases — cars are both too obvious and too specific, so let’s think about things like laptops and phones (which are not cheap). Consumers do research online, looking at reviews and prices, and so on, until they decide on what they’re going to buy. Discovery is mostly done at this point.
Once they have narrowed things down sufficiently, they move to:
- Buyer contacts a real estate agent, either through an online source like Zillow or through offline referrals and such. — Aggregators
- In the post-COVID era, the buyer must get pre-qualified at this stage if he’s to be taken seriously. (This was happening before COVID, but the pandemic accelerated this trend.) — Lenders
- Having pre-qualified, and knowing the budget, real estate agent works with the buyer to narrow down homes. Critically, this step involves physical showings (unless we’re talking about investors who don’t need to walk through their future home, but let’s leave those out for our analysis). — Real Estate Agents
- This is also where the agent can add value by providing advice to the buyer on — Real Estate Agents
- Buyer decides on a house, instructs the agent to make an offer. — Real Estate Agents
One thing that makes real estate somewhat different from e-commerce is that there is additional Discovery with a real estate agent. If “laptop experts” offered personalized shopping, it might be similar. The buyer might have thought he wanted the latest Macbook Pro, but after talking to a “laptop expert,” he realizes that he really wants the new Asus gaming laptop or some such. There is real value there.
Nonetheless, Discovery is dominated by the Aggregators. I really don’t think that can be argued in 2020.
Platform: Does Not Exist… Yet….
Once we move to the Distribution Phase, however, things get all kinds of complicated.
What is the equivalent of Shopify for real estate? A company/organization/platform that lets agents “fulfill” the order?
The short answer, I think, is that it does not yet exist. Because the real estate transaction fulfillment has numerous distinct parts, with different companies, organizations and people playing different roles.
First, just to make the offer, in most of the 50 states, that means the REALTOR Association gets involved as it produces the forms used by the agent to make an offer. (In some states, the state real estate commission provides the forms.) Any lawyer can provide a form, of course, but in a real way, the typical agent uses the standard forms vetted by and produced by (usually) the state REALTOR Association.
Second, you have financing. Very few people can buy a home for cash, which means just about every buyer needs to secure financing to purchase. All of that today exists outside of the “real estate” industry; it’s banking. And because most banks want an appraisal of the collateral (the house) before making a loan, Appraisers have to get involved.
Third, you have inspection. Because of the size of the purchase, very few buyers are going to purchase without making sure that there’s nothing seriously wrong with the house.
Fourth, you have all of the legal paperwork, which includes title search, title insurance, and all of the government-mandated documentation.
Fifth, you have the actual recording of the deed and the mortgage in government records.
So let’s look at the Distribution side with these in mind.
Phase 2: Distribution
- The offer is accepted, after some back-and-forth, and the contract is signed. — Real Estate Agent, REALTOR Associations, Government
- Buyer submit an application for a mortgage. — Lender + Appraiser
- Simultaneously, buyer or his agent arranges for inspection. — Inspector
- Agent contacts closing companies (title, escrow, etc.) to begin the paperwork. — Title & Escrow
- After a great deal of paperwork coupled to an experience that ranges from merely annoying to excruciatingly painful (see, e.g., mortgage), more negotiation, and more paperwork, the buyer gets the “Clear to close” approval from everybody. — Lender, Title, Escrow, Real Estate Agent
- There is a closing, which often involves a notary (or an attorney), wet signatures, and the handing over of keys. — Notary, Title, Escrow, Real Estate Agent
- The relevant government office records the deed transfer along with the mortgage. The buyer now officially owns the new home. — Government
Given the wide variety of tasks and people/companies that have to be involved, it’s no wonder that there is no Platform in real estate today.
What Might the Platform Look Like?
We’ll delve more into this in Part 2, but it seems to me that Thompson’s general observations about a Platform applies to real estate as it does to e-commerce.
- The Platform must be “plug-n-play” as much as possible. The work of connecting all of the disparate backend players must be done by the Platform, so that the broker or agent does not have to. Otherwise, what’s the point?
- The Platform must be invisible to consumers; you win when your merchants win. That means as far as consumers are concerned, brokers and agents are doing fulfillment, not some third party company. It’s fine to have the last step be done by another company — like the actual closing happening at a title company, just like a merchant can deliver my laptop via UPS — but the consumer doesn’t need or want to know about who took the laptop off the shelf and into a box.
- The Platform is not an Aggregator, which is to say that it is as unconcerned with lead generation as FedEx is about a merchant’s website traffic. In real estate, this means that the Platform comes into play after the contract is signed. Everything before has to be considered “Discovery” and is the domain of Aggregators and merchants (i.e., agents or brokers).
- The Platform must be brand and company neutral; otherwise, it is trying to be Amazon. This is critical for real estate, as we’ll see in Part 2.
The Platform in real estate is not logistics, as it must be in e-commerce, as no physical products are going back and forth. It is transaction management. The investment required is not in warehouses and trucks, but in processes, relationships, and technology and possibly people to make everything more efficient for the agent. But the Platform differs from real estate transaction management today, as it delivers results, not the tool. To use the logistics analogy, it’s the difference between drop shipment and operating one’s own warehouse.
I believe this is one of the big opportunities in real estate going forward, because the Aggregators so dominate Discovery, and what they don’t dominate will move inexorably to super agent teams in various major metro markets. And what so many people do not understand is that there is a race on, and has been a race on for a few years, for someone to assemble The Platform in real estate.
In Part 2, we’ll turn to that.