Global Insights: Online agent market share grows in the U.K.

As someone who studies new models that change the way we buy and sell houses, I'm naturally interested in the online agents in the U.K. Late last year, two raised significant money: eMoov raised £9 million in August and Yopa raised £27.6 million in September -- and it's having a noticeable effect on the market.

Mo Money Mo Listings

The charts below look at the total number of new listings for the top online agents, as recorded by Rightmove (and confirmed with data from Zoopla).

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A few facts stand out:

  • Purplebricks is very much in a dominant market position.
  • Both Yopa and eMoov have seen strong gains, followed by Tepilo.
  • HouseSimple is going backwards.

If we strip away Purplebricks' numbers for a moment, the "Battle of the Rest" becomes more clear.

Yopa and eMoov raised a lot of new capital and are deploying it in sustained marketing campaigns. While Tepilo hasn't raised money, it has significantly increased its marketing spend. And HouseSimple's new CEO pulled its marketing spend before a product relaunch.

The correlation here is clear: the more money spent on marketing, the more new listings. It's not rocket science, but that's the point with this model.

If we assume the inverse is also true (the less money spent on marketing, the fewer listings), it leads to a sobering conclusion: the various propositions are undifferentiated with little organic, word-of-mouth growth, or network effects. There are no repeat customers, and the models don't "pick up steam" with more people using them (think Uber or Airbnb).

Online agents -- like traditional real estate agencies and brokerages around the world -- are expensive businesses. Investors take note: there's no secret sauce in this model that changes that equation.

Market share winners and losers

While the online agents are clearly competing with each other, the real loser in this fight is the traditional estate agent. 

The chart below shows the top online agents (Purplebricks, Yopa, Tepilo, eMoov, and HouseSimple) gaining impressive new listing volumes (up 32% from January) while also growing their collective market share of the entire market. They're not taking market share from each other; they're taking it from the incumbents.

Overall new listings market share for the online agents is up from 5.7% in January to 7.1% in April. In that same period of time, the leader Purplebricks increased its market share from 4% to 4.5%.

The time period is small -- four months -- so take it with a grain of salt. Plus these figures are based on new listings, not sales. But the story is clear: the online agent market segment is growing.

Strategic implications

There are a few salient points to consider:

  • Purplebricks is dominant. In April, it had 6.7 times the number of new listings of its nearest online competitor, and a massive 3.3 times the number of new listings of its top 4 online competitors combined.
  • Relative to the point above, scale equals efficiency (and profits). The low-cost model only works at a certain scale. Purplebricks' lead means lower expenses on a per customer basis, likely making it the only profitable online agent.
  • Money, money, money. If you want to compete in this space, you need to spend a lot on marketing. The various models are otherwise undifferentiated.
  • The market is shifting. The online players are all gaining market share, and the loser is the traditional estate agent.

The race for second place is on, with several players raising and spending tens-of-millions of pounds in the market. And there is clearly room to grow market share at the expense of traditional agents. But can they make money, or is it an expensive race to the bottom?

Global Insights: Zillow's revenue growth slows

My analysis on Realtor.com earlier this week surfaced a particularly interesting chart on Zillow's revenue growth. The slowing growth piqued my interest, so I dug deeper into the data and strategic implications.

Zillow has been growing fast over the past few years. The company topped $1 billion in annual revenue for the first time in 2017. But the gravy train can't last forever. How big can Zillow really get?

In its FY17 annual report, Zillow had this to say about its future growth prospects: We see significant opportunity to expand our addressable market over the long term. As we dive deeper in the funnel we see more opportunity to increase the number of transactions and commissions to our partners. 

Many people think Zillow is right at the beginning of its journey, and that it is just scratching the surface of the U.S. market opportunity. However, the numbers tell a different, more nuanced story.

Sources of growth

Zillow generates the vast majority of its revenues (71%) from its premier agent program, which is essentially lead gen for buyers agents.

Other revenue streams, such as display advertising, mortgage leads, and rentals, form a small percentage of overall revenue. Zillow is very much a business centered around -- and reliant on -- its premier agent program. So it is natural to focus on premier agent revenue growth to frame the future prospects of the business.

The key question is: How much runway is left for Zillow to monetize and grow its premier agent business? Are we just at the beginning, or is the opportunity maturing?

Premier agent growth slows

Zillow's year-on-year premier agent revenue growth, broken down by quarter, shows a clear trend of slowing growth. Keep in mind this is off a large revenue base ($760 million annually) so is to be expected. But the trend is clear: growth is slowing.

The chart below shows the same metric, but with absolute year-on-year dollar growth, instead of a percentage. After running up to a high in Q2 2017, the growth rate is dropping, and Zillow is forecasting that trend to continue.

We can also look at the numbers from a full-year financial perspective. The chart below shows steady year-on-year growth in the premier agent program, but Zillow's own guidance shows that it is -- for the first time -- forecasting a slowdown in that growth on an annual basis.

Most businesses eventually reach a terminal growth rate, or a rate at which the business grows in perpetuity. At property portals around the world -- in mature markets where the leaders have effectively saturated the market -- this rate ranges from around five to 15 percent.

Zillow's premier agent program hasn't reached maturity yet, but it appears to have hit its peak growth rate. Now the question is, where will it settle?

Strategic implications: Where to from here?

With Zillow's primary revenue stream slowing, it needs to look at new revenue streams to drive future growth.

One area where Zillow is seeing strong growth is in rentals, where it saw a 124 percent increase in revenue. This is undoubtedly driven by the decision to start charging for rental listings on StreetEasy in NYC in July of last year. You can see the corresponding bump in revenue below.

In 2018, expect Zillow to begin aggressively monetizing new revenue streams. My guess would be a continued focus on rentals and back office tools (dotloop), with additional efforts around new construction and mortgages. This is relatively consistent with the strategy of its international peers.

Also expect Zillow to continue to aggressively monetize agents. By its own admission, "as we dive deeper in the funnel," is code for doing more and charging more. Zillow will attempt to increase the value of existing leads while becoming the technology partner of agencies with transaction management tools like dotloop.

Zillow's slowing premier agent revenue growth will put pressure on the business to develop and exploit new revenue streams. Expect that to be the theme of 2018.

Global Insights: Australia's REA Group vs. Domain

Key points

  • Both businesses are growing at the same, strong rate, with all revenue growth coming from depth products.
  • Domain has a much more diversified revenue stream, at the expense of profitability.
  • Domain is generating 1/4 the listing revenue of REA Group, and is not having a competitive impact.
  • Adjacency revenues are small, and in Domain's case, quite expensive.

Australia is home to two leading real estate portals, REA Group and Domain Group. Last month, both businesses released their half-year results.

REA is the clear market leader and one of the biggest and most profitable portals in the world (read more in my Global Real Estate Portal Report). Domain was recently spun-out from Fairfax Media and listed on the Australian stock exchange, and is now able to invest and focus on its core mission.

Growth from depth products

Both REA Group and Domain are growing strong. Their latest financial results show impressive revenue growth in their core residential listing business lines (and for REA, I'm only looking at its Australian business).

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Proportionally, both businesses are growing at nearly the same rate (around 19%). This is especially impressive for REA, which is already operating on a large revenue base.

For both businesses, nearly all of this impressive revenue growth is coming from depth products. These are the incremental fees paid by vendors and agents to promote a property listing on the site. $50 million is a big number!

Over time, these depth products are accounting for an increasing percentage of overall revenue (the remainder being subscription fees).

REA is generating about 4x the revenues as Domain in the core residential real estate listing business. I've included Rightmove and Zoopla from the U.K. as an additional data point.

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This number isn't changing over time. Both businesses are keeping pace with each other, almost down the the decimal point. In other words, Domain as a strong #2 in the market is not having an adverse impact on REA's ability to grow.

Revenue diversification and profitability

REA Group generates the vast majority of its total revenue from listing fees (depth and subscription), around 84%. Domain, on the other hand, generates only 47% of total revenues from listing fees.

This trend is identical to the U.K. market, where Rightmove, the #1 portal, generates 76% of its revenue from listing fees, compared to 25% for Zoopla, the #2 portal. The #2 players have diversified their revenues in an effort to grow through other avenues.

The market leaders have high profit margins (EBITDA) from the profitable listing business, while the #2 players have lower profit margins from their diversified revenue streams (which tend to be lower margin).

REA's profit margin continues to improve, while Domain's is going down as the business invests in new growth areas. The market leaders are able to continue monetizing their audience without needing to diversify. 

Adjacent services

In Australia, both REA Group and Domain have launched adjacent businesses in financial and transaction services. For REA, this represents a small, but profitable, percentage of total revenue.

Domain, on the other hand, is investing heavily in its transaction services business (which includes utility switching, loan, and insurance products -- and the last two are just getting off the ground). It's generating revenue, but is not yet profitable. In other words, it's spending $12.8 million to generate $11.1 million in revenue -- expensive!

While many in the industry talk up the opportunity in adjacency revenues, the evidence suggests a much smaller (and less profitable) opportunity -- and one that is quite expensive to get off the ground.

Strategic implications for Domain

Domain is clearly operating from Zoopla's playbook: to grow, it must diversify. However, their strategies differ. In the U.K., Zoopla fully owns all of its adjacent businessess. However, Domain prefers joint ventures, owning 50% of its comparison business, 60% of its loan business, and 70% of its insurance business.

Domain is effectively starting its loan and insurance businesses from scratch, while Zoopla acquired existing businesses. Starting from scratch is expensive and will take years of investment.

The scope of the adjacency plays also varies. Zoopla generates and monetizes leads through a comparison portal, while Domain is playing a greater role in the transaction. This is a more expensive, more uncertain, but potentially more lucrative opportunity. The key word is potentially.

Domain's foray in adjacencies should not be viewed as a sure thing. While the intent mirrors Zoopla's strategy in the U.K., the execution is materially different, with the result being far from certain.

Global Insights: Is Realtor.com in it to win it?

On March 7th, this report on Realtor.com owner News Corp piqued my interest. Chief Executive Robert Thomson, referring to Realtor.com, said, "Obviously we’re in a competition, long term, to be number one..."

He went on to say, “...I think it’s fair to say that we turned what was the number three company into a very strong number 2 and, depending on the quarter, depending on the metric, in some quarters the fastest growing."

Here's the thing: I don't think Realtor.com is really competing to be number one.

Growth metrics

If we look at the most important metrics, I don't see evidence that Reator.com is the "fastest growing" in any category. These self-reported traffic metrics are essentially static: Zillow has around 3x the traffic of Realtor.com.

Zillow is growing its revenue (from a larger base) considerably faster than Realtor.com.

On a quarterly basis, Zillow blows away Realtor.com in terms of year-on-year revenue growth (again, from a much higher base).

The last chart does show an interesting trend, which is slowing revenue growth at Zillow compared to rising growth at Realtor.com. But in absolute terms, during the last quarter Zillow increased its revenue by $54 million while Realtor.com increased by $17 million -- a big difference!

There's still a lot of distance between the two, but it's true that Realtor.com is trending upwards while Zillow's revenue growth is slowing.

I'm not sure I'd agree that Realtor.com is the "fastest growing" in any meaningful metric, but the last three quarters show the start of a promising trend for the business.

Is Zillow concerned?

If Zillow were genuinely concerned with Realtor.com's growing momentum, I'd expect its sales and marketing expense to increase. If Realtor.com's market share were growing, Zillow would be spending more advertising money in response.

Aside from a slight bump a few quarters ago, Zillow's sales and marketing expense as a percentage of revenue is relatively flat and trending downwards.

Serious competition for top spot?

You can't argue with the fact that Realtor.com would like to be the #1 portal in the U.S. market. But are they really in a serious competition to be #1?

News Corp has been a major investor in REA Group, the leading portal in Australia, for almost two decades. More than most, it understands the power of network effects and how expensive and futile it can be to unseat a #1 player.

So is News Corp realistically expecting to overtake Zillow in the U.S.? I doubt it. I believe it's happy to run slipstream to Zillow and operate a strong, profitable business in its own right, but remain the #2 player. Attempting to overtake Zillow would be incredibly expensive and uncertain, and the resulting marketing war would drain all profits from both companies.

News Corp would never admit this strategy (who would admit they're happy to be the runner-up?). Being the underdog and striving to overtake the market leader is a great story and good for morale, but it will probably remain just that: a story.