Consolidation in the US property portal market

by Alistair Helm in

This week saw the announcement by Zillow that it had entered into a definitive agreement to acquire its competitor Trulia for US$3.5 billion. The move by Zillow is an aggressive one that further cement its position as a key part of the future of the real estate industry in the US market.

Zillow has long held the mantle as the largest real estate website in the US surpassing the effective incumbent many years ago as it has headed for an aggregated audience of over 80 million unique users per month. Trulia has played a powerful game as the challenger as it has also surpassed and carved out an audience and support base within the industry.

Both companies rely on advertising revenue from agents and 3rd party companies as the US model with industry owned MLS’s (Multiple Listing Services) effectively making access to listings open and free for portals negating the opportunity to build a business model of a subscription as operated in most other countries. Agents are sold advertising packages to provide profile to secure listings as either buyers or sellers agents. With over 1.5m agents there is a large customer pool and with $12 billion of marketing spend across the industry each year these two leading portals and others have a significant cake to carve up between them, especially as the US industry effectively ceased print advertising for real estate a few years ago.

Neither company is as yet 10 years old and equally neither really makes any serious amount of money. For Zillow the 2013 year saw revenues of $197m and EBIDTA of $29m; for Trulia revenues of $143m and an EBIDTA of just $17m. Yet these two companies have a collective market capitalised value of $8.2 billion that is a staggering combined price earnings ratio of 178:1.

Trulia and Zillow are very different operations strategically, culturally and in regard to user experience and consumer brand experience and this has been part of the reason for the healthy and respectful rivalry.

Zillow has always been about data and the desire to empower consumers as home-shoppers with all the information and insight to make better decisions in the real estate process. They began originally as a site with no listings, merely a valuation estimate for every house in the US, matched to historical sale price records which was instantly a much talked about and compelling reason for almost every American to visit the site. This razor sharp focus on data off-sided them in the early days with the industry of agents and brokers as the accuracy and credibility of these valuation estimates “Zestimates” were challenged by the industry. However applying huge technology to the problem their data insight and analysis has turned them into the leaders in property tracking in the US with the largest and most valuable database on US households.

Trulia on the other hand has always been about the agents and the listings, working to empower agents through creating a community for home-shoppers to learn, ask questions and establish contact with trusted agents.  They have tried to engage their audience on a hyper-local basis so that you feel that Trulia is there at your side as a trusted friend, unlike the Zillow role as a trusted advisor.

In terms of business development Trulia has been focused on getting closer to their customers especially through the acquisition in Market Leader last year a leading SaaS CRM provider to the industry. Conversely Zillow has been more focused on the consumer engagement first by powering the leading media portals of Yahoo and MSN and then moving to acquire the New York portal Easy Street last year. They have also outspent Trulia in advertising and has lead a massive social media and PR campaign that has effectively intertwined Zillow into the vocabulary of US home-shoppers.

So Trulia and Zillow are different very different brands, different in culture, focus and user experience; however they are competitors. They both fight for the same advertising dollar of agents and brokers, as well as 3rd party advertisers eager to engage with home-shoppers. For this reason I hold no long term belief that Zillow will continue to operate both websites - Trulia as a website and a brand has a finite life. Zillow will be the gorilla in the market. A portfolio strategy as advocated by Spencer Rascoff Zillow’s CEO is a laudable strategy when the portfolio is made up of regional players or segment specific portals for rental property or holiday property or commercial property, but two national residential real estate portals - I don’t think so.

This acquisition will drive Zillow’s growth and earnings. For a start, the combined companies were due to be spending over $100m on advertising this year - no point in wasting half that money to try and out-flank your sister site! A single site will allow Zillow to begin to leverage their massive audience to drive lead generation solutions for agents and brokers, unchallenged by a competing offering from Trulia.

This consolidation is very unlikely to be challenged as anti-competitive even allowing for the shear scale of the combined audience share; as the marketing of property listings will not be impeded by the deal with the MLS structure still effectively allowing any real estate company to be a local portal with all the listings; after all real estate is far more a local business than a national business, especially across 100+ million homes and 300+ million people across the vast continent of 50 states.

Zillow have however not won the war with this acquisition, they have merely avoided a distracting skirmish with a competitor on the road to their ultimate goal of getting closer to the advertising cake of $12 billion a year. They will continue to innovate and acquire on their path as they will continue to grow in influence and power. Both companies have been highly innovative with technology across all platforms and whilst the acquisition could potentially be seen as a chance for Zillow to take a breather on such innovation, I suspect not. Zillow is all about empowering consumers and they are at their core a tech company so I see no easing up in the flow of smart user friendly innovative future tech. This is good news for the consumer and the real estate industry in the US who have nothing to fear and much to gain from this consolidation. However within the US real estate industry the general feeling is of the threat this acquisition brings to the core operation of real estate. That view is in my view more a function of the industry's inherent lack of confidence that their business model (with dual agency services and c. 6% commission fees) being ultimately sustainable.

As to the implications and ramifications for other countries and specifically for NZ. This deal demonstrates the stakes that the key players are playing for in the global property portal space. Zillow is by no means the poster child of the industry, those accolades rightly belong to the likes of Rightmove in the UK and REA group in Australia who deliver significantly stronger financial results from far smaller markets. Those operations though do have very significant competitors who have gained significant ground over the past few years. The likelihood of consolidation in these markets of the #1 player acquiring the #2 are less likely. What is far more likely is regional consolidation with more acquisitions of emerging market players by these two key specialist portal players and other media companies such as Axel Springer and Schibsted.

In NZ Trade Me has no need to consider acquisition, nor would it probably be able to as the ownership of is more a strategic asset for its shareholders than a financial investment. The key focus for them as it is for Zillow, will be cementing the relationship with the industry customers at all levels, agents and business owners. More likely on the agenda may well be the benefit of an integrated CRM system as Trulia saw with the Market Leader acquisition. In NZ and Australia new operations offering SaaS solutions for real estate CRM look to be redefining the digital backbone of the industry and this could be key for Trade Me and other property portals who all rightly recognise their core customer are agents and brokers / business owners.

The fact is that nowadays the property portal industry is far exceeding the value of the real estate industry they support and rely on for their business. This is largely a function of a continued belief that the digital transformation of the whole industry process will occur at some time and smart tech companies will be the ones to take advantage of any such trend. For real estate companies there are massive efficiency gains to be made through working with portals, however collectively the industry around the world still holds an adversarial relationship with their local portal.