When Zillow announced on Monday that it was acquiring Trulia for $3.5 billion, CEO Spencer Rascoff said the reason was for cost savings and that they were trying to create a company like IAC/InterActiveCorp. He said the two sites would stay separate, as Zillow is simply aggregating a set of media properties to maximize their advertising revenue.
Zillow and Trulia are the two biggest online search engines for residential real estate, showing different homes with their most recent prices. While it makes sense that they’d combine for cost savings and to maximize ad revenue, I doubt that’s the primary reason for the merger. I believe there’s a more systemic reason for the merger — the Zillow-Trulia acquisition is actually a strategic acquisition built on changing their industry entirely.
Zillow and Trulia have traditionally been advertising companies. They’re data markets, selling advertising around data they’ve compiled from various sources. The merger, however, allows them to become a legitimate proprietary network in a way they’ve been unable to be previously.
Think about the difference between the Yellow Pages and Yelp. The Yellow Pages simply compiles semi-public information and sells advertising around it. But, as they’ve found, when the data becomes more accessible like it has become online, their business dries up. Yelp, on the other hand, uses the same data but has built a proprietary set of reviews that are the real basis of their business. The problem for Zillow right now is that their basic information, the listing of homes, originates in Multiple Listing Services (MLS).
Multiple listing services have existed since the late 1800s as a way for real estate agents to help each other sell properties. They’re also extremely useful for home buyers because they don’t have to go to every agent in town to find the house they want. The MLS systems were a bit like the internet, before the internet. And today, even though consumers are showing up to real estate offices significantly more educated about what they’re trying to buy because of sites like Zillow and Trulia, the MLS system still runs the industry.
Zillow and Trulia currently work with the existing MLS systems and the National Association of Realtors (NAR) to get access to their data. But, not owning the data makes their advantage tenuous over the long-run for a couple of reasons: first, like in the travel industry where the primary information comes from the airlines and hotels, the third party information source is often more than happy to give their data to any upstart competitor; and second, the owner of the information dictates terms.
The MLS services are the existing proprietary data networks. But it appears that Zillow is trying to flip the dynamic. Not so they can sell homes directly, as some are suggesting, but so they can become the primary source of information. Most proprietary markets that facilitate transactions, like Yelp, craigslist or LoopNet, rarely sell the underlying products directly. Instead, they make connections between interested parties and sell advertising around the transaction – just like the MLS has done.
The acquisition of Trulia by Zillow is about taking on MLS and unseating the existing proprietary network. It’s about owning an industry for decades to come, not about profitability in the next few months.
However, usurping the entrenched monopoly is particularly difficult in proprietary markets, especially if they have an associated network. Proprietary networks tend to have one major winner: there is only one Yelp, one craigslist, and one LoopNet.
The combined company will own 71% of online real estate traffic, making it a legitimate threat to go around MLS entirely for many transactions. If realtors don’t need MLS to get a transaction done, they don’t have to pay real estate association dues. With 80% of sales being made by 20% of brokers, pulling the highest producing brokers away from the National Association of Realtors could upset the entire balance of the MLS systems. And when they’re going only through Zillow, then Zillow owns the proprietary network. If they unseat MLS entirely then they own the same seat MLS has had for a century.
While the goal is audacious and likely to be a drawn out affair, it’s not entirely implausible. In fact, for some it’s already happening. Cyndi Lesinski, a broker in Valencia, CA is finding success after leaving a big brokerage because she’s using Zillow, Trulia and Yelp. She left last year and generates 40% of her leads from Zillow alone. Real estate brokers are almost always independent contractors anyway – if they don’t need a big brokerage to close deals, the highest producers may start to walk. With the merger, Zillow can start to push their advantage in an attempt to change the economics of their business.
Trulia accepted the merger because they recognized that competing against Zillow was fighting for a smaller overall pie – being media companies. Zillow, the higher valued of the two companies, is making the all-stock acquisition because this is a merger of two companies who realize that without each other the war is lost. The battle is with the National Association of Realtors and MLS, not against each other. And certainly not against realtors themselves or consumers.