Zillow: Killing the golden goose?

Over the past week, real estate has been dominated by news of Zillow Group’s Instant Offers. The new program, which allows prospective home sellers to receive instant offers on their homes, has been covered across the industry, with the reaction – as one would expect – largely negative.

A thought-provoking article in VentureBeat rhetorically wondered whether Zillow could “Uber-ize” the hundred-billion-dollar real estate brokerage business. The author claims that Zillow is well-positioned to disrupt the industry and capture an even larger share of the brokerage market.

All up, there’s an immense amount of interest related to Zillow disrupting or displacing the traditional real estate industry structure. It’s a huge opportunity, but one fraught with risk.

I’m going to approach this situation from two angles: my own time as head of strategy for a publicly-listed, multi-billion dollar business, and what the data tells us.

Instant Offers: offensive, defensive, or opportunistic?

The key strategic question in all of this is whether Instant Offers is an offensive, defensive, or opportunistic move by Zillow?

If Instant Offers is an offensive move and amounts to Zillow’s first salvo against the real estate industry, it’s a strange one. It’s just too far removed from the endgame of displacing real estate agents. The risk doesn’t match up with the reward.

Or, perhaps it’s a defensive move against the rapid rise of Opendoor and its growing list of national competitors. With Opendoor raising over $300 million U.S. and valued at more than $1 billion U.S., it’s difficult to ignore. But, even a disruptive operation such as Opendoor still needs to sell houses, and those houses will appear on Zillow. And with a two-percent market share in the Phoenix market, it still has niche appeal – not exactly an existential threat to Zillow.

So, the most likely answer is that Instant Offers is an opportunistic move by Zillow. It wants to capitalize on the growing consumer demand for instant home offers, and sees it as a potential new revenue stream, whereby it can collect and monetize seller leads.

This fits well with Zillow’s existing business model: It continues to operate as a marketplace, monetizes leads, and sells those leads to real estate agents. It’s a natural extension, rather than a radical disruption.

Real estate websites versus agents

Real estate websites around the globe have the same problem: a love-hate relationship with their biggest customers – real estate agents. The top sites are fighting a constant battle to extract more money from their customers through regular price rises and value-added services.

On the other hand, real estate agents pay the sites for advertising, exposure, and leads, because of the clear return on investment, but do so begrudgingly and with a sense of fear. Most agents are afraid of these sites gaining too much power, continually raising prices, and perhaps even replacing them with an online-only offering.

So, while real estate sites are best positioned to disrupt the real estate industry by displacing agents, they’re also the least likely to do so, because agents are their biggest customers and source of revenue.

Case in point: The Trade Me Property price rise. While I was at Trade Me, New Zealand’s dominant horizontal, we initiated a modest price rise for agents. It was a change from an all-you-can-eat model with a flat subscription fee towards a pay-per-listing fee. It was not well-received.

Real estate agents across New Zealand were angry. They did not take kindly to a price rise and organized themselves around our rival and No. 2 on the market, the industry-owned RealEstate.co.nz. The impact was a material narrowing of the traffic gap between both sites – arguably the most important performance indicator for a real estate website (see Network Effects for more on that). 

Source: Properazzi

Trade Me Property’s traffic lead went from five times to three times the traffic of the No. 2 rival, a huge drop. Increasing prices for real estate agents – let alone disrupting them – isn’t easy.

(Zillow’s traffic is approximately three times higher than its top competitor in the U.S., namely Realtor.com.)

I believe there are a number of critical preconditions for a real estate website to truly disrupt real estate agents:

1. A monopoly on traffic. Ideally, there is no major No. 2, but if there is, the top site needs to have a massive traffic advantage.
2. Revenue diversification. The less reliant the site is on revenue from agents, the better able it will be to withstand a revenue hit.
3. A strong brand. It should be well-known in the market and be seen as a leader in the field, the equal of any strong brokerage.
4. Online tools to disintermediate brokers. A site needs to offer all the tools and capabilities that a brokerage offers, including CRM, document signing and management, marketing and promotional tools, lead capture and management, and inventory management.

Revenue diversification and risk

Most real estate platforms capture their revenue from agents. Whether spending their own money to promote themselves or buy leads or spending their vendor’s money to advertise a property, the agent controls the purse strings.

In the case of Zillow, around 70 percent of its revenue comes from real estate agents. While not surprising, it’s still a big number that reflects a poor level of diversification. Furthermore, as we can see below, that number as a percent hasn’t changed over the past four years. Zillow does not look like a business trying to diversify its revenue.

Zillow fully believes it is at the beginning of its journey, not the end. It sees plenty of runway left to grow its revenue even higher as more spend goes online. And the numbers prove it: revenue grew 31 percent from FY 2015 into FY 2016, higher than any of its global peers.

In other words: Zillow is making a ton of money with its current business model and sees plenty of growth left. Why put that at risk and kill the goose that lays the golden eggs?

We can also see that Zillow’s revenue share from agents is on par with its global peers. Most of the major players illustrated above receive between 65 percent and 75 percent of revenue from agents. 

Zoopla, the single exception, has taken a proactive strategy to diversify its revenue streams away from agents. In 2015, it acquired uSwitch, a price comparison business, for £160 million and the acquisitions have continued at a brisk pace since then, all in an effort to expand along the value chain and become a one-stop-shop for consumers and real estate professionals.

As opposed to Zillow, Zoopla looks like a business that is diversifying its revenue streams. With that clear strategy in place, revenue diversification has followed.

Of all the major real estate websites in the world, Zoopla is best positioned from a revenue diversification standpoint to disrupt the industry.

Given what we know about its strategy and what the data shows us, I consider it unlikely that Zillow is making moves against the industry. The existing business is just too lucrative with plenty of growth left to put it all at risk.

Rather, Instant Offers is about giving consumers choice, expanding the existing lead marketplace, and a new source of revenue with seller leads. It’s also just a test.

Zillow is not well-positioned to make a big move against the industry. Its revenue is not diversified and there is a strong No. 2 on the market.

Regardless, Instant Offers should be instantly interesting to all of the major real estate websites around the world. It’s capitalizing on a pro-consumer offering that can make these sites more valuable to consumers around the world. I guarantee many – myself included – will be watching this test with great interest.

Zillow: Is profitability in sight?

What’s interesting in the Zillow Group results for Q1? Here are highlights, with charts and commentary. In a nutshell:

• Zillow continues to edge toward profitability, with overall expenses coming in line with revenue.
• Overall revenue growth is re-accelerating, matched by increased spending on sales and marketing.
• Technology-and-development spend has slowed considerably, contributing to slower overall expense growth.

First: The profitability chestnut. Cutting out all the noise for a moment (including stock-based compensation), let’s focus simply on revenue and expenses.

One of the biggest questions for Zillow is: Can it turn a profit? Zillow has lost millions of dollars during the past few years and has yet to turn a profit, even though it’s on track to generate more than $1 billion U.S. in revenue this year.

So, any signs that give clues to whether Zillow can and will become profitable are quite relevant. Zillow has done a good job over the past three quarters; expenses are finally matching revenue.

Quarterly revenue growth has picked up steam as well, up from a relatively slow Q4. In Q1, revenue was up 8 percent from Q4, and 32 percent from Q1 in FY2016.

In particular, the sales and marketing expense is quite illuminating. While Q1 revenue was up 8 percent from the previous quarter, expenses were up 9 percent overall and the sales and marketing expense was up 18 percent.

In absolute terms, revenue was up $18 million U.S., expenses were up $19.7 million, and sales and marketing $15.8 million.

But, looked at over the past year, the story changes. Compared to the same quarter last year, revenue is up 32 percent, expenses up 10 percent and sales and marketing 7 percent.

Again, looking at year-over-year growth in absolute terms, revenue was up $60 million, expenses $22.6 million and sales and marketing up $6.8 million.

Looking further, we can see a rough proxy of how effective sales and marketing spend is in driving revenue. For the past several quarters, each dollar spent on sales and marketing generates from $2 to $2.50 in revenue. And it’s slowly trending upwards.

There was a big increase in sales and marketing spend in Q1 of FY2017, so relative effectiveness has dropped slightly. But, overall it’s a good direction to be heading in — upward, that is.

Another interesting metric is technology and development spend. It’s finally leveling off. In fact, it’s flat when compared to the previous quarter.

Technology is surely a critical component of Zillow’s consumer and customer proposition, so tech spend will always remain high. But, if you’re anxious for Zillow to turn a profit, the relatively flat growth is an important factor and a good signal.

Overall, it was a good quarter for Zillow. Not simply for the headline revenue growth, but for the drivers behind it, that signal a meaningful turn for the company towards sustained profitability.

Observations on Zillow's 2016 results and the U.S. market

Hey, Zillow! Thanks for reporting your full year financial results for 2016. It provides a great opportunity to update my international property portal analysis and draw out a few observations on the U.S. market.

Let’s start with EBITDA

The first thing we need to understand when talking about Zillow is its EBITDA. As I have written in the past, Zillow reports non-GAAP “Adjusted EBITDA” numbers, which exclude stock-based compensation (SBC) costs. Many large U.S. tech companies now include SBC costs in their numbers, which is the generally accepted part of GAAP (generally accepted accounting principles). It’s also necessary to do this for an apples-to-apples comparison to international property portals.

Zillow’s 2016 Adjusted EBITDA is $144.8 million. Once we include SBC costs of $106 million, that drops down to $37.9 million. If we then include the negative impact of the $130 million litigation settlement with News Corp, we arrive safely in negative territory. But for comparison purposes, we’re going to stick with an EBITDA of $37.9 million; the litigation settlement was truly a one-off.

With 2016 revenues of $846 million and EBITDA of $37.9 million, Zillow has an EBITDA margin of 4.5% (far less than its reported 17% using Adjusted EBITDA numbers). As you can see below, that margin is well-below international peers.

Zillow claims that it can reach 40% EBITDA margins “at scale,” which is on par with its international peers. I suspect that number is using Adjusted EBITDA figures, which would not be an apples-to-apples comparison with the peers above.

I highly doubt that Zillow can go from an EBITDA margin of 4.5%
to an EBITDA margin of 40%. 

Zillow is projecting 2017’s revenues to crack $1 billion with Adjusted EBITDA of around $200 million. Assuming stock-based compensation costs of $110 million, that implies an EBITDA of $90 million and EBITDA margins of 8.7% -- nearly double 2016’s levels.

The chart below shows Zillow’s Adjusted EBITDA and EBITDA margins over the past 4 quarters. There was a big jump into profitability in the third quarter of 2016, which has subsequently levelled off in the fourth quarter.

A $200 million Adjusted EBITDA in 2017 looks pretty similar to extending the last two quarters out for the entire fiscal year (the blue line in the chart above), with around $50 million of Adjusted EBITDA per quarter. That implies a relatively flat trajectory when it comes to earnings (in other words, expenses will track higher with revenues).

But does it scale?

I’m interested in understanding how well the Zillow business model scales. When I think about scaling, I think hockey stick curves where revenue grows at a faster pace than expenses. Making more money by spending the same amount – that’s scaling. (For more on scaling in real estate, see Purplebricks results show promising trends written by yours truly.) 

The chart below shows historical revenue and expense growth. In 2016, revenue and expenses both grew at 31%. I’ve forecasted 2017 below based on Zillow’s revenue and Adjusted EBITDA guidance, which implies revenue growth of 23% and expense growth of 13%.

If Zillow can pull that off, it shows the business model has the ability to scale. But judging its historical numbers only, the graph is pretty clear – it’s not scaling; expense growth is keeping pace with revenue growth.

If we look at the previous seven quarters, we see another story of revenue growth. There is no accelerating upward trajectory; in fact, growth is slowing down. 

Going macro

I find it helpful to look at revenue potential from a macro level. How much more room is there to grow revenues in the U.S. market?

Let’s look at the average monthly revenue per advertiser (ARPA). The chart below highlights Zillow compared to international peers and suggests a nice uptick in ARPA, placing Zillow in the middle of the international pack. But it also suggests incremental, rather than exponential, room for growth.

Zillow is again middle of the pack when it comes to revenue per employee. This suggests a limited ability for Zillow to monetize on a radically different expense base (in other words, it probably can’t extract much more revenue without adding more expensive headcount).

At a high level, 2016’s results have moved Zillow up in the pack when it comes to overall monetization relative to population size. In the chart below, REA Group, Domain, and Trade Me Property all operate in a vendor-funded market (meaning home sellers pay for marketing costs, not agents). So Zillow is again middle of the pack for peers in the remaining markets. 

At a macro level and compared to its international peers, there is little to suggest that Zillow can achieve an outsize revenue growth going forward. 

Zillow and the U.S. market

To wrap up, there are a few observations that stand out from Zillow’s results and the overall international analysis:

• We can’t use Zillow’s “Adjusted EBITDA” numbers; it doesn’t paint an accurate picture of the business.
• 2017 is the year when Zillow can prove its business model scales. There is very little in the data above to suggest that revenue growth can materially outstrip expense growth.
• Zillow can and will be profitable, but it will be from relatively low margins on a large base. It will be difficult to reach its intended 40% Adjusted EBITDA margins, let alone anything close to that when you include stock-based compensation costs.

Key insights from a global property portal analysis

I'm big fan of data and an even bigger fan of data visualizations. I track a lot of data on the major property portals around the world. Today, we're going to look at three key insights from that analysis.

If you follow my writing you've seen this first chart before. It shows a financial comparison of the major property portals. This time around, the major change is an effort to present a true apples-to-apples comparison by normalizing EBITDA -- by using generally accepted accounting principles and including share-based compensation as a true cost.

Source: annual reports, company presentation and analyst coverage. All information based on the last full year's results (2015 or 2016).

This has the immediate effect of worsening Zillow Group's 2015 financial results, and making it the only major portal to lose money. But it also leads to the first insight...

Insight #1: Zillow Group is at a turning point

Stock-based compensation (SBC) is the practice of compensating employees with stock instead of cash. According to generally accepted accounting principles, or GAAP, this form of compensation should be included as a cost. But when Zillow Group reports earnings, it does so as "Adjusted EBITDA," which is non-GAAP, and does not include stock-based compensation as a cost. Large technology companies like Amazon and Facebook now admit stock compensation is a normal cost. For a true apples-to-apples financial comparison, we need to include these costs.

The issue is that Zillow Group issues a lot of stock to compensate its employees! Over $105 million in 2015 alone, or 16% of its total revenue. Compared to peers around the globe, that's a big number we can't ignore.

Source: annual reports and company presentations.

We should also consider Zillow's latest quarterly returns for more recent trends. In the chart below you will see its reported EBITDA numbers excluding and including share-based compensation (SBC). It's the difference between profitability and unprofitability.

Source: Zillow Group's quarterly results.

The last three quarters show a promising trend of profitability! Even when including stock-based compensation costs -- which forms a more accurate picture of financial health -- Zillow is finally managing to turn a profit.

In its last full financial year, 2015, Zillow was growing on-par with its global peers (as per below).

Source: annual reports, company presentations and analyst coverage. All information based on the last full year's results (2015 or 2016).

But if the last three quarters are anything to go by (as per below), we can expect Zillow to pull ahead of the pack in a very meaningful way when it reports its 2016 full-year financial results.

Source: Zillow Group's quarterly results.

The signs are promising for Zillow. Revenue growth is accelerating and it's demonstrating an ability to turn a profit, even when including share-based compensation costs. It's at a turning point and should be watched closely.

Before we leave Zillow for our next insight, it's worth throwing in the following chart on board of director composition.  I believe diversity is fundamentally important.

Source: company annual reports and investor web sites.

Why so blue, Zillow?

Insight #2: REA Group is a true global leader

I often speak about REA Group being a global leader, but the data below shows just how much they're blowing everyone else out of the water. Let's start with the average revenue per advertiser (ARPA) below.

Source: annual reports, company presentations and analyst coverage. All information based on the last full year's results (2015 or 2016).

This shows just how effectively REA Group is able to monetize its advertiser audience in Australia. But it's not just the absolute ARPA number that is impressive, but the annual growth.

First we're going to look at ARPA growth rates among its global peers. The other major players around the world are growing nicely, with a promising uptick for Zillow Group.

Source: annual reports, company presentations and analyst coverage. All information based on the last full year's results (2015 or 2016).

But it's not until you add REA Group to the mix that you realise how astronomical its growth is compared to global peers. Not only is ARPA significantly larger, but it's growing at a faster pace.

Source: annual reports, company presentations and analyst coverage. All information based on the last full year's results (2015 or 2016).

REA Group generates more profit than any other property portal in the world. It's worth a quick shout-out to Rightmove, though, for being an incredibly efficient operation and having the highest profit margin of the major portals. Revenue per employee illustrates this perfectly.

Source: annual results and company presentations. Trade Me Property and Zoopla are educated guesses based on available information and the broad nature of the larger groups.

Insight #3: Property portals are not winner-takes-all

With a clear leading portal in each market, there exists enough room and marketing spend for a viable #2 player to emerge. I've opted to look at total population below because the data is easily available. It's much more difficult to find an accurate number of transactions in each market.

Source: annual results, company presentations and Google. Axel Springer includes Germany, France and Belgium. SeLoger is not broken out separately for France, which would likely result in a much higher number.

REA Group and Domain are the #1 and #2 property portals in Australia, and Rightmove and Zoopla are the #1 and #2 portals in the U.K. The top portals are able to monetize between 1.8 and 2.3 times higher than the runner-up portal in each market. This is reflective of both absolute revenues as well as ARPA.

It's worth noting that Australia and New Zealand (Trade Me Property) operate in a "vendor funded" market, meaning that home sellers -- and not real estate agents -- pay for advertising on the portals.

2017 is going to be an interesting year in the property portal world. Will Zillow Group successfully turn the corner of profitability? Will REA Group's momentum in Australia continue? And how will the #2 players in each market grow?

How property portals are expanding across the value chain

Big property portals around the world have built their businesses off of advertising. Much like the classified sections in the newspapers they replaced, portals like Zillow Group in the U.S. and Rightmove in the U.K. offer the most prominent way to advertise properties for sale.

But in an effort to grow their revenue streams and provide more value to consumers, many of the portals have added other verticals in addition to advertising, looking to develop other services a home seller or homebuyer might need. They are expanding across the value chain.

As an example, one of the big areas of focus over the past few years has been valuation and data services. The first step in many home selling journeys involves a home value estimate. So, many portals have begun offering this information to consumers through automated valuation models (AVMs), a computer-generated model based on a mix of publicly available information and portals’ listing data. Zillow’s Zestimates are a good example of this.

While I was serving as head of strategy at the New Zealand property portal and classifieds site Trade Me, we invested in Homes.co.nz, in part, for this reason (I left Trade Me in January to pursue other interests after four years at the firm). Trade Me recently launched Property Insights, which offers home valuations for properties across New Zealand. It was a calculated, strategic move to expand the value offered to consumers beyond advertising and increase overall value in the market in the process.  

For this article, I look at how the big property portals in the U.S., U.K., Australia and New Zealand have expanded across the value chain. By tracking past and current trends, some commonalities emerge. Based on these, I’ll also suggest future ones.

Current verticals where portals are expanding their focus

Data and valuation verticals have been a key area for portals for the past few years. In addition to Trade Me’s efforts, Zoopla announced a partnership with property research startup Property Detective earlier this year, Zillow has had its Zestimate since 2006, and REA Group launched a tool to show estimated home values for all properties in Australia in 2015.

Home services and repairs is also a big area of focus, and potentially lucrative. Many of the big portals are making moves into this space, with marketplaces that connect tradespeople with homeowners that take a clip of the ticket along the way.

In December 2015, News Corp. (REA Group’s parent company) paid $40 million for a 25 percent stake in HiPages, an Australian online marketplace for tradespeople.

And just a few months later, Fairfax Media’s Domain Group (the No. 2 property portal in Australia) acquired a 35 percent stake in Oneflare, a similar tradesperson marketplace, for $15 million.

Antony Catalano, CEO of Domain Group, told startupdaily.net that the investment is “part of our strategy to broaden our offering to consumers and agents across the property lifecycle, into home improvement and local trade services.” It’s also a huge revenue pool, with both businesses tapping into a $100 billion local services market in Australia.

If we go back to the color-coded chart above, I wouldn’t be surprised if a few of those reds in the home services category flip to yellow or green over the next 12 months.

The rationale for expansion

At Trade Me, one reason for our desire to expand across the value chain was to extend and expand our relationship with consumers outside of the actual homebuying and selling experience. If the utility a property portal provides consumers occurs on a more regular basis, the more likely they are to come back to the portal when it’s time to sell their home and buy another one.

Growing revenues is another motivating factor when looking to expand. Many property portals see a relatively limited runway of growth in the core advertising business. Once they mature and capture a large market share, what else is there to do but slowly raise prices over time?

Expanding into adjacent services that complement the core advertising proposition makes sense. It provides consumers with more value, streamlines the entire process, and allows the property portal to tap into new revenue streams.

Another key reason for the desire to expand -- and a bit of a dirty little secret -- is that it’s exciting! If there are a bunch of Type A personalities running a property portal and setting strategy, it’s quite boring to travel the same track and look for small, incremental efficiencies. It’s sexy and exciting to try new things, especially for the types of individuals in these positions (and I’m just as guilty as the next person).

The Rightmove situation

Unless you’re color blind, you might notice that the Rightmove column in our chart is nearly all red, meaning it hasn’t expanded across the value chain. But wait, I can hear you asking, isn’t Rightmove a global leader in the property portal space?

It is, and as I discussed in my previous article on the investment strategies of the major portals, it has a narrow and focused strategy on its core advertising proposition. Zoopla, the No. 2 player in the U.K. market, has the opposite strategy. It aims to be the one-stop shop for consumers, aggressively expanding across the value chain in the process.

So we have the top two players in the U.K. with completely different strategies. We should be able to see which approach is the winning one, right?

My analysis leads me to believe that Zoopla’s strategy is a result of its market position, rather than the cause of it. In other words, because Zoopla has always been the No. 2 underdog in the market with its potential of dislodging Rightmove extremely unlikely, management opted for an alternative strategy to differentiate its offering.

So, in the end there is no clear winning strategy. Or rather, both are winning strategies. But what is clear is that the big portals focus on their core proposition and completely nail it before expanding across the value chain.

Future focus areas

If I consider future trends and where the big property portals are and will be spending more effort, two emerge: the mortgage and insurance space.

Zillow Group does a great job of this with its mortgage rate comparison service, and Zoopla made a big move in the space with its £160 million acquisition of uSwitch (which has a mortgage comparison service) and its investment in startup Trussle to speed up the entire mortgage process.

These two areas represent the biggest potential revenue pools across the entire value chain. Everyone is talking about them, but not everyone is doing something in that space. It’s difficult to execute on because of the inherent complexity and well-established incumbents.

During my time at Trade Me, we launched a big effort in the insurance space with Trade Me Insurance. We partnered with an existing player in the market and worked together to launch a Trade Me-branded insurance product. It was a considerable undertaking and represents a big, long-term bet in insurance.

Where to place your bets

Another way to view the value chain is as a roulette wheel. If you’re a property portal, startup, or VC investor, where should you place your bets?

I would do three things:

• Place the biggest, long-term bets on mortgages and insurance. It’s the biggest revenue pool and ripe for new solutions that reduce friction. Property portals are ideally placed close to the transaction where they can add real customer value.
• Place the second-largest, short-term bets on home services and repairs. The Australian market is locked up with REA Group and Domain active in the space, but there’s still room for a big property portal tie-up in the U.S., U.K., New Zealand and Canada.
• Stay away from other categories like moving, home inspiration, agent profiles and conveyancing. These all sit on smaller revenue pools, face strong competition from global giants (Houzz), or offer limited value to consumers from a property portal’s perspective.

Expanding across the value chain is a smart strategy that will continue in mature and emerging markets for the years to come. There will always be outliers like Rightmove, but for now, it is the exception to the rule.

Zillow Group: not quite a global leader

Many Americans, myself included, tend to think that the U.S. is the leader when it comes to online businesses. With established tech giants like Google and Microsoft and emerging players like Uber and Airbnb, they can’t be blamed for thinking the U.S. is the home of online.

But this is not the case for my area of specialisation, online property portals. The market leader in the U.S. is Zillow Group, but what may come as a surprise to many is that they are not the global leader in the space. In fact, the U.S. market is significantly behind other markets like the U.K. and Australia when it comes to business model maturity.

Comparison on a global stage

I included the following financial snapshot in my previous article on the investment and acquisition strategies of the major property portals around the world:

Subsequently, I asked the rhetorical question, “Why is Zillow so far behind in terms of profitability?” That’s exactly what I decided to take a look at today, by digging deeper into a few areas of comparison.

The profitability question

Zillow Group has the highest revenues of the major property portals around the world, but significantly lags in profitability. In fact, on a standard cash-in/cash-out basis, they are not profitable.

I prefer to look at full year results, as it’s a longer time period and presents a more complete picture than quarterly results. In 2015, its last full financial year, Zillow reported revenues of $644 million and expenses of $794 million.

In other words, they only collected $81 for every $100 spent.

Rightmove, the market leader in the U.K., collects $350 for every $100 spent. They are an exceedingly profitable business.

And I’m not just cherry picking by comparing Zillow to Rightmove. For every $100 spent, REA Group in Australia collects $266, Trade Me in New Zealand collects $277, and Zoopla in the U.K. collects $183. These are all profitable businesses that represent a positive return on investment.

So why is Zillow lagging so far behind?

Revenue growth

The U.S. market is significantly bigger than the U.K. and Australia. So perhaps Zillow is just earlier on the growth curve, right? Let’s take a look.

Again, based on the last full year’s financial results, Zillow’s pro forma revenue (which reasonably includes Trulia) grew by 18%, compared to Rightmove’s 15% and REA Group’s 17% (for their Australian operations only; total group was 20%).

So on that basis, the growth curves are not wildly different at all. But if you go more granular and dig into Zillow’s last six quarters, you get a different picture of accelerating revenue growth. The real test will be to look at their full 2016 financial results.

On a full year basis, they are basically growing at the same rate as the other big international portals. But their recent quarterly results suggest faster growth in 2016.

Employee count

Another aspect to look at is the average revenue per employee. At last count, Zillow employed around 2,500 people compared to around 400 at Rightmove. That’s about $260k/employee at Zillow compared to $600k/employee at Rightmove.

If Zillow were to achieve the same level of efficiency by doubling their revenues on the same cost basis (extremely unlikely), they would be collecting $162 for every $100 spent - a big improvement!

Monetising their customers

One last area to examine is the monthly average revenue per advertiser (ARPA) - effectively how much their customers pay for their services.

It’s difficult to get matching time periods, but here are the most recently reported ARPA numbers for Zillow, Rightmove and REA Group in the 2015/2016 timeframe. Clearly the international portals are able to better monetise their services than Zillow.

I would argue this is a factor of business model maturity. All markets have significant competitive tension. In Australia, REA Group greatly benefits from a vendor-funded marketing environment (where home sellers pay for marketing directly). But clearly Rightmove and REA Group simply have more experience and expertise around monetisation.

Followers, not leaders

It is not my intention to disparage Zillow. My point is to properly place them in a broader, international context, and acknowledge that they (and the U.S.) are not market leaders in this space.

Many people don’t realise that the U.S. is behind in the property portal space. Zillow is not on the leading edge. The clear market leaders are not in the U.S., but the U.K. and Australia, and there is a lot we can - and should - learn from them!

How the world’s top real estate portals think about innovation

Innovation is a tricky, vital component for every firm, and the world’s largest real estate portals are no exception.

I thought a lot about innovation during my four-year tenure as head of strategy at New Zealand’s leading property portal Trade Me. Much of my time centered on identifying and growing new ventures.

When I joined the business in 2012, it had about 300 employees. I used to say there were 299 people focused on growing the existing business and one (me) focused on growing new lines of business.

That was a big portion of my attraction to Trade Me and the role in the first place. I was intrigued by the idea of running a “conveyor belt of growth,” as the job description stated. I quickly learned that innovation at a large, publicly-traded business is vital, for reasons I didn’t fully realize until years later.

Why is innovation important?

Many assume, of course, that innovation is important at a big corporate, but rarely ask why.

The answer, in my eyes, boils down to relevance. The world moves lightning-fast; if you stand still too long, you die. Innovation isn’t a luxury; it’s standard operating procedure for any business.

But you can’t simply go to your teams, announce your intent to innovate and rejoice when the magic begins. You need to focus your efforts in the right areas, where you have a strong competitive advantage or existing network effects. In other words, areas that will naturally multiply your efforts.

For example, at Trade Me we knew when people were looking for new homes or browsing for vehicles. That was our competitive advantage. So we acquired an insurance-comparison business and launched a new insurance brand.

Innovation vs Execution

Execution is a critical component of effective innovation, a fact easily overlooked. Ideas are a dime a dozen; execution animates innovation but it’s where most companies fall down.

In a big company, new ideas come from all sources like water out of a firehose: customers, employees, market scans, books, board directors. Everyone has ideas, and they’re rarely unique.

Execution is the critical component of successful innovation. It breeds winners. Mismanaged ideas mire leaders with deadly false hopes. Those who execute on a new idea best, succeeds. It’s simple: if you want to improve innovation, focus on execution (more on this later).

The differing models of innovation

Large firms can tackle innovation in a number of ways. Below isn’t an exhaustive list, but how we thought about and considered innovation at Trade Me:

• Run an internal skunkworks team. This is the sexiest option. Who doesn’t love the idea of a small, elite group of contributors in a dimly lit side office working on the next big thing. On the plus side, you have dedicated resources working on new, new, new all the time. On the downside -- it’s very easy to fly off the rails without proper oversight.
• Corporate venturing. This was the strategy at Trade Me while I was there. We regularly scanned the market and made opportunistic investments and acquisitions in interesting businesses. Once we made an investment, we worked with the firm’s leaders to supercharge their company. Our big goal: make 1+1 equal 3. (Big not-so-secret secret: it doesn’t always work out.)
• Work with local innovation aggregators. Find your local incubator or accelerator programs, scout for new opportunities and help promising startups. This can be a great place to find talented people and nurture promising ideas. This tactic marks a much earlier stage than corporate venturing and requires patience.
• Internal hackathons. Shut your entire company down for a number of days and get everyone working on prototyping new ideas. At Trade Me, we held 24-hour hackathons twice a year. It’s a great way to get ideas flowing and increase motivation and excitement, but the outcomes are usually smaller and more incremental and can suffer without proper follow-up.
• Nothing. Just acquire businesses or potential competitors when they get big enough. Let the market do the hard work for you by vetting new ideas, teams and execution. You’ll pay a higher price for the business, but with the higher price comes a higher certainty of success.

The challenges of corporate venturing

All big corporates face many innovation challenges. In my opinion, the biggest is always attention. How do new programs with uncertain outcomes compete against known opportunities with more certain results? As a CEO, I would much rather put my resources behind an initiative I know will pay off, rather than one that might pay off. That’s the innovator’s challenge.

Based on my experience as an entrepreneur and corporate ventures guy, I recommend segregating resources to solve this inherent perceived value disconnect.

Commit most of your resources to your existing businesses, but set aside resources, time and effort for the new stuff: 1 percent, 5 percent, 10 percent -- whatever you think makes sense for your business. Make the delineation in your mind, keep the two separate and stick with it.

One of the other big problems we faced at Trade Me was our small market. With a population of approximately 4.5 million, New Zealand has a smaller number of potential startups and entrepreneurs available, in addition to low deal flow.

The inherent challenge of working with startups narrowed our opportunities further. In my venturing, I found that startups don’t like to solve your problems; they like to solve their problems.

So what about everyone else?

When I left Trade Me in 2016, I knew deeply how we thought about innovation. But, like my interest in how other major property portals look at investments, I am intrigued by how other major portals think about innovation. How important is it to them? What processes do they have in place to efficiently execute on it?

Let’s take a look!

Innovation at three of the world’s top property portals

Trulia’s Innovation Weeks

When Zillow and Trulia combined forces in February 2015, they became the dominant real estate portal in the U.S.

Although they’re united under Zillow Group, they operate separate consumer teams. Each brand sets a week aside each quarter for innovation. Trulia calls it “Innovation Week”; Zillow calls it “Hack Week.” It’s a time for their teams to dream big and develop new products and features.

“Our culture emphasizes autonomy and innovation,” said Jeff McConathy, Trulia’s vice president of engineering. “Anyone can participate in an Innovation Week. You don’t have to be in a technical role or an engineer.”

Trulia sees this as dedicated time for all employees to experiment with new product ideas or work on pet projects they’re passionate about.

“We like to encourage employees to work with new technologies and new teammates so they can hone new skills and engage with colleagues they may not interact with on a daily basis,” Jeff said.

Each Innovation Week has a theme. When I visited earlier this year, the theme was personalization and user behavior.

The event starts the week before with a pitch party, where participants pitch their project ideas to the group. A social mixer follows to encourage team formation.

During Innovation Week, senior leaders and subject matter experts make themselves available with scheduled office hours. Trulia also trains teams on public speaking and designing pitches.

The Monday after the week of hacking -- where all participants are encouraged to put aside their normal job tasks and to avoid scheduling any unrelated meetings -- teams present their work at an event open to all in the company.

A panel of judges and the audience choose the winners. Judges pick a theme winner and the audience picks three winners: first, second and third place. The theme and first place winners work with Trulia leadership to get their ideas on the release roadmap.

Last year, teams presented more than 120 projects. Five Innovation Week projects have already shipped this year: updated Local Info Pages, Rent Near Transit, Trulia bot for Facebook Messenger, Trulia for Apple TV and Quiet Streets Map.

In addition to the week dedicated each quarter to innovation at its largest consumer brands, Zillow Group also practices a good deal of corporate venturing through acquisitions of related businesses. It also maintains strong ties with the startup community through formal relationships with two U.S. real estate tech accelerators: MetaProp NYC in New York City and Elmspring in Chicago.

Earlier this year, Zillow also hosted MetaProp’s demo day at its San Francisco offices.

REA Group’s Big Idea

Leading global digital business REA Group, parent company of Australia’s realestate.com.au, has several innovation programs.

REA Group Chief Technology Officer Tomas Varsavsky summed up his firm’s position: “We disrupted the industry 20 years ago, now we’re the incumbent to get disrupted.” Innovation is already in the DNA of the company, but its innovation programs -- it hopes -- will help it stay ahead of the curve.

Similar to Trulia and Zillow, it runs quarterly three-day hackathon events it calls “REA.io.” It encourages its employees across the globe to work on anything during these events -- even projects that aren’t directly related to the firm’s business. “It’s as much about the culture of the company as about the ideas,” Tomas said.

The firm also runs a small “Innovation Team” focused on consumer tech. It’s an internal team that plays with virtual reality, augmented reality, 3D modeling, a HoloLens, drones and more to help keep the firm on technology’s bleeding edge.

But the big idea came two years ago.

In an effort to bridge the gap between an idea that’s too big for a two-to-three-day hackathon and a business-as-usual product roadmap, it launched “The Big Idea” in May 2015.

The event starts with a company-wide call for project ideas -- typically bigger, more ambitious and more disruptive than hackdays projects. Dozens of ideas pour in not only from tech pros, but also the firm’s salespeople, marketers and those in its legal department. The firm posts those ideas for all employees to view and reviews them on a global scale. Eventually, it filters the ideas to six finalists.

REA Group then holds a “Shark Tank”-style event where the finalists pitch their ideas. The panel picks a winner (or winners) who receive $100,000 and 60 days to develop their idea into a working prototype. The company provides resources -- both internal and external -- to help the teams succeed.

The first year employees submitted over 40 ideas. This year they submitted over 60. “I was worried that we’d use up all of our good ideas the first year, but there was very little overlap and repeat ideas the second time around,” Tomas said.

For example, this year’s winner Linda Brunetti, a digital engagement consultant from REA Group’s Corporate IT team, is preparing to kick-off her project.  She’ll get support from one of REA Group’s existing lines of business, an exec-level mentor, internal IT resource, and a connection to an agency to produce a minimum viable build. In addition, she gets two months off from her day job to focus on the project.

Tomas has some advice for other companies thinking about rolling out innovation programs: “People often get caught up on the ROI of a hackday, but the culture you’re creating and the signals you’re sending companywide are just as important. Everyone is an innovator and we’re going to create space to make it happen.”

Rightmove’s Head of Innovation

Rightmove, the U.K.’s top real estate portal, is the only major portal I found with a dedicated head of innovation. A big part of Hannes Buhrmann’s job is to experiment with new consumer ideas the firm may want to implement in the near future.

To accomplish this, Hannes typically works with external teams.

“My focus is to conceptualize and validate the propositions,” Hannes said. “Sometimes that validation might consist of user research, clickable prototypes, functional prototypes and, at times, deploying fully functional features in a closed alpha or beta environment.

“When developing fully functional features, we specifically assume that the code will eventually be thrown away,” Hannes added. “This is for two main reasons: speed of development and avoidance of polishing something that may fail as a consumer proposition. The basic approach is fail as fast as possible, and as cheaply as possible.”

Hannes’ team’s inspiration for its innovation efforts include:

• To aid Rightmove’s overall business objectives
• To better understand the broader competitive environment (i.e. not only what other portals are doing, but also what other companies are doing within the property vertical, whether established or startups)
• To uncover technological advances that present new opportunities for disruption

In general, the firm focuses on ideas and technologies that it can produce in the near term, not blue sky stuff.

For example, the team is currently toying with a “Where Can I afford to Live?” tool. It’s live in early alpha here (best viewed on a desktop). It’s rough around the edges and has some usability issues, but that’s the point. The goal is to get stuff out early, pull in feedback, plan next steps and release frequently.

Like the others, Rightmove also runs a hackathon event. The annual three-day event has been going for over a decade.

Making innovation work for you

While innovation is all about execution, success doesn’t happen without a smart framework to cultivate it. Like Trade Me, many of the top portals have structured programs designed to encourage innovation and build a culture of experimentation. Then they pump promising ideas through the execution engines of their larger businesses.

We held hackathons at Agora Games, the tech company I founded and ran before my time at Trade Me. It’s safe to say that the primary impetus for holding the events – and the primary outcome – was to reinforce a culture of innovation.

I’m impressed by the depth and breadth of innovation at REA Group and Zillow Group. They both run a number of different programs – from hackathons to innovation teams to a heavy involvement in the entrepreneurial scene. I’m also impressed by the massive commitment senior management at Zillow makes; one week every quarter is a big chunk of time! And given the number of projects that have launched from the event, I’d say this is a good model to follow.

A successful program requires commitment and structure.

Outside of these programs’ tangible results, the other benefits flourish. Employees receive a clear message that innovation is important. The firms maintain a vigilant eye on the future. They’re willing to make a real investment in their talent and the future of the business by supporting these programs.

When I speak to property portals from around the world about innovation, my advice boils down to three points:

• Stay plugged in to the local entrepreneurial environment (like Zillow Group does with its strong ties to the startup community)
• Hold structured innovation programs multiple times a year (like REA Group does with its quarterly hackathons)
• Devote some resource – however small – to experimentation (like Hannes’ team at Rightmove)

Doing the above will keep you on the cutting edge, so you don’t get left behind.

How major property portals think about mergers and acquisitions

How do large residential real estate portals around the world think about investments and acquisitions? What types of companies do they look to acquire and how do they incorporate them?

As the head of strategy at New Zealand’s leading property portal, Trade Me, I dealt with these questions on a daily basis. I hunted for new lines of business, scoured the landscape for investment and acquisition opportunities and then executed the deals in my four years at the firm. I also developed an intense interest in how similar firms in other countries went about the same ventures.

Property portal models differ around the world, but in general they aggregate real estate information, allowing consumers to search for homes to rent and buy.

Scratching my Entrepreneurial Itch

In January, I left Trade Me and moved back to the U.S., my home country. With these questions still swirling in my head and my curiosity kindled, I decided to investigate. So I hit the road to find out how portals around the globe deal with growth, particularly around investments and acquisitions.

My journey included interviewing and studying the following portals:

• Rightmove and Zoopla, the largest and second-largest portals in the U.K., respectively.
• Zillow Group, the U.S.’s top player.
• REA Group, Australia’s leading portal.
• And, of course, Trade Me, New Zealand’s leader.

Based on the last full year’s reported numbers and converted to U.S. Dollars. Sources: Rightmove, Zoopla, Zillow Group, REA Group, Trade Me.
*Adjusted EBITDA numbers.
^It’s difficult to make apples-to-apples comparisons on portal profitability. For example, Zillow Group reports “Adjusted EBITDA Numbers” on a non-GAAP basis, which can be misleading as this article points out. Zillow's actual EBITDA result is around a $68 million dollar loss.

I hypothesized that I would find a common thread in the strategies of each firm. Surely they must evaluate investments in generally the same manner. I was excited to learn what each considered the “right way.”

The Journey

Rightmove is the leading property portal in the U.K. It reported 2015 revenues of $250.9 million and has a market cap of $5.1 billion.

The 16-year-old firm dominates the U.K. market with a massive homebuyer audience built on organic search traffic. In 2015, its site received 17.5 billion pageviews, according to the firm. It makes the bulk of its money by charging agents and developers to list homes.  

Rightmove’s mergers and acquisitions strategy sets it apart from all other major portals in the world: it simply doesn’t do them.

Instead, it focuses squarely on being the U.K.’s best place to list a home for sale. Period. It invests in that goal alone, year after year, without spending much attention on other business opportunities.

It plans to maintain that singular focus as it aims to raise the average monthly revenue per advertiser (ARPA) closer to its target of approximately £2,500, an amount consistent with newspaper advertising in 2007, the firm explained in its 2015 annual report. Its current ARPA stands at £750.

Zoopla, on the other hand, has the most aggressive M&A strategy I found among the major portals.

Driven by its entrepreneurial CEO Alex Chesterman, the U.K.’s No. 2 property portal aims to be the one-stop shop for home buyers and sellers. Its tagline could be: “Whatever you need, you can find it at Zoopla.”

The 8-year-old firm has a much smaller audience than Rightmove. Rightmove accounts for approximately three-quarters of the time consumers spend on the U.K.’s top four real estate portals, according to comScore data cited in Rightmove’s 2015 earnings report. Zoopla is second with approximately 20 percent of the attention.

London-based Zoopla has a market cap of $1.7 billion and 2015 revenues of $140.4 million.

The firm makes aggressive investments, ranging from seed investments in startups like the one it made in property repair reporting software platform Fixflo to nine-digit acquisitions of mature businesses like its purchase of the home-related services cost comparison digital platform uSwitch.

In some cases, Zoopla folds its acquisitions directly into its core business; in its smaller investments, it takes a more hands-off approach.

The U.S.’s top player, Zillow Group, is a giant. It has a market cap of $6.0 billion and reported $679.9 million in 2015 revenues.

The portal conglomerate emerged in February 2015 when Zillow -- already the market leader -- acquired its top U.S. competitor, Trulia, for $2.5 billion in stock.

The 12-year-old firm’s M&A strategy is more defined than Zoopla’s. Zillow Group only makes full acquisitions; it doesn’t bother with seed investments or minority stakes in new ventures.

It acquires businesses to build audience, plug service gaps and prepare for new opportunities in the residential real estate space. For example, it acquired two New York City portals in recent years to grow presence  in the lucrative Big Apple market: the rental site Naked Apartments for $13 million in February of this year and the portal StreetEasy for $50 million in 2013.

It’s also made big acquisitions to provide better tools to its real estate broker and agent advertisers, epitomized by its $108 million July 2015 acquisition of digital transaction management platform dotloop.

From an outside perspective, it appears Zillow Group practices a hands-off approach to managing its acquired companies.

Most brands remain intact post-acquisition. Although part of the same team and under the aegis of Zillow Group executives, the acquired firms don’t appear to experience intense corporate oversight.

REA Group, a subsidiary of global media giant News Corp, runs Australia’s dominant portal, realestate.com.au. REA Group also runs a suite of portals in other countries (see below).

REA Group has a market cap of $5.8 billion and FY2016 revenues of $488.2 million.

Portal	M&A strategy
Rightmove	No activity. It’s focused squarely on organically building its consumer audience.
Zoopla	Aggressive and varying, ranging from seed investments in startups to full acquisitions.
Zillow Group	Aggressive, but solely focused on full acquisitions to build audience and tools for its customers (agents and brokers).
REA Group	Aggressive, with a strong international focus using full acquisitions to enter new markets.
Trade Me	Strategic. Makes investments and acquisitions to build service offering.

Along with Rightmove, investors see REA Group as a poster child for property portal success because of its clear market-leading position and its ability to effectively monetize its agent relationships. Both businesses are cash-spinning machines.

While Zillow Group and Zoopla built audience by acquiring domestic businesses, Australia-based REA Group has an international scope. It made early plays in Europe -- Italy, Germany, France and Luxembourg -- with mixed success, and most recently took a minority stake in realtor.com operator Move Inc. in the U.S.

REA Group finalized its $414 million acquisition of Malaysian portal iProperty in 2015, giving it a strong Southeast Asia presence. Its global aims are clear.

REA Group operates real estate sites in 11 countries: Australia, Italy, Luxembourg, Germany, France, Malaysia, Singapore, Hong Kong, Macau, Indonesia and Thailand.

Trade Me operates a portfolio of classified and marketplace businesses in New Zealand, including the country’s leading residential real estate portal Trade Me Property. As a group, Trade Me has a market cap of $1.5 billion and reported FY2016 revenues of $158.7 million.

Trade Me has a flexible investment approach. In my four years there we made minority investments -- like the one we made in the data valuation company Homes.co.nz -- and outright acquisitions.

The degree to which we integrated acquired companies varied.

Based on personal experience of selling my own technology company, the video game development firm Agora Games, in 2009, I prefer to give acquisitions as much autonomy as possible. This became our default position. However, in some cases we fully integrated acquisitions into existing business units.

Because Trade Me Property dominates the New Zealand market, our M&A philosophy centered on adding more services to our offering rather than expanding audience. For example, Homes.co.nz moved us into the data and valuation space, while our 2014 acquisition of rental viewing scheduler Viewing Tracker improved our offering to property managers and tenants.

Why should we care?

After finding a new investment opportunity and presenting it to my boss at Trade Me, he would ask: “So what?” He meant, “Why should Trade Me care about this?”

The same question applies to this globe-trotting survey of portal M&A strategy.

The answer is different than the one I expected when I embarked on my journey last spring. I expected to uncover general investment themes shared by the world’s major property portals.

However, after six months of travel and dozens of interviews, I am surprised to find no commonalities among them. No two portals share the same investment approach and strategy. Each achieved massive success in its own way.

It’s clear that no one winning strategy exists.

So, if you’re looking to replicate the success achieved by these global leaders, my survey suggests it’s best to pick a path that aligns with your aptitude and vision and then execute well.

Happy hunting!