Thoughts on Stratechery’s Article on Zillow Offers

Ben Thompson at Stratechery, the man responsible for setting Zillow on its path into iBuying, has published a newsletter discussing Zillow’s exit from iBuying. He’s very generous to Rich Barton and to Zillow, and eats a bit of crow.

I rarely find anything in Thompson’s writings and opinions to disagree with, because he is one of the foremost thinkers on all things tech… but in this case, I have to differ on a couple of points. Since I’m still working through what the Zillow exit means for the company and for the industry, I thought I might as well work some stuff out in writing and share the progress with you all.

Thompson’s Take

First, you should read the whole thing. You should subscribe to Stratechery if you’re not already.

Thompson’s general take is, sucks for Zillow, but kudos to Barton for being decisive, and I goofed on a couple of things.

He starts off by noting that Zillow’s algorithms were off, and that Zillow had operational and structural challenges:

I discussed Opendoor’s likely operational advantages two weeks ago; unlike Zillow, Opendoor was built from day one to turn over houses, and while the company doesn’t release earnings until next week, its public posture is that it remains open for business.

What is also worth noting is that Opendoor has two more advantages that come from being a startup laser-focused on home-buying: first, while Zillow started with a Zestimate tool that was about attracting customers to the top of the real estate funnel, and thus only ever had to be directionally correct, Opendoor knew from day one its entire fate as a business rested on its model’s accuracy; it’s definitely plausible to imagine its accuracy being much better as a result.

Second, Opendoor has a dramatically larger appetite for risk than Zillow does. Yes, it is a public company now, but it is a public company whose entire business is home-buying; investors know what they are getting into. And, by extension, Opendoor has no choice but to make the model work: they don’t have a profitable Marketplace business to fall back on.

Ultimately, though, the biggest problem with Zillow Offers is that it was always strategically flawed, and I for one should have seen it at the time.

Thompson thinks it’s great that Barton did what he did, and decisively:

Zillow Offers is certainly Barton’s baby — he made that clear in a Stratechery interview — but credit him for clear-eyed thinking on this point. Sure, Zillow could press forward, but if they don’t trust their model that basically turns the business into a role of the dice; that’s a particularly big problem given that Zillow is not only a public company, but a company that has a thriving Aggregator business in the Zillow Marketplace.

And then he blames himself for not recognizing that Zillow Offers was strategically flawed, because of the difficulty of building a new kind of company and how a startup would have a big advantage. Except that Rich Barton, when he returned, and announced Zillow 2.0 talked about how it was like being in a startup again. So, there’s that. Anyhow….

He goes on to talk about how an Aggregator really shouldn’t do vertical integration, mentioning Google’s push into Android, and says Zillow shouldn’t have done iBuyer because it was the dominant Aggregator:

Zillow the Aggregator encountered two problems with Offers: first, because the company felt compelled to push Offers, it was actually leaving most potential sellers with a bad taste in their mouth; this is a big problem given that an Aggregator’s advantage is the fact the end users like it and go there first. Second, the return, when properly priced for risk, of serving the fraction of customers that Zillow extended an offer to, didn’t outweigh whatever risk-free commissions Zillow might be able to earn by directing customers to other buying channels.

Again, this is absolutely something I should have foreseen, because it fits the model perfectly: an Aggregator is a horizontal business that ought to make investments to serve all of its customers; vertically integrating screws up those incentives, and that is a risk in its own right. I can see why I didn’t emphasize this point — the housing market is so large, and Zillow’s share was not only small but also served to preserve the warped U.S. real estate agent-driven model — but new opportunities entail opportunity costs, and I should have emphasized those more. [Emphasis added]

So, where to begin….

About that Vertical Integration Bit…

Let’s begin with this: if Thompson is criticizing Zillow for pursuing a vertical integration strategy that is at odds with its status as the dominant Aggregator… then he needs to continue with that criticism. Because Zillow has not given up on vertical integration. At all.

Here’s Rich Barton from the Shareholder Letter:

Zillow’s vision is to help people unlock life’s next chapter by innovating on products and services as we evolve from a search-and-find experience to be directly involved in modernizing the real estate transaction itself. We are uniquely well-positioned to deliver on this vision given our audience, our brand, and our profitable and growing core business. We call this Zillow 2.0, and it firmly remains our vision today.

Perhaps Thompson should look more into what Zillow 2.0 means. Because it doesn’t mean “Aggregator.” From GeekWire in 2019, right after Rich Barton came back:

Barton called the shift to focus on home sales the beginning of “Zillow 2.0.” He said the company, which went public in 2011 and today has a market value of roughly $7 billion is “on the threshold of becoming a brand new startup.”

“This is why we founded Zillow, to actually change the way people bought and sold houses, and the way they found a new place,” Barton said in an interview with GeekWire. “This was our original conception, something like this to actually solve the headaches that we were experiencing, that our moms and sisters and brothers were experiencing.”

…

“We have evolved form being a media company to delivering more of a full-stack transactional experience for home shoppers because that’s what is expected and demanded by consumers,” Rascoff said, noting that Zillow’s evolution is not yet complete

But there’s more. I think Zillow 2.0 was in fact, Zillow’s attempt to become a true Aggregator, under Thompson’s definition.

Zillow as Aggregator

I emphasized an important idea in Thompson’s quote above: “an Aggregator is a horizontal business that ought to make investments to serve all of its customers.” I agree with that definition of Aggregator.

The issue is that Zillow 1.0 was serving only half of its customers: the buyer. Zillow 1.0 had nothing for its seller customers. Zillow Homes represented a real attempt to serve that other half of the consumer audience.

This came up during the earnings call. Ryan McKevney asks the all-important question:

Zillow has always been mainly a platform that’s monetized the buy side. And I think a lot of people looked at iBuying and said, this is opening up that sell-side opportunity. So maybe it’s the same question twice, but how does this play out on the sell side going forward? What’s next in that regard? What’s the strategy to really drive this so it’s not just viewed to be a buy-side monetization vehicle and really capture what should be a significant opportunity on the sell side?

Barton’s answer is long, convoluted, and confusing. It seems to amount to the idea that Zillow has a lot of technology for buyers, like 3-D tours, ShowingTime, digital floor plans, mortgage, etc., so by throwing all of that together, it will somehow represent a real value proposition to sellers. Literally, Barton says, “we have an opportunity to stitch these things together in a way that very few are going to have the opportunity to do it” and then says, “It turns out that a whole bunch of buyers are sellers, too, so there is a pretty heavy overlap between buyers and sellers.”

That is not an answer. Yes, lots of buyers are sellers, and lots of sellers are buyers. But that doesn’t mean that a website that caters to buyers caters to sellers who also happen to be buyers.

Everybody going to Cargurus is a buyer, but if they have to trade in a vehicle, or sell it for cash, all that Cargurus offers them is a FSBO platform and a place to check out what dealers were selling used cars for. Carvana, on the other hand, does, by offering cash for the seller’s vehicle.

Zillow 1.0 was the Cargurus of real estate; lots of great tools for buyers, but not doing much for sellers other than being a place to check comps. Zillow 2.0 was an attempt to be a combination of Cargurus and Carvana, that served the entire consumer base.

This is quite different from Google pushing into the hardware operating system space with Android. That involvement did cost Google because it was counter to serving the “widest possible user base.” The better analogy might be Google’s push into video by acquiring YouTube: serve not just the web search customer base, but also the video search customer base.

It’s also similar to Google push into YouTube in that moving into iBuying was defensive. If, as we have seen, video became more important for the internet, for web advertising, and for audience attention, then Google had to get into that business. Same with Zillow. If Opendoor was going to capture more and more of the seller customer base, then Zillow had to do something to defend against that.

Strategic Flaw vs. Mistake

So in a way, our disagreement comes down to this: was it a strategic flaw that doomed Zillow Offers? Or was it a mistake that did?

I’m in the camp that it was a mistake, and what doomed Zillow Offers was risk tolerance… or more precisely, the lack thereof. Thompson is in the camp that Zillow Offers itself was a strategic flaw, because (1) it’s hard to build an entirely new type of company, and (2) vertical integration sucks for Aggregators.

I wonder if he felt that way after Q2, when the volatility and the mistake of the underlying models led to an outsized, unexpected gain. And if he didn’t feel that way then, why does he feel that way now?

This feels a lot like ESPN analysts criticizing a coach’s decision to go for it on 4th and short… but only if it fails. If it works, then that coach is a brilliant tactician who knows when to take a risk. If it fails, then the coach is a moron who doesn’t understand football.

It is entirely possible that you can have both (a) the correct strategy, and (b) unfavorable outcome. Strategy guarantees nothing. Talent doesn’t mean winning. Execution does not guarantee results. It’s why you have to play the game on Sunday afternoon.

There’s only one way to guarantee that you will never lose a game: don’t play. That’s what Rich Barton and Zillow have chosen to do. That’s their choice, and it’s probably the smart play, and it’s likely the wise business move.

But I don’t know that I would call that strategy.

Can You Go Back to Yesterday?

One of the things I’m really thinking hard about now is whether Zillow 3.0 can actually go back to Zillow 1.0. It’s so hard to say goodbye to yesterday. Hollywood romances are filled with stories of lovers coming together, then breaking up, and then after a series of misadventures, getting back together.

But I don’t know if that really happens in real life. Nor does it happen in movies that tend to be more faithful to real life, like Cast Away… when Tom Hanks reappears after years of being assumed dead. The scene with Helen Hunt is among the most poignant in film history… but ultimately, they part and he drives away.

You can’t go back. Not even Cher can turn back time; she can only sing about what she would have done differently if she could. But the point is that she can’t, so it’s ultimately a wistful song about regret, no matter how upbeat the tempo.

So it seems unlikely that Zillow can go back to being Zillow 1.0. They will have to go forward into Zillow 3.0, a totally unknown and uncharted future.

And they will have to do so as half-an-Aggregator according to Thompson’s strategic insights.

-rsh