Writing has been thin as I’ve been on the road constantly, and very busy with projects. But news came across today that fairly requires some commentary.
General “Mad Dog” Mattis, a storied military commander and Secretary of Defense under Trump, is said to have once told a group of Iraqi tribal leaders, “I come in peace. I didn’t bring artillery. But I’m pleading with you, with tears in my eyes: if you fuck with me I’ll kill you all.” He is the man who made the motto of the 1st Marine Division, “No better friend, no worse enemy.”
Those phrases came to mind as I was reading the media confirmation of something I had known for a while, but could not discuss, because it wasn’t public: the breakup between BPP (Broker Public Portal) and Homesnap, the division of CoStar that was leading the effort to build a partnership between CoStar and the MLS community. From the Inman News story (paywall):
When real estate juggernaut CoStar acquired real estate tech firm Homesnap for $250 million at the end of 2020, Homesnap said it was committed to its partnership with the Broker Public Portal, a company formed by a large group of brokers and multiple listing services to launch the nation’s first national public-facing MLS website.
But nearly two years later, the two companies are going their separate ways. The National Broker Portal LLC, a joint venture owned 50-50 by the two companies since December 2016, will shut down on Oct. 31.
The change is a turning point for an industry initiative that hoped to create a national listing site to beat out third-party portals such as Zillow and Realtor.com for consumer traffic and adhere to industry-friendly policies at the same time.
This is, I think, more than just a tempest in a teapot. This isn’t your normal industry drama. This is something potentially far more significant.
Andy Florance, the Founder and longtime CEO of CoStar, is like Wu Tang Clan, ain’t nuthin’ ta F wit. And the BPP did just that.
Let me say at the outset that there are things about this that I can’t talk about, so I have to rely on public news stories and public announcements already made. What we’ll do is engage in some close reading of the language of the players involved.
According to Inman, which presents both sides of the story, BPP just could not accept the changes to the joint venture agreement (which critically controls the data license rights to the MLS data held by BPP) proposed by CoStar:
Asked which terms BPP could not accept, Chaver said, “The specific terms are confidential,” but indicated that CoStar’s intention to offer listing brokers the ability to pay to have their listings featured or promoted on Homesnap was a sticking point.
“CoStar/Homesnap has publicly stated their desire to build a consumer marketplace based on promoted listings, while the BPP is focused on the premise of selling real estate, not ads, and maintaining a user-friendly display of listing information based on search results and not paid promotion,” Chaver said. [Emphasis added]
These “promoted listings” of course, are a common monetization route for many a company from Google to Ebay to Amazon to Yelp. Sellers are often willing to pay to have their companies or their items at the top of search results, and as long as the result is clearly identified as a promoted listing, there’s nothing particularly troubling about the practice. We’ve all seen thousands of promoted listings on dozens of websites.
After a year and half of negotiations, this is what took down the partnership?
On the one hand, I wonder why it took so long. When CoStar acquired Homesnap in 2020 for $250 million, literally every single person with any idea of who CoStar is and how it makes money would have known that promoted listings would be how they went about it. Because that’s how Loopnet and Apartments.com, both CoStar companies, make money. In fact, I wonder if the BPP of 2020 gave its blessing to CoStar to acquire their JV partner, Homesnap, or if CoStar and Homesnap didn’t bother to ask. If the BPP was so opposed to promoted listings, then seems like something like that would be kind of a major point in a $250 million acquisition.
On the other hand, if that was the ultimate issue that killed this partnership, I can’t imagine negotiating for a year and a half over that. I mean, how do those negotiation sessions even go?
“We wanna do promoted listings.”
“You don’t understand; we want to do promoted listings.”
Seems like each negotiation session would be like 2 minutes long. Which means that wasn’t how the conversation likely went. In all likelihood, there were complex discussions and offers of compensation in exchange for the various things that CoStar wanted. I can’t imagine that experienced executives and their highly paid attorneys spent a year and a half negotiating over “Yes/No” questions. They likely offered something or a lot of somethings, and the BPP rejected them enough so that CoStar decided to give up and file for divorce.
Inman also presented CoStar’s side of the story, complete with a document from CoStar they acquired and had subsequently verified. CoStar’s narrative is that throughout the year and a half of negotiations, they came to realize that “no ‘one size fits all’ solution would work for all MLSs and brokers, many of whom prefer to deal directly with Homesnap and Homes.com rather than through a standard BPP agreement.”
Inman interviewed Steve Barnes, Homesnap co-founder and SVP at CoStar, and his response was:
“What really it came down to is we on our end are building a national product, both in terms of Homes.com running as a portal that needs to compete nationally, and Homesnap Pro as a product that’s available to agents across the country, so we were looking for a standard set of rules so that we knew how we could operate both those businesses,” Barnes told Inman in a phone interview.
“We’ve always operated under an agreement with the BPP where it was spelled out what we could and couldn’t do, which worked very, very well. We wanted to similarly do that going forward, but MLSs, given how big CoStar is, [were] wanting to have more say individually, particularly large MLSs, about what we could do or not do with Homesnap Pro in their local markets.” [Emphasis added]
Huh. So many questions.
First question: BPP says the deal went bust because CoStar wanted to do promoted listings. CoStar says the deal went bust because of a lack of a standard set of rules for a national product. Which is it?
Second question: Can you find the letters “M-L-S” in “Broker Public Portal?” Well, I suppose the letter “L” appears twice, but… MLSs wanted to have more say, particularly large MLSs, about what CoStar could do or not do? Did brokers of the BROKER public portal want to have more say or no?
I think it significant that Barnes did not say, “MLSs and the Brokers” but “MLSs” — especially when the Board of Managers of the BPP are made up primarily of brokers. Only 3 of the 13 Managers are MLS executives; the other 10 are brokerage executives or broker-owners. This is a case of the dog that did not bark.
Third question: CoStar is big? Where?
Because frankly, CoStar isn’t that big in residential. Sure, they spent $250 million on Homesnap and plans to spend millions more on Homes.com. Listen to a recent CoStar earnings call. In Q2, Andy Florance said that they expect investment in residential to be between $180 million and $200 million for the year. He has admitted in past calls that Homes.com is not yet ready for prime time, but that CoStar would make the appropriate investments to make it ready. Homes.com is so far behind the leaders of Zillow, Realtor.com and Redfin that it isn’t worth talking about yet.
So that’s not it.
What is it is the fact that CoStar is big in commercial real estate. CoStar utterly dominates commercial in a way that no company does in residential. Zillow comes the closest in residential, but no one fears Zillow like they do CoStar for a variety of reasons. And despite the crazy bear market we’re in, CoStar is still a $29 billion public company with a long long track record of success with $2 billion or so in annual revenue at 81% gross profit margins. And most importantly, CoStar is that successful because it is the de facto MLS for commercial real estate in the United States.
Now it all makes sense, doesn’t it? The brokers of Broker Public Portal may hate Zillow, but the MLSs hate and fear CoStar.
White Knight No More
Back in 2020, when CoStar entered residential real estate, I wrote a longass report on it. You can still get a copy if you’d like. Most of what I wrote there still remains relevant. Well, except for one key part.
In that report, I laid out what I thought were the seven steps to CoStar’s strategy:
- Acquire Homesnap (complete)
- Acquire CoreLogic (failed to win the bid)
- Win over the Broker Public Portal (obviously, failed there now)
- Become the Best Friend the MLS Has Ever Had
- Wait for Cooperation and Compensation to Go Away
- Step in to Rescue the Industry as a White Knight
- Control the MLS, Choke Out Zillow
It seems relatively clear to me now that Step 4 might still happen, but with friendly MLSs, as the official narrative of CoStar on the breakup suggests that there are many MLSs and brokers who want to deal directly with CoStar, rather than through the BPP. Unless I am completely wrong about CoStar and its leader, CoStar isn’t Zillow. They don’t get slapped in the face then come back smiling and being sweet. The entire history of CoStar suggests that they know how to treat their enemies. No better friend, no worse enemy.
I imagine what we’ll see in the weeks and months ahead is CoStar calling on individual MLSs and individual brokerages offering them all manner of goodies (maybe including cash compensation) to deal directly with them and cut out the BPP. The BPP is not a governing body with any kind of authority to bind its members. It is a voluntary cartel, and CoStar has enough of a war chest to try and break that cartel up piece by piece.
Remember: CoStar spent an estimated $7 million to throw a street party with a free Keith Urban concert. A party. For REALTORS. What do you imagine they’d spend to ink deals with MLSs willing to split from the BPP flock?
What also seems relatively clear to me now is that Step 6 is not going to happen. CoStar will not be riding in after .GOV brings its hammer down on the industry to save it. Indeed, I think it more likely that CoStar will now begin to take steps to accelerate that day of reckoning.
What Comes Next
Obviously, I do not know CoStar’s exact plans. They have not asked me and I haven’t asked them. I have no relationship with them. And even if I did know CoStar’s exact plans, I wouldn’t and couldn’t talk about them publicly. Having said that, I can make some reasoned speculations based on close reading.
First, note this passage from CoStar’s Q2 earnings call:
Our Homesnap business continues to focus on expanding agent engagement and sales of our Pro+ products, while we develop our Homes.com marketplace. Registered agents for our Homesnap Pro product totaled 880,000 at the end of the second quarter, an increase of 17% over the same quarter last year. Revenue from our Pro+ products grew an impressive 46% year-over-year, while our concierge Pro+ product grew 175% versus the second quarter of last year. Agents continue to spend more and more in our residential products with average agent spend increasing 42% on a year-over-year basis. It’s important that we continue to grow our sales force to reach more agents and prepare for the launch of our Homes.com product next year. We’ve successfully established our direct sales force to support the Pro+ product, and I’m encouraged by the initial sales productivity of that team.
We have plans to expand this team to over 100 dedicated sales representatives by the end of 2022. In the second quarter, we grew that team by almost 50%, including adding field-based sales agents who are having some real success.
Our research efforts are off to a good start as we build proprietary content for Homes.com around playgrounds, neighborhood, schools and other features that are important to consumers. From a standing start, we have successfully engaged over 1,000 photographers, writers, editors, voice talent and video editors across the country.
So far, we have produced content on over 70% of the largest residential markets in the U.S.
We expect our rich original data and media content will produce significant organic search results that will be a product differentiator from our competitors. [Emphasis added]
1,000 photographers, writers, editors, voice talent and video editors across the country producing content on over 70% of the largest residential markets in the U.S. eh? Seems like a good start for a… ah… what do we call such a thing? A library? A repository? Perhaps a national database of property-related content?
Second, let’s refer back to what Steve Barnes said: CoStar is building a national product that requires a single standard set of rules. They thought they had that with the BPP. It turns out, they did not. That does not eliminate CoStar’s need for a single standard set of rules that can be used to build a national product and a national portal.
Sure, in the short-term CoStar will copy Zillow’s playbook and just join all of the MLSs as a participant brokerage through its TenX subsidiary. But they know, as Zillow learned, and as everybody with any experience in real estate has learned, that getting the IDX feed simply means complying with some 600 local rules administered by 600 local MLSs. MLSs wanting more say? That doesn’t change by taking the IDX feed.
Ultimately, CoStar needs one national set of rules. Whoever can provide that to them will find CoStar to be a rich patron with nearly unlimited deep pockets. You don’t think there’s one MLS out there, perhaps one owned by brokers, who might want to be CoStar’s horse in the race? I can think of a few who would love to have CoStar provide them with a war chest to seriously pursue a rollup strategy.
Here’s the thing. You know who else wants a single national standard set of rules to build out national-scale products and services? This list is just off the top of my head:
- HomeServices of America
- Keller Williams
- Rocket Mortgage
- Every single proptech company I met at Blueprint
- Every single proptech company I didn’t meet at Blueprint
None of those companies wanted to deal with the headache of trying to fight the MLS; they just gave in and focused on their core business. CoStar can’t do that if it is to achieve its strategic goals of overtaking Zillow before Andy Florance has to join the giant Boardroom in the sky. CoStar has to figure this out. If CoStar chose to do something about this “single national set of rules” problem, many of those companies might criticize CoStar in public, but behind closed doors, they’d be cheering CoStar on.
Are the MLSs Ready for a Fight With CoStar?
It would be a giant mistake for the MLSs and for the BPP to think that they have beaten CoStar off with a stick, especially now that CoStar “caved” and chose to take the IDX feed via TenX. I did significant research into CoStar as a part of my report, and here’s what I ended up writing as a result:
Simply put, CoStar has shown a willingness to fight even against its top customers. Its litigation history is long, varied, and usually successful. CoStar has an in-house Head of Litigation; Jaye Campbell held that position until she was promoted to General Counsel and Secretary in 2020. She said in the announcement press release, “When I left private practice in 2013, I would have laughed if you said that in my role at CoStar, I would train the FBI on how to process terabytes of electronic evidence.”
None of the companies or organizations in residential real estate has ever shown that kind of a willingness to go to the mattresses.
The MLS has a long history of problems with password sharing. They have tried all sorts of security measures to stop freeloaders. MLSs know for a fact that they have brokers and agents who are reselling data to the grey market. I am not aware of a single MLS that has taken strong action against such activities. No MLS anywhere that I’m aware of has ever brought a lawsuit against violators.
Part of the reason is that the MLS is a nonprofit controlled by the REALTOR Association, where the violators often hold leadership positions. But the other part of the reason is the culture of residential real estate: cooperative, go-along-to-get-along, political to the maximum, and playing nice.
CoStar don’t play that game.
Zillow has been the object of irrational hatred for a decade now, and has never once taken any kind of a step, either in public relations or in the courts. There have been Premier Agents who have gotten rich off of Zillow leads, who nonetheless publicly call out Zillow, engage in conspiracy theories, and call for boycotts. Zillow has done nothing.
CoStar don’t play that game either.
If the endgame described here comes to fruition and CoStar ascends the Iron Throne of real estate… the industry is in for a new kind of king.
CoStar would never tolerate a challenge to its power and authority like a Broker Public Portal, or a Project Upstream — especially since it took advantage of those entities to enter, then take over, the residential real estate industry.
CoStar would not countenance the kind of vitriol and hatred that residential agents and brokers heap upon Zillow. Note the number of references in media stories about agents wanting to remain anonymous for fear of retribution. Note that the two people we ourselves interviewed for this report asked for anonymity and non-attribution, because they too did not want to get on CoStar’s bad side.
Nobody worries about getting on Zillow’s bad side. Nobody worries about getting on Realtor.com’s bad side. Or on the MLS’s bad side. And why should they? There have never been any consequences for criticizing, abusing, and screwing with those companies and organizations for years.
That will not be the case with CoStar. CoStar will make you pay for screwing with them. If not through litigation, then through PR. If not through PR, then by cutting off your access to the data and tools. Or frankly, all of the ways not just to punish you, but to also make an example of you pour encourager les autres.
The prevailing culture of residential real estate has been one of soft power: relationships, influence, relentless positivity, negotiations and working things out. It’s backroom deals and phone calls and sending messages with things like withholding Committee assignments or not being invited to industry confabs.
CoStar’s culture, on the other hand, has been decidedly harder edged. Of course they have relationships and work influence and negotiate and make backroom deals. Every company does. But CoStar has an in-house Head of Litigation.
You may find this story originally published in The Real Deal in 2018 entertaining. I sure did. It’s a fantastic piece of reporting.
In the rough and tumble world of commercial real estate, the tactics and strategies detailed in that article are… let’s say accepted as simply being a tough competitor. Sure, it’s playing hardball but it’s not anything all that unusual in the high-stakes world of big money commercial deals. Commercial real estate, like finance which it so closely resembles, is a bloodsport played in suit and tie.
Residential real estate simply has no history of that kind of aggression. Our version of playing hardball is stuff like not inviting David Liniger to events, or not allowing Zillow to buy booths at shows. Nothing in residential real estate involves calling in SWAT teams and private security contractors. NAR and the MLSs have been sued over and over, but usually by the government or by little mom-n-pop ambulance chaser type of firms. We have never seen a ruthless and brilliant competitor like Florance, and we have never dealt with a company like CoStar with its history and its hard edged culture.
The MLSs in particular did not need to make an enemy out of Andy Florance and CoStar at this point in history, when the DOJ and the FTC and a bunch of very experienced and very highly paid lawyers are filing massive lawsuits against them. But they did, or at least some of their representatives on the BPP Board did.
Well, I’d say prepare for a fight like you’ve never seen. I don’t know what shape or form it will take, and perhaps I am completely wrong about Florance and CoStar. Perhaps he has mellowed with age, and he’s more of a peace, love and hugs kind of a guy today. But if I were an MLS executive or a BPP Board member who decided ta F wit CoStar… I’d be purging every record, every photo, every text message that a private investigator might find and use against me somehow. Request additional money in the budget for legal bills in the years to come. Cross every T and dot every I in everything you do. Assume that every email you write will be read out in open court by CoStar’s lawyers.
It isn’t paranoia if they’re really out to get you.