I apologize for the lengthy silence. I’ve been heads down on final prep for launching a new project I’ve been working on for over a year now. You’ll hear about it soon enough, I promise. And I hope it’ll interest all of you. In fact, I know it will interest some of you. I know, mysterious. Just hang on for a few more days.
But I got quite a few emails and messages from friends and readers about the announcement that CoStar and Move are in talks. I thought I’d add my $0.02 as this is something I’ve talked about both on Notorious and on Industry Relations.
The story from The Real Deal:
Murdoch’s News Corporation is in talks to sell Move Inc, the parent company of listings giant Realtor.com, to CoStar Group, Reuters reported. The move would further entrench CoStar in the residential space, following major acquisitions such as Apartments.com and HomeSnap.
Supposedly, the deal would value Realtor.com at $3 billion — a nice return on the $1 billion that Move paid for it back in 2014. Even taking inflation into account, that’s more than double.
Now, people are saying this is a real game-changer if CoStar is able to acquire Realtor.com, the #2 or #3 portal in traffic in the U.S. I think it could be, but then again… I’m not 100% sold on it. A lot of what follows is a rehash of things I have written and said over the years, but with this news, it’s worth taking another look.
Before we begin, let’s state (then restate) the obvious. This is not a deal being done. This isn’t even a deal being announced. This is news that there are talks between two mega corporations. Just talk. It’s not a wedding, or an engagement. It’s more like a first date.
Still, we’re gonna have fun speculating on what the couple’s baby is going to look like.
Traffic
Let’s start with the obvious: Realtor.com is the #2 portal nationally behind Zillow. But man, it’s pretty far behind Zillow.
As of Q3, Zillow’s monthly uniques were over 230 million; Realtor.com was clocking in at about 90 million. That’s less than half.
It isn’t as if CoStar acquiring Realtor.com suddenly makes its portal presence (Realtor.com + Homes.com) close to Zillow’s. Sure, it’s closer, but closer is not close.
Plus, Realtor.com’s traffic growth is… well… negative since start of 2022. Zillow isn’t growing much either and shrank in 2021 but Zillow has a far larger base. Zillow doesn’t need to grow (and there are questions about how much more Zillow can grow given its complete dominance); it just needs to maintain the lead. CoStar has to grow and grow aggressively.
Realtor.com gets them a new base number… but now CoStar has to turn around two failing/sluggish portals in Homes.com and Realtor.com.
Marketing & Advertising
Presumably, that turn around has to be accomplished with aggressive marketing and advertising — just like CoStar did with Apartments.com.
I have real questions about whether that is helped or hindered by having two brands instead of one.
For the sake of thinking through this, suppose that CoStar was planning on spending $500 million a year in advertising for Homes.com. That gets you a certain amount of reach, a certain amount of consumer eyeballs. Superbowl ads and such. What kind of traffic growth to Homes.com could CoStar have gotten with that sort of spend?
If CoStar adds Realtor.com to its stable, does that imply a doubling of the ad spend? Or dividing the $500 million between two websites now? Is either a particularly great option?
The Brand
One thing most people do not address is the fact that Move does not own or control the brand of the flagship website. REALTOR is a registered trademark of the National Association of REALTORS. Move licenses that brand from NAR. It does not own it and does not control it.
I haven’t seen the actual license agreement between Move and NAR, but I understand that it is far less restrictive than the previous versions when Move was an independent public company. Still, less restrictive doesn’t mean ownership and control. It doesn’t even mean that the license transfers to a new buyer, so it is as yet unclear whether CoStar could even own Realtor.com.
Let us not ignore the fact that the REALTOR brand, no matter what NAR says, is not even controlled by NAR. A fundamental of branding is that your brand is only as good as the weakest link in your brand. Think about hits that companies like Subway took when viral videos of Subway employees doing vile things to sandwiches got released. NAR claims that REALTORS are all wonderful, knowledgeable, ethical professionals who (if you go by their commercials) are all slender and diverse. That’s the brand promise today.
The reality of the brand, of course, is a consumer’s personal experience with a specific REALTOR will color that brand promise. For example, this shocking video from the Long Island Divided report from Newsday:
Long Island Divided: How agents treated undercover Black clients
Newsday’s investigative reporter Keith Herbert describes how 49% of Black testers faced challenges during the paired testing of real estate agents.
What do you imagine is the brand promise of REALTOR for a lot of the consumers in Long Island?
I’ve written at length about Long Island Divided already, and the whole racial discrimination thing isn’t the point. I know that NAR, state and local Associations, brokerages, and individual REALTORS were all disgusted by what happened in Long Island and have taken steps to prevent such things from happening.
The point is that NAR does not control the REALTOR brand. Move certainly doesn’t control the REALTOR brand. If CoStar acquires Move, it doesn’t control the REALTOR brand. To pay $3 billion for a brand that you do not and cannot control is… well… scary.
Your Listings, Your Leads
Another factor to consider is the fact that CoStar has gone all-in on “Your Listings, Your Leads” with Homes.com.
It all starts with a listing. Your listing. You drive to a house and show the seller how you can help them get the best price possible. You take tons of pictures and write a great description. Then you decide where to advertise that listing to get it sold as quickly as possible. When you choose Homes.com, your listing imports through your brokerage, the MLS, or perhaps Listhub. Regardless of how it gets there, once your listing pops up in your city, it receives great exposure where the millions of active buyers on Homes.com can see it.
Well, Realtor.com is not a “Your Listings, Your Leads” website at all. It makes a lot of its revenues from referrals that it sends to buyer agents. Will CoStar convert Realtor.com to the Homes.com model? If it does, then the revenue projections for Move will need to be revised downwards quite sharply. Does CoStar keep them separate with different business models? If so, the marketing and advertising spend question from above applies even more.
Obviously nobody knows today, and the deal might not come together, but it is something to think about.
Strategic Incentives
So far, I think I’ve listed the downsides of doing a deal for Move. There are strategic upsides in addition to the obvious one of traffic.
First, REA Group is a minority owner of Move. Perhaps CoStar doesn’t acquire 100% of Move; perhaps CoStar only acquires News Corp’s 80% stake in order to keep REA Group as a partner.
If any company knows how to monetize a Your Listing, Your Lead type of approach, it has to be REA Group. Andy Florance has spoken very highly of REA Group over the years. That’s a strategic partnership that could make all kinds of sense.
Second, as far as I know, Realtor.com has data feeds from every MLS in the country. Realtor.com’s data feeds are pretty widely known to be “privileged” as compared to other portals, especially those who have to abide by IDX rules… like Zillow. This is a historical anomaly from back when Realtor.com was seen and thought of as NAR’s own little portal and NAR “encouraged” its MLSs to be nice to Realtor.com. Since News Corp acquired Realtor.com, there have been significant changes to how MLSs view Realtor.com… but there is still quite a bit of privileged data access left over from the old days and some of those data agreements might survive a transfer of ownership.
Third, it is widely suspected (because it is widely true) that NAR fears CoStar. They have tangled in the past with Xceligent, and the large brokerages and MLSs who make up Broker Public Portal have huge influence within NAR. I don’t know if I would go so far as to say that NAR and CoStar are enemies… but I think it’s safe to say Christmas cards are not getting exchanged.
Perhaps a part of the Move acquisition includes a way to turn enemies into friends. Maybe the licensing deal is renegotiated to make NAR love CoStar. Maybe there is a revenue share mixed in to really incentivize NAR to ally with CoStar… and as we all are learning from the Ukraine war, actual alliance means you go to war against your ally’s enemies. It wouldn’t be all that difficult for CoStar to convince NAR that Zillow is their common enemy since Zaterade is a real phenomenon in the industry.
Alternative Use of Funds…
The general sentiment this early on appears to be that the deal between CoStar and News Corp makes sense, and that it will happen. Since I think there are real reasons not to do the deal, the deal will likely happen. That’s just my track record to date, which largely explains why I am not an investment analyst.
But suppose the deal falls through. What could be some alternative use of $3 billion?
The obvious answer is that CoStar could get far more aggressive in marketing and advertising Homes.com. I mean… if CoStar takes the $3 billion that Move is supposed to cost and spends that on growing Homes.com, would that get Homes.com to 90 million monthly uniques in a year or two? I don’t think that’s crazy.
What’s even more interesting is this scenario: what if CoStar takes the $3 billion and decides to pay $2,000 to each and every REALTOR in the country to move over to a new Homesnap Industry Association… which would use Homesnap as the national MLS for all of its members? And realistically, since only about 20% of agents do any real business, CoStar could offer $10,000 to 300,000 REALTORS and get the same result. As far as I know, there is no RESPA restrictions on incentivizing agents to move Associations (and of course, MLS membership).
It goes without saying that this new HIA would charge annual dues of like $49.99 instead of what NAR charges with the three-way agreement.
I mean… if CoStar really wanted to get all the listings to Homes.com and the MLSs won’t play ball… $3 billion could be spent differently, y’know?
Thought > Blind Reaction
All we have so far is news that CoStar and News Corp are talking. We have speculation about the price. And none of us know anything.
So why bother writing this? Because what I’m seeing today on social media, getting from emails and messages, is a lot of blind fear. It’s news that a big company is using its huge resources to buy another big company. But it should not then result in all kinds of “OMG! TEH DOMINOS ARE FALLING!!!” and such. It’s amusing to see MLS executives start talking about how it’s time to review their Realtor.com contracts.
Since the deal isn’t even done, not announced, but merely being discussed, perhaps this could be better used to think about some of the important strategic and structural issues at play here. That CoStar might buy Realtor.com is uninteresting unless you are a shareholder in either company, but why we might care that such a thing happens is interesting. Those whys point to all manner of issues in the industry that everyone should think about, whether the deal happens or not.
In any event, let me leave it there. I have more docs to review, and more meetings to have, and there’s a big legal decision that just landed while I was writing this. I’ll try to get to that as well.
Happy Wednesday everybody.
-rsh
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