Portal War ‘24: What $1 Billion in Advertising Buys You

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The biggest upstart real estate portal in the world, CoStar’s Homes.com, has comfortably settled into the #2 spot in the U.S. – but at what cost?

Why it matters: Homes.com is a real-time case study of what it takes for a portal to disrupt the status quo, and it appears to take $1 billion in advertising.

  • After a year of heavy investment, Homes.com has overtaken realtor.com for the #2 spot for two consecutive quarters.

 
 

Dig deeper: In May I asserted that portal traffic was a non-zero-sum game, meaning that traffic gained by one portal (Homes.com) is additive and not coming at the expense of other portals.

  • That trend continued into Q2, with the combined traffic of Zillow, realtor.com, and Redfin remaining the same as last year, while Homes.com significantly grew its traffic.

 
 

It’s not rocket science; Homes.com’s traffic growth is directly correlated to its overall advertising spend – which is how advertising works.

  • The steady increase in traffic during the first three quarters of 2023, the dip in Q4, and the big increase in the first half of 2024 tracks exactly with CoStar’s overall advertising spend.

 
 

Astute readers may notice that advertising spend is required to maintain traffic levels, revealing insights around overall advertising efficiency.

  • Dividing the overall advertising spend by the number of average monthly uniques provides a rough illustration of advertising efficiency over time (cost per visit).
     

  • Not all of CoStar’s advertising budget is going into Homes.com, but considering it was $55 million in Q1 2022 and $234 million in the latest quarter, it’s clearly a lot.
     

  • Directionally, this highlights that advertising efficiency isn’t meaningfully changing, traffic is not growing organically (yet?), and that, for the time being, continued advertising spend is required to maintain Homes.com’s traffic levels.

 
 

The bottom line: For years, disruptor portals have tried unsuccessfully to unseat market leaders around the world. 

  • Becoming the #2 portal has cost CoStar about $1 billion in advertising, but the real question is: how much will it cost to maintain that position (the current math suggests the answer is around $950M in advertising spend per year).
     

  • Homes.com is proving that changing the status quo is possible, if you have the cash.

Cash Flows of the Rich and Famous

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Cash flows are in for the first half of 2024, and some companies are losing money, some are making money, and some are making a lot of money.

Why it matters: Operating cash flows are an accurate measure of business model health, and a data-driven analysis reveals insights around various models and market dynamics.

  • Operating cash flow is a metric that cuts through the hype to measure the actual profitability of the core operating business model: does it make money?

Dig deeper: eXp Realty, a real estate brokerage, and Zillow, a tech company and portal, both generated the same amount of cash – a surprising result given the very different business models.

 
 

Industry incumbent Anywhere has moved away from being a big cash generator, likely a result of the challenging market; its business model is less resilient.

 
 

Meanwhile, eXp Realty has grown its cash generation abilities during the same period of time – and in the same market conditions.

 
 

Adding real estate portals from around the world – Germany’s Scout24, the U.K.'s Rightmove, and Australia’s REA Group – reveals just how profitable those businesses are.

  • Rightmove and REA Group are the most profitable real estate portals in the world.

 
 

Considering market size, as measured by population, when comparing real estate portals reveals a thought-provoking data point.

  • Real estate is similar around the world, but market dynamics and business models are very different, as highlighted by operating cash flow per capita (per capita means “per person”).

 
 

REA Group is world-class in its ability to monetize its market – with an operating cash flow per capita 16x higher than Zillow.

  • Australia is the market that CoStar points to when talking about its monetization plans for Homes.com.
     

  • But the markets are very different: Australia doesn’t have MLSs and has vendor funded advertising (for more, check out my Real Estate Portal Strategy Handbook).

 
 

The bottom line: The market is tough but it doesn’t mean all businesses are struggling, and real estate portals remain some of the most profitable businesses in real estate.

  • The U.S. market is huge, but market size does not always correlate to profit potential – it has more to do with local dynamics.
     

  • In the end there will be winners and losers – companies generating cash and burning cash – which is an accurate reflection of business model efficacy.

Investing for Growth: Zillow and Redfin in Mortgage

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A number of real estate tech companies have ambitions to grow mortgage businesses, and results from the past year highlight which companies are actually gaining market share.

Why it matters: The data shows, in very real terms, what “investing for growth” really means, and which companies are best positioned to grow mortgage as a meaningful adjacency.

  • Zillow is the standout, doubling its MLO (Mortgage Loan Originator) headcount over the past 14 months – during a very difficult time to be in mortgage.

 
 

In a down market, it’s rare for a company to double its mortgage headcount.

  • But one other company has done so, seemingly back from the abyss: Better Mortgage.
     

  • After shedding over 1,000 MLOs during the dark days of 2022, Better is back – or at least investing for growth – by doubling its MLO headcount over the past year.

 
 

Redfin has slowly shed MLOs since its acquisition of Bay Equity Home Loans in 2022.

  • Like Zillow, its goal is to attach mortgage services to its core brokerage operation, but in contrast to Zillow, its headcount is shrinking (down 30 percent since acquisition).

 
 

More MLOs correlates to more funded loans: Comparing the two portals over the past year, Zillow has more than doubled its loan origination volume, while Redfin’s has slightly declined.

  • Redfin’s mortgage business is still larger than Zillow’s, but unlike Zillow, it’s not growing.

 
 

The bottom line: My latest podcast guest, Greg Schwartz, CEO of Tomo and former president at Zillow, summed up the situation well: “Growth is in our control.”

Portal War ‘24: Traffic is a Non-Zero-Sum Game

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Homes.com appears to have solidified its place as the #2 portal in the U.S. market, without a corresponding decline in traffic at any other portal.

Why it matters: Portal traffic appears to be a non-zero-sum game – traffic gained by one portal is additive and not coming at the expense of other portals.

Dig deeper: In the first quarter of 2023, the big three real estate portals – Zillow, realtor.com, and Redfin – had a combined 334 million average monthly unique visitors.

  • Fast forward to the first quarter of 2024 and those same portals have a combined 338 million average monthly uniques – no change – with Homes.com growing to an additional 94 million average monthly uniques.

 
 

And that’s just for Homes.com – if you include CoStar’s entire residential network, which includes Apartments.com, the scale is even greater.

  • It's a valid comparison; the other portals also include traffic from a larger network of sites, including rentals.
     

  • The result is that CoStar’s resi network has nearly double the traffic of realtor.com.

 
 

CoStar’s traffic reporting hasn’t been consistent – it has fluctuated between Homes.com and the entire residential network, and sometimes includes quarterly averages and other times specific months.

  • CoStar’s inconsistent reporting runs the risk of reducing trust in its traffic numbers, even when the underlying results are impressively real.
     

  • But traffic has unequivocally increased over the past year, punctuated by two periods of heavy advertising.

 
 

CoStar’s advertising spend reached an all-time high in Q1 2024 – which directly corresponds to the recent traffic surge in February and March.

 
 

The bottom line: While Homes.com’s traffic increase is additive to the market and not affecting other portals’ traffic, that’s not to say it won’t affect their businesses. 

  • Unlike website visits, there is a finite amount of transactions, commission dollars, and agents willing to spend money online; that’s a zero-sum game.

Note on data: Collecting traffic data for Homes.com and CoStar’s residential network relies on a combination of assembling clues, triangulation, and making a few assumptions. The numbers above are estimates based on public information. 

The DelPrete Probability Paradox

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There is an inverse correlation between how likely something is to occur and how much attention it gets – a phenomenon a friend has dubbed the DelPrete Probability Paradox.

Why it matters: This leads to attention being focused on the highly exciting, yet least likely scenarios, which dilutes focus and clarity while creating noise and distraction. 

  • Getting informed and being entertained are two separate things; boring headlines don’t sell papers.

 
 

Real estate is rife with possibility – news headlines and conference agendas are packed with topics that exist in the realm of the possible and plausible, but not necessarily probable.

  • Will AI replace agents? What will happen to interest rates? How will the commission lawsuits change the industry?
     

  • The reality is that no one knows, and the most probable outcomes are slow, incremental deviations from the current state, not radical changes.

 
 

Probability revolves around the existence of data, facts, and evidence – the more we know, the more certain the predictions.

  • The least likely events – the possible – generally exist in a reality light on facts and flush with speculation. 
     

  • Facts are important; they form a trajectory of likeliness – plotting them over time and triangulating data points can identify likely outcomes.

 
 

For example: Opendoor’s IPO prospectus presented a very plausible argument supporting its ability to attach adjacent services to a real estate transaction.

  • The company asserted that because it had success attaching title & escrow services to its sales, it would be able to attach other adjacent services like home loans.
     

  • The story made sense – to those outside of the industry – but in the end it didn’t work and Opendoor shut down Home Loans. Plausible, yes, but not probable.

 
 

Inertia rules: Newton’s First Law states that an object in motion will stay in motion unless acted upon by an outside force – in other words, systems tend to remain constant.

  • Consider the percentage of homeowners that use a real estate agent to sell their home: even after the introduction of Zillow, Opendoor, and billions of dollars in venture capital pushing alternative models, it remains at a 40 year high.

 
 

Speculation is running high with the recent NAR settlement; my thoughts were summed up in this Bloomberg article.

  • "Right now, everyone is turning this ruling into what they want it to be,” said Mike DelPrete, who teaches courses on real estate technology at the University of Colorado Boulder. 
     

  • “Some people are saying not much is going to change. Others want the story to be that it’s a seismic shift for the industry.  The whole thing is being driven by fear and uncertainty.”

The bottom line: Don’t confuse news with entertainment – news is meant to inform, entertainment is meant to distract. 

  • Making smart decisions requires cutting through the noise and gathering evidence, pattern matching, and distilling insights.
     

  • But it's easy to get distracted, which is the crux of the DelPrete Probability Paradox: the less likely something is to occur, the more attention it gets.

The Portal Traffic Wars & The Mother of All Metrics

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On my recent podcast, Redfin’s Joe Rath and I discussed the Mother of All Metrics – close rate – and its critical importance to online leads and real estate.

Why it matters: Close rate is especially relevant in Portal War ‘24; traffic is top of the funnel, but close rate – which correlates to lead quality – will guide the investment decisions of potential customers.

Dig deeper: Homes.com has become a serious contender in the portal space, with similar traffic to realtor.com and Redfin, and once Apartments.com traffic is included (CoStar Resi), it surpasses both.

 
 

After a few years of crazy, Zillow has reestablished its commanding traffic lead over realtor.com; its position as #1 is clear.

  • For more about a leading portal’s competitive advantage, read my strategic analysis: Millions More Buyers.

 
 

During the last quarter of 2023, all portals experienced a seasonal decline in traffic.

  • Compared to the previous quarter, that decline was fairly even across the board – surprisingly similar for Zillow, realtor.com, and Redfin – at 13 percent. 
     

  • Homes.com and CoStar’s residential network were down a smaller degree at 11 percent, most likely benefiting from a sustained marketing blitz. 

 
 

Homes.com’s meteoric rise in traffic is the result of CoStar’s massive advertising spend. 

  • For perspective, across its entire network in 2023, CoStar outspent Zillow by 4x, or $412 million, or more than 2x Zillow and Redfin combined.
     

  • It’s clear that CoStar is very, very serious about its investment in residential portals.

 
 

What to watch: lead quality.

  • I've spoken to some early customers and it's too early to make a call about the quality of leads generated by Homes.com.
     

  • So if you’re using Homes.com as an advertising channel, reach out and share your experience!

The bottom line: Traffic is just a number – ultimately, each portal is a business that must turn traffic into leads, and leads into money. 

  • Homes.com is coming to market with a new business and monetization model, and it needs to prove that it can deliver a strong return on investment to its agent customers.
     

  • Traffic is an important first step in the process, but in the end it comes down to lead quality, and that process will take time.

Note on data: Collecting traffic data for Homes.com and CoStar’s residential network relies on a combination of assembling clues, triangulation, and making a few assumptions. Some of the numbers above are estimates based on public information. 

Some of what’s known is that Homes.com’s average monthly uniques was 62M in Q3 2023, Apartments.com had 44M average monthly uniques in 2023, and CoStar’s entire residential network was 95M average monthly uniques in Q4 2023.

Zillow’s Transition to “Super App” Driving Revenue Growth

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Zillow’s latest momentum is a manifestation of its strategy to diversify revenue across the transaction as it transitions from a lead gen platform to a housing “super app.”

Why it matters: As Zillow scales new revenue streams, including Zillow Home Loans, Rentals, ShowingTime+, and Seller Solutions, it is planting important seeds for its next phase of growth.

Context: After a pandemic bump, Zillow’s overall revenue declined and has remained flat since 2021 – during one of the worst real estate markets ever recorded.

 
 

Over a challenging two years, Zillow’s residential and mortgage businesses have shrunk (on par with the declining market), while its rentals business has ticked up from strong organic growth.

 
 

Even with flat revenue, Zillow has significantly outperformed the market during this period, with the magnitude dependent on whether you consider Zillow a lead generation platform or a housing “super app.”

  • While revenue growth at Zillow, the lead generation platform, has slightly outperformed the market, revenue growth at Zillow, the housing super app, is outperforming at a much higher rate.
     

  • This is a result of new products and services that are generating additional revenue across more of the transaction. 

 
 

Dig deeper: For years I’ve used the following framework to think about real estate portal growth strategy.

  • Zillow’s evolving strategy sees it getting closer to the real estate transaction (Zillow Flex and Zillow Home Loans) and expanding to more parts of the transaction (Mortgages, Rentals, Seller Services, Agent Tools).
     

  • Typically, services closer to the transaction are higher revenue, while services further from the transaction are higher margin and more scalable.

 
 

Zillow asserts that its strategy to grow transaction and revenue share is working.

Zillow’s mortgage business is growing, but, counter-intuitively, revenue is dropping as purchase volume nearly doubles.

  • This is a result of a shifting product mix – Zillow is funneling leads from its mortgage marketplace to fulfillment by Zillow Home Loans.
     

  • It’s shifting from an asset-light marketplace to an asset-heavier mortgage brokerage operation, with much higher revenue potential.

 
 

Last year I claimed that Listing Showcase was Zillow’s most interesting product, and now it’s probably Zillow’s most interesting slide in its investor presentation.

  • The mid-term revenue potential is spot on based on my earlier calculations, representing a significant revenue opportunity as a new, sell side product.
     

  • But the most interesting opportunity is long-term, where Listing Showcase could be rolled out as a mass market product for all agents.

What to watch: Zillow’s future growth aspirations hinge on a few key factors.

  • Expansion into 40 markets – as early “enhanced markets,” Atlanta and Phoenix are useful data points, but not necessarily representative of all 40 markets.
     

  • The last mile problem – Zillow remains completely dependent on local real estate agent teams to drive adoption of its new products.
     

  • Zillow Home Loans is driving revenue, but it’s unprofitable, lower-quality revenue – the business needs to demonstrate an ability to grow revenue faster than expenses.

The bottom line: Zillow is diversifying its revenue along the transaction – what it calls its super app – and is outperforming a depressed market.

  • Zillow will almost certainly miss its $5 billion in revenue by 2025 goal, but like many plans that were laid in early 2022, things have changed.
     

  • While early signs are promising in a few key markets, the path forward hinges on the stubborn realities of conversion rates, profitability, and – as always – partnering with agents.

Scout24: Growing a New Consumer Revenue Stream

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Real estate portals around the world have been trying to diversify their revenue streams for years – with mixed results – but one portal’s efforts stand out as a success.

Why it matters: Leading German portal Scout24’s consumer subscription product is a rare example of a new revenue stream that’s undoubtedly working – and a novel offering that directly targets consumers.

  • In addition to consumer subscriptions, Scout24 offers the usual suspects of adjacent revenue streams, mortgages and seller leads, neither of which are growing.

 
 

Scout24’s consumer subscription business offers property buyers and renters (pictured below) an enhanced experience, including early access to listings and priority messaging, for a monthly fee.
 

 
 


The product is resonating with consumers in a meaningful way; revenue is up 20 percent year-over-year and it will generate over €60 million for the year.

 
 

Growth is being driven by a steady increase in subscribers; Scout24 has likely passed the 400,000 paying subscriber mark.

  • Average subscription revenue is around €16 per month, with a 3 month minimum term. 

 
 

Context: The consumer subscription business represents a substantial 14 percent of Scout24’s total revenue.

 
 

The bottom line: Successfully diversifying revenue streams in a meaningful way is hard, especially for real estate portals.

  • While most portals have focused on the false promise of mortgages – the siren song that has lured so many – Scout24 has built a valuable subscription business that directly targets consumers.

  • Yes, but: Just because a consumer subscription product is working in Germany doesn’t mean it will work in other markets!

Redfin: High Debt, Low Cash, and Unprofitable

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Redfin’s latest results reveal a worrying financial trend – and raise questions about the sustainability and viability of its business model.

Why it matters: A lot of debt, dwindling cash, and an unprofitable core business are a challenging collection of attributes for the business to deal with, which may force a larger strategic change.

  • It all started with Redfin taking on a substantial amount of debt in 2020, eventually rising to $1.2 billion by 2021.

 
 

Redfin then made a pair of expensive acquisitions: In 2021, it bought Rentpath for $608 million, and then acquired Bay Equity Home Loans for $138 million in 2022.

  • Since 2020, Redfin’s available cash balance (cash and liquid investments) declined sharply, from over $1 billion in 2020 to just $173 million at the end of Q3 2023.

 
 

Redfin is using its cash to gradually repay its debt, but the challenge is that the business itself is unprofitable (as measured by Net Income/Loss).

  • Redfin has incurred a net loss since at least 2018 – it doesn’t appear that the business has ever been profitable.

 
 

Over the years, Redfin has assembled a collection of unprofitable business lines.

  • Redfin’s real estate brokerage is unprofitable, its now-closed iBuying business, RedfinNow, was unprofitable, its rentals business is unprofitable, and its mortgage business is unprofitable.

 
 

To say Redfin’s problems are a direct result of the market would be incorrect – it’s not the market, it’s the business model.

 
 

This leads to a strategic dilemma: Redfin is significantly under-resourced in a challenging, competitive market.

The bottom line: A receding tide reveals, and the current market is highlighting Redfin’s various challenges.

  • Strategically, it appears that Redfin is overstretched with limited resources, and up against well-funded competitors with cost advantages, something it cannot compete with.
     

  • This is a galvanizing moment for the business; one way or another, something has to change.

Portal War ‘24

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2024 is shaping up to be the year of the PORTAL WARS in the U.S., with CoStar Group, owners of Homes.com, leading the world’s largest effort to unseat a #1 real estate portal.

Why it matters: This multi billion-dollar game of financial chicken will certainly shake up the portal landscape and will force competitors to change strategy – if they can – or risk the specter of irrelevancy.

The primary driver of CoStar’s Homes.com growth is the near doubling of its annual advertising spend to almost $600 million, a massive investment that keeps increasing.

  • Keep in mind this advertising spend also includes brands like Apartments.com and other commercial real estate portals – but the big increase is being driven by Homes.com.

 
 

Comparatively, CoStar’s advertising spend – all to drive consumer traffic and build awareness – dwarfs its real estate portal peers.

  • In 2022, CoStar outspent Zillow by a factor of two, and is on track to outspend Zillow by 3.5 times this year.
     

  • Momentum is important: While Zillow and Redfin have been slimming their advertising to cut costs, CoStar continues to increase its investment.

 
 

Competition between portals is a marathon, and cash in the bank is not only a requirement to play the game, but a critical prerequisite for success.

  • CoStar has an enormous war chest of over $5 billion in cash, enabling it to outspend the competition, while Redfin simply does not have the resources to compete at the same scale.
     

  • Note: News Corp is the media empire that owns realtor.com and dozens of other businesses, including TV, newspapers, publishing, and more.

 
 

The ability to invest with cash flows from a profitable core business is another key factor in this race.

  • Once again, CoStar outstrips the competition with its cash-generating core business, as opposed to Redfin and Zillow, which both posted a net loss in the most recent quarter.
     

  • As a massive media conglomerate, News Corp generates a good deal of cash, but also pays a dividend and is more conservative with its investments.

 
 

An effective strategy should be simple and straightforward – and as I like to say, Compete Where You Can Win.

  • CoStar is demonstrating clarity in its strategy; it knows what its unique advantages are and is leveraging them to the fullest.
     

  • And it’s targeting a gap in the market: the 97 percent of real estate agents that aren’t buying leads from its competition. 

Critically, CoStar is focused on ONE key point of difference for each of its two main audiences, agents and consumers – in areas where it is betting that it can win.

  • For agents, Homes.com offers “Your listing, your lead,” which prominently positions the listing agent to collect leads directly, instead of being auctioned off to the highest bidder.
     

  • And for consumers, Homes.com is building exclusive content that’s actually good for consumers: rich media on over 20,000 neighborhoods across the U.S., including custom promotional videos, created by a team of over 1,000 human employees.

 
 

The bottom line: At its core, this is a case study in the importance of a clear strategy and focused execution. 

  • Love or hate it, CoStar’s strategy is crystal clear and its tactics aligned with its strategy and competitive advantages, while some of its peers are stuck in reaction mode with disbelief, discredit, and distraction – which is not a strategy.
     

  • Without a cogent strategy, CoStar’s competitors (especially realtor.com and Redfin) are at risk of being stuck with a waning value proposition, decreased relevancy, and not enough resources to mount an effective defense.

Dig deeper: On my podcast, David Mele, president of Homes.com, and I discuss Dunkin Donuts coffee, post-acquisition growth, lead gen hell, the 97% opportunity, innovator's dilemma, exclusive content, strategic clarity, what's in Andy's head, and what he would do if he were Zillow's CEO. Give it a listen!

Zillow Pressures Flex Teams to Perform

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Zillow continues to double down on its mortgage business, this time by compelling Flex teams to send back leads that have expressed interest in learning more about Zillow Home Loans – or risk getting kicked out of the program.

Why it matters: Zillow is leveraging its immense market power and forcing its partner ecosystem to change behavior, all in an effort to meet its revenue goals.

The following chart, provided by Zillow to its Flex partners, clearly outlines its performance expectations.

  • Underperformance, in terms of not converting buyer leads or not sending leads back to Zillow Home Loans, can result in “disengagement” – no more leads.
     

  • While Flex teams that convert leads and send customers back to Zillow Home Loans are eligible to get more leads.

 
 

Zillow asks Flex agents to send back leads that have expressed interest in learning more about Zillow Home Loans.

  • Consumers “express interest” through a checkbox on the initial contact form, which is checked by default – so it’s really an option to opt-out rather than opt-in.

This is another clear signal of the critical importance of Zillow Home Loans to Zillow’s long-term strategic plan to double revenue.

Perspective: While Zillow is strongly leveraging its power on the market, it only affects a very small percentage of agents and transactions.

  • Less than five percent of the U.S. real estate agent population works with Zillow (with far fewer Flex agents), and Zillow only touches around three percent of U.S. real estate transactions.

The bottom line: Zillow is curating a small, exclusive ecosystem of agents that are willing to play by its rules, which now includes tight integration with Zillow Home Loans.

  • Zillow continues to lean heavily into mortgage as part of its broader strategy, even though Zillow Home Loans has lost $283 million since 2017.
     

  • At the end of the day, there is only so much Zillow itself can do; it is reliant on its agent partners, and Zillow is exerting immense pressure on those partners to achieve its goals.

Zillow Flex Fee Rises to 40 Percent

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Zillow recently raised the success fees on its Flex program – from 35% to 40% – for the completion of a successful transaction in six markets.

Why it matters: Zillow, like every other leading real estate portal around the world, has tremendous pricing power, and is able to flex that power to squeeze more revenue from agents and the multi-billion dollar commission pool.

Dig deeper: In early 2022, Zillow set itself lofty revenue goals, including generating an additional $1.5 billion per year from its Premier Agent program.

  • This revenue stream, paid for by agents, taps directly into the $70+ billion annual commission pool.

 
 

A key component of Zillow’s strategy is growing its Flex program – Next Gen Lead Gen that monetizes transactions on a success fee model.

  • That success fee has been 35 percent for years, but has recently risen to 40 percent in a half-dozen markets.
     

  • Zillow Flex accounts for around 25 percent of Zillow’s entire Premier Agent revenue, a percentage that has yet to materially change in 18 months.

 
 

The pricing change quietly occurred in September (there was no press release, for obvious reasons) in six markets: Denver, New Haven, Cape Coral, Reno, Oklahoma City, and Greenville.

There is a graduated referral fee band, but in all but two markets the average home value (as computed by Zillow) falls within the highest, 40 percent fee band.

 
 

The bottom line: Zillow’s market dominance, coupled with the exclusive nature of its Premier Agent and Flex programs, gives it unprecedented pricing power.

  • As outlined in my Real Estate Portal Strategy Handbook, most revenue growth at real estate portals around the world comes from raising prices.
     

  • Despite talk of new revenue streams and super apps, the easiest way for Zillow to increase revenue may be to simply raise prices on a captive audience.

Zillow Still Crazy About Mortgages

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In a down market with historically high interest rates, Zillow continues to invest in its mortgage business – Zillow Home Loans – and is the only company among its peers that is adding mortgage loan originators (MLOs) to its headcount.

Why it matters: While other real estate tech companies are shedding mortgage headcount, cutting expenses, and closing their mortgage operations, Zillow’s investment is a clear sign of strategic intent and a reflection of its ability to invest for the long-term.

Zillow’s real estate peers, including iBuyers, Power Buyers, digital brokerages, and mortgage start-ups, have all shed MLOs over the past 18 months.

  • Some companies, like Opendoor, have shut down their entire mortgage operations, while others have cut MLO headcount by half (or more).

 
 

The number of Zillow’s MLOs has fluctuated over time, but there has been a sustained and noticeable increase throughout 2023. 

  • Zillow’s MLO headcount is up around 40 percent since February ‘23.

 
 

Better Mortgage, which recently went public via a SPAC, presents a very different story of MLO headcount. 

 
 

Zillow Home Loans is still relatively small compared to industry peers, including Redfin’s Bay Equity and Prosperity Home Mortgage (a subsidiary of mega-broker HomeServices of America).

 
 

Zoom out: And as I’ve written in the past, these companies are a drop in the bucket compared to mortgage industry behemoth Rocket Mortgage.

 
 

Remember: Zillow’s recent financial reporting changes have removed an informative layer of transparency from its business.

  • After six years of losses, it’s no longer possible to track the profitability and operating expenses of the mortgage business unit.

The bottom line: The number and growth of MLOs is an important leading indicator of a company's firepower and strategic intent.

  • With continued struggles around profitability and uncertainty around adoption, Zillow Home Loans is far from an unequivocal success story – but the company continues its heavy investment.

  • The depth of investment stands out by going against the grain of other mortgage companies, real estate tech disruptors, and the overall market – which highlights the importance of mortgage for Zillow.

The Last Mile Problem

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Real estate has a last mile problem. Despite advances in online lead generation, tech platforms, emerging AI assistants, and disruptive new models -- an agent is still the necessary bridge to a consumer. Watch a clip of me outlining this phenomenon during my Inman Connect keynote below.

The last mile problem is a concept that comes from logistics and transportation.

  • Getting goods from a factory to a warehouse, and from a warehouse to a distribution center, is the easy part.
     

  • The difficulty comes with the final delivery -- the last mile -- where the experience is uncertain, complex, and expensive.

 
 

Real estate's last mile problem is similar -- you can buy thousands of online leads, invest millions into building a tech platform, and use predictive analytics to score how likely a lead is to transact.

  • But you still need an agent to pick up the phone, make a call, and build a relationship with a consumer.

 
 

And that's why the biggest players in real estate are working with agents, and not trying to disintermediate them.

  • Zillow's Premier Agent and Flex programs keep high-quality agents at the center of the transaction.
     

  • And now Opendoor is pivoting back to agents with a significant marketing and partnership campaign.

 
 

Online real estate companies probably wish agents weren't necessary and that they could go directly to consumers -- and agents probably wish the online disruptors would just go away.

  • But both forces operate in a tentative equilibrium, not necessarily liking each other, but able to work together to achieve a common outcome.
     

  • Which leaves real estate agents as the last mile solution -- the unavoidable, indisputable, and irreplaceable central part of the transaction.

Watch my enitre keynote, Pandemonium, to hear more about the industry's Netflix vs. Blockbuster moment and what a receding tide reveals about business models and true intentions. Enjoy!

Zillow’s Listing Showcase Opportunity

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As Zillow's Listing Showcase rolls out, it’s becoming clear that it will play a central role on the seller side of the business as it unlocks new premium revenue streams.

Why it matters: Zillow’s goal is to double its revenue and customer transaction share by 2025 – a significant undertaking – and Listing Showcase appears to be a foundational component of that strategy.

 
 

Listing Showcase is sold to agents on a subscription basis, and each geographic “zone” has a limited number of subscriptions available.

  • One subscription includes five new Showcase Listings per month (which include photos, a 3D tour, interactive floorplans, and enhanced visibility).
     

  • Subscription prices vary by thousands of dollars depending on the market, but the average appears to be around $3,000 per month.
     

  • Exclusivity is an important cornerstone of Listing Showcase: It’s possible for one agent or team to purchase all of the available subscriptions in a zone.

The revenue opportunity is significant, measured in hundreds of millions of dollars per year.

  • Assuming six million total listings per year, converting five percent of them to showcase listings at an average subscription of $3,000 per month, the revenue potential is $180 million per year (Zillow’s existing premier agent business is about $1.2 billion).

 
 

And by the way: Listing Showcase doesn't cannibalize Zillow's existing business – listing pages still have tour requests which are routed to paying premier agents. 

 
 

Perhaps most importantly, the launch of Listing Showcase gets Zillow’s paying customers on the premium product flywheel, a concept very familiar to its international portal peers.

  • Once customers start paying for premium placement (listings and exposure), they usually end up paying more and more over time.
     

  • This is ARPL (average revenue per listing), and it keeps going up, driven by consumer demand and agent exclusivity – it’s the growth engine of international real estate portals like REA Group in Australia, Rightmove in the U.K., and Hemnet in Sweden.

 
 

Zillow's goal is to double its customer transaction share – a transaction that Zillow monetizes – from three to six percent of the market.

  • Zillow reported that it had five percent of buyer customer transactions in 2021, and, as outlined above, if it's able to capture five percent of seller listings, the goal of six percent of all buyer and seller transactions is within reach.

 
 

The bottom line: Up until now, the path to Zillow's lofty goals hasn't been entirely clear – but Listing Showcase is providing tangible clarity. 

  • Listing Showcase doubles down on what the business actually is (a high-margin online advertising platform) and not something it isn’t (an unprofitable, low-margin iBuyer or mortgage company).
     

  • In other words, Listing Showcase is strategically aligned to Zillow’s DNA and sustainable competitive advantage; it is competing where it can win.

Zillow’s Most Interesting Product

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In a year dominated by a confusing market, major advances in AI, and disruptors fighting for survival – Zillow has arguably released its most ambitious product since iBuying: Listing Showcase. 

Why it matters: Listing Showcase represents a new business model – from pay-per-lead to pay-per-listing – which is aligned to how Zillow’s very profitable international peers monetize their market-leading positions.

 
 

The Listing Showcase product promotes a specific listing with larger photos, enhanced agent branding, and premium placement in search results.

  • It’s also exclusive in each market, providing participating agents a unique advantage over other agents (“only my listings are enhanced in this market, making your property stand out”).
     

  • The result is a high profile listing with strong agent branding, ideally leading to more seller leads for partner agents.

 
 

Dig deeper: For years, seller leads have been the mythical holy grail of online real estate – incredibly valuable, but very difficult to generate at scale.

  • One surprise of the last five years was iBuying, which despite its challenges, turned out to be a great way to generate high quality, high intent seller leads (read more: Zillow's billion dollar seller lead opportunity).
     

  • Before it was shut down, Zillow Offers was generating tens of thousands of valuable seller leads per month.

 
 

Like its overseas peers, Zillow is using the concept of scarcity to increase the value of Listing Showcase; if it were available to any agent willing to pay, it would confer no unique advantage – but offered on an exclusive basis, the value becomes exponentially higher. 

  • Without an MLS, nearly all international portals charge agents (or home sellers) on a pay-per-listing basis, with multiple tiers of enhanced exposure.
     

  • Australia’s REA Group is masterful in the art of premium listings, which always include larger photos, premium placement in search results, and enhanced agent branding – all of which are features of Zillow’s Listing Showcase.

 
 

Yes, but: By only promoting the listing agent, Listing Showcase will cannibalize Zillow’s existing buyer lead business – but that’s not necessarily a bad thing.

  • Listing Showcase is a hedge against any potential impact from the various lawsuits that may restrict or change buyer agent commissions.
     

  • It also neutralizes the threat of CoStar's "your listing, your lead" product offering.

The bottom line: Listing Showcase is a serious, credible attempt by Zillow to expand its business from selling leads to selling exposure.

  • Modeled on its international peers, Listing Showcase has the hallmarks of a classic pay-to-play premium product, which, on a per listing basis, is a significant endeavor for the company. 
     

  • At its best, it’s a potential premium revenue stream that’s good for agents (the ones that pay), consumers, and Zillow's bottom line.

Signal vs. Noise: Unpacking the “Portal Wars”

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The first quarter of 2023 saw a seasonal increase in traffic for all U.S. real estate portals and, despite the hype, the competitive landscape remains unchanged.

Why it matters: For real estate portals like Zillow, traffic – consumer eyeballs – remains the lifeblood of their strategic and unrivaled power across the industry. 

Zillow added twice the amount of monthly unique users than any other portal during the quarter.

  • Absolute users are more important than percentage gains; users turn into leads, and leads turn into money.
     

  • The number of users also increases the total audience size, which is THE most important metric for an advertising platform.

 
 

Zillow has increased its commanding lead over realtor.com during the previous year.

  • This is a reflection of the overall real estate market and a change in consumer behavior, rather than anything within Zillow or realtor.com’s direct control.
     

  • During a hot housing market with limited inventory, consumers spent more time on multiple portals, but in a cooling market with significantly less people moving, consumers are simplifying their casual searches on just one portal.

 
 

The new entrant is CoStar’s Homes.com, which was acquired in May 2021. With deep pockets, CoStar is known for its heavy advertising campaigns.

  • Homes.com’s Q1 growth of 7 million monthly uniques did not come cheap; CoStar spent $112 million across all of its consumer properties during the quarter, including an increase of $55 million “primarily for SEM advertising of our residential brands.”
     

  • SEM (search engine marketing) is buying traffic.

 
 

What’s playing out in the U.S. portal space is not unique, but the latest example of network effects and the dominant position of leading portals.

 
 

The bottom line: Once the signal is separated from the noise, Zillow’s commanding position becomes clear, despite heavy investment from competitors.

  • The hype may suggest that the portal wars are heating up, but the evidence suggests no meaningful change – in fact, Zillow’s position has become even more dominant.
     

  • Furthermore, it’s not even a war; Zillow already won.

Zillow 3.0: Is It Working?

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Zillow’s latest earnings reveal growth in its core Premier Agent business after nine months of decline – the longest in the company’s history – a promising result of Zillow’s new strategy.

Why it matters: The next iteration of Zillow revolves around a back to basics strategy of generating more leads and monetizing those leads through an integrated consumer experience (a super app).

  • But a change in financial reporting will make it more difficult to track the various components of the business on its journey to building that super app.

Zillow’s Premier Agent revenue increased during the first quarter of the year, breaking a nine-month losing streak – the longest consistent revenue decline in the company’s recent history.

  • Premier Agent revenue was up 8 percent from Q4 2022 (but still down 16 percent from the heady days of early 2022, when the market was at its peak).

 
 

Comparatively, Zillow had a strong quarter – its Premier Agent business outperformed the market year-over-year and quarter-over-quarter.

  • Compared to the same period last year, overall transactions in the market were down 26 percent, compared to a 16 percent decline in Premier Agent revenue.
     

  • And compared to last quarter, market transactions were down 14 percent while Zillow managed to grow its Premier Agent revenue 8 percent – a noteworthy achievement!

 
 

Zillow’s ability to outperform the market comes down to two activities: capturing a higher percentage of leads in the market, and generating more revenue per lead.

  • Zillow’s stated goal is to double its share of customer transactions from 3 to 6 percent by the end of 2025.
     

  • ShowingTime and Flex are both designed to engage more consumers and increase conversion rates, resulting in more leads and more revenue per lead.

Zillow Home Loans is another source of revenue growth, and the company continues to invest in it.

  • The segment saw an increase in revenue during the latest quarter, but the change in financial reporting means we’ll no longer be able to see profitability for the segment – after six years of losses and two years of me writing about those losses.

 
 

Losses aside, Zillow continues to invest in its mortgage business and is hiring more mortgage loan officers (MLOs) to handle an increase in volume.

 
 

The bottom line: Zillow’s path forward is dependent on its ability to capture more leads, further monetize those leads, and attach ancillary services like mortgage – a super app leading to super revenue.

  • But Zillow’s change in financial reporting will make it more difficult to track, with any degree of granularity, which pieces of the puzzle are working well and which are struggling.
     

  • Still, the numbers (while they last) don’t lie – the company’s recent performance relative to the market underscores the powerful position Zillow occupies at the top of the consumer funnel and its ability to affect change for consumers, agents, and the entire industry.