If you have a look at the market cap of the REA Group, Zillow and Trulia you see the billionaires club. The REA Group has a market cap of around USD 5 billion, Zillow is USD 3 billion and Trulia just over USD 1 billion. However, while the REA Group is delivering more than USD 100 m in EBITDA, Zillow and Trulia are break even at best. So clearly the markets are valuing Zillow and Trulia on potential and, as I have discovered in my discussions with analysts and brokers, using the REA Group (and Rightmove) as a proxy for what can be. One even said that as the US market is nearly 20 times the size of Australia, there must be enormous upside for Zillow and Trulia.
Clearly this logic is flawed in one simple way, it assumes the underlying characteristics of the markets are the same. They are not.
Yesterday we looked at how the US and Australian real estate markets operate on a local level. We saw that they are fundamentally different in most respects. Today we are looking at how the property portal market is structured to see if there are similarities or differences.
Comparison Between the US and Australia Property Portal Markets
Access to Listings
The core difference between the Australian and US property portal markets is access to listings. In the US, listings are basically free. All a portal has to do is link with an MLS in a market and they have all the listings. This is a relatively simple exercise (at least technically speaking and putting politics to one side). This means that it is relatively quick and easy to set up a portal in the US. While you may not have too much traffic, you will have content as long as you follow the MLS rules.
Therefore a home hunter can often find the same inventory on many different sites including the agent sites, broker sites, MLS sites (if they exist), and of course the many portals. Don't just take my word for it, check out the same search (and sort order) on each of the following sites: Zillow, Trulia, Realtor.com, Homes.com, Realestate.com
What you see if the same property displayed first on most of them - 2297 Sunshine Mountain. Even the information displayed about a property is basically the same on each site. There is really not much difference from one site to the next in terms of the core reason for going there - to look at the listings.
Therefore, US sites compete more on brand and additional information / functionality.
In Australia, the market is very different. As we saw yesterday, there is no MLS. What the portals have to do is go to each agent (or their software supplier - and there are many) and put in place data links to get the listings. Once they sign up an office as a customer, the listings are then sent and displayed on the site. In addition, as it is a pay to list market (rather than a freemium model), not all listings make it to all sites.
What this means is that the REA Group did all the heavy lifting in 2000 - 2005 to create Australia's MLS - the central repository of almost all listings. So if you are a consumer and you want to see what is for sale in your market, going to realestate.com.au (owned by the REA Group) is the simplest and often the only way. This makes the REA Group database (and linkages to all data sources) a highly valuable asset that is extremely hard to replicate.
In the US the freemium model is the predominant model. This means that the listings are placed on the portals free of charge (yes free). The portals then offer upgrade or premium services to either promote the listings ahead of other listings (featured listings) or to promote an agent's brand around a listing or group of listings (display advertising). This is a very hard model to make money for 2 simple reasons - firstly you have to ring many agents to get a buyer of a premium service and secondly you have to deal with high rates of churn. Both of these squeeze your margins.
Many of the US portals look for other sources of revenue from display advertising, software products (e.g. Top Producer) or from ancillary services such as mortgage brokering or lead generation.
In the Australian market the model is very different. You pay to advertise your listing. Offices buy listing subscriptions that allow them to advertise all their listings on the realestate.com.au site. If they don't pay, their listings are removed - very simple! Then the REA Group sells premium products around these listing subscriptions that achieve the same outcome as the premium products in the US - either promote the listing above others or promote the agent or office brand.
As realestate.com.au is the MLS in Australia, all agents and offices really need to be on the site to get leads so the REA Group can basically charge what they want and the agents have to pay or miss out on leads. This is a little easier (on the agent / office) as it is predominately a vendor paid market where the home seller pays for the advertising. In reality, the real estate offices and agents are really sale people for the REA Group - promoting and selling premium advertising packages to the home sellers.
Branding and Traffic
The final difference is around brand and driving traffic. In the US market the portals invest heavily in brand building and driving traffic. They need to do this so that they can differentiate themselves from the competition and drive leads to the premium advertisers (as well as the free guys - just to keep them happy so they don't remove their listings). This results in massive advertising / marketing costs compared to other markets. For example in Q1 2013, Zillow had advertising costs of USD 15m and revenues of just USD 39m - that is 38% of revenue going on generating awareness.
In Australia, because the REA Group is the nations MLS, word of mouth (and being the only show in town) is a much more powerful tool and therefore it spent only 12% of revenues on marketing.
As you can see from the above discussion, not only are the ways in which real estate is sold different, so are how the property portals operate. In the US, the cards are fundamentally stacked against the property portals. Listings are easily come by creating too much competition and making money is extremely hard given freemium models.
In tomorrow's last instalment we will look at what this all means for the future of the REA Group, Zillow and Trulia and whether they are worth their current price (or more or less).
Simon is the former CEO and MD of the REA Group, founder of Property Portal Watch and will be a speaker at the Property Portal Watch Conference in New York on the 13th and 14th of January. This conference brings together the leaders of Property Portals from around the world to discuss the key issues facing their businesses. We already have attendees from businesses such as Immoscout24, Move.com and Foreclosure.com. Register before the 15th December and pay only US$349 for the 1.5 day conference.