Zoopla's private equity strategy shift

Zoopla recently announced that it has removed all non-property advertising from its listing pages. This is one of several significant strategy changes after its acquisition by private equity firm Silver Lake.

Why it matters: The benefit of being a private company is that Zoopla can be more aggressive, focus on longer-term opportunities, and be less sensitive to a stock price that focuses on short-term earnings growth. This move is an example of that strategy in action.

The advertising revenue dilemma

A number of real estate portals generate revenue from non-property advertising on their listing pages. Zoopla's move puts it in line with arch-rival Rightmove by banishing banner ads from listing pages.

Note : REA Group and Domain do not have advertising on featured property listings, but do have non-property advertising on "normal" listings.

Note: REA Group and Domain do not have advertising on featured property listings, but do have non-property advertising on "normal" listings.

Banner advertising can be an important source of revenue for portals. However, it comes at the expense of the user experience. If a visitor clicks on a banner ad, their attention is diverted away from the property listing, reducing its effectiveness.

Often times user experience loses out to finances, especially for publicly listed companies under pressure to deliver revenue growth. And given that core revenue growth is slowing at a number of mature portals, the decision is even harder. But for a private company that's focused on the long-term opportunity, the decision is easy.

A shift in strategy

Aside from jettisoning nearly its entire management team, Zoopla has been up to quite a bit post-acquisition; there is the appearance of a significant change in strategy.

Zoopla's aggressive diversification strategy has been a leading factor making it unique in the world of real estate portals. It's been a world leader in acquiring adjacent businesses to dramatically grow revenues (for more on this, check out my 2018 Global Real Estate Portal Report).

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The company's narrative has centered around a cross-sell strategy, where acquisitions are deeply integrated across Zoopla's network of web properties.

I've questioned the effectiveness of the cross-sell strategy, most recently in my Future of Real Estate Portals Report. The evidence didn't suggest a runaway success when it came to integration and cross-sell synergies.

Notably (and here's the big strategy shift), Zoopla's new managing director recently stated that, "Going forward, the former comparison and property businesses of ZPG will be managed largely separately, but we will continue to achieve synergies between the two wherever it is appropriate and relevant.”

To me, that sounds like a "back to basics" approach with a deep focus on the core product: tools for agents with a fantastic consumer experience. Cross-sell synergies and deep integration across the portfolio are taking a backseat.

Which is an interesting development for Scout24, which recently purchased financial comparison site Finanzcheck for $330 million, and Domain, which has been running the Zoopla diversification playbook for some time. Oops?

Strategic implications

Public companies that are focused on short-term revenue growth are at a distinct disadvantage to private companies backed by private equity. And private equity is getting more involved in the sector:

  • General Atlantic acquires a majority stake in Hemnet, December 2016.

  • Silver Lake acquires Zoopla for £2.2 billion, May 2018.

  • General Atlantic invests $120 million in Property Finder, November 2018.

  • Apax Partners offers $2.5 billion NZD for Trade Me, December 2018.

  • Rumors circulate that several private equity firms are looking at Germany's top portal, Scout24.

It's going to be difficult to compete with private equity-backed portals given their fundamental advantage: they can be more aggressive, focus on longer-term opportunities, and be less sensitive to a stock price that focuses on short-term earnings growth.

Axel Springer goes all in on hybrid agents

How many international media conglomerates -- that own a number of leading real estate portals worldwide -- have “hybrid agents” as one of its top strategic priorities? Just one: Axel Springer.

Why it matters: Axel Springer, the $6 billion European media house, is going "all in" with online hybrid agents, through its investments in Purplebricks and Homeday. It's making a calculated bet that competing with its real estate agency customers is the best long-term strategy.

Making hybrid agents a strategic priority

Dozens of the largest real estate portals around the world are owned by a small collection of international media companies: News Corp, Schibsted, Naspers, and Axel Springer. But of them all, only Axel Springer has taken the step of investing in a potential sector disruptor: the online hybrid agent.

Axel Springer owns major real estate portals in France, Germany, Belgium, and Israel. In March 2018, it made a bold, £125 million investment in Purplebricks. The investment is notable because Axel Springer owns several top portals whose customers are the same real estate agents that Purplebricks is trying to disrupt (albeit in different markets).

Furthermore, Axel Springer is the only major international entity that has targeted online hybrid agents as a future growth priority. In its latest presentation to investors, hybrid agents are included as a top priority for the core classifieds business (which generated revenues of over €500 million in 2017).

Disrupting its biggest customers

Axel Springer's strategy offers a fascinating juxtaposition: Adding value to traditional agents by providing more services (seller leads), while "satisfying even more consumer needs" with its hybrid agents -- which directly compete with traditional agents.

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Axel Springer is wonderfully upfront about its motivations. Its move into the hybrid agent space is designed to tap into a much larger revenue pool: agent commissions.

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Continuing to serve your customers while entering into direct competition with them is a delicate balancing act. It's a move reminiscent of Amazon promoting its own products in direct competition with many of its sellers.

This is the nightmare scenario that U.S. real estate agents have been predicting for years. But in this instance it's not Zillow, but one of Europe's most powerful players, taking active steps to disrupt agents.

Winner take most

It's been clearly illustrated in the U.K. market that the online agent space is winner take most (market share). Access to capital is the single biggest predictor of success.

There is no first mover advantage in these markets (Purplebricks was not the U.K.'s first online hybrid agent). Rather, there is a rich first mover advantage: the business with the deepest pockets generally wins.

In this regard, Axel Springer and Purplebricks form a powerful combination. From a competitive standpoint, the most dangerous thing about Purplebricks is its investment risk tolerance. It is willing to invest tens-of-millions of dollars year after year to build market share -- incurring big losses along the way. And with Axel Springer and its deep pockets along for the journey, it's a hard combination to beat.

Strategic implications

Axel Springer and Purplebricks are quickly building a potentially insurmountable lead in the online hybrid agent space globally. There is no runner-up in the sector; it's a one horse race.

Purplebricks has proven the online hybrid model works in the U.K., and is aggressively launching in other markets. Copycats are popping up around the world. What's stopping News Corp, Schibsted, and Naspers from entering the space? It's either capital, ambition, or fear of upsetting their agent customers.

Real estate portals are moving from search engine to service engine; they are moving closer to and becoming involved in more of the transaction.

There is undeniable momentum in this direction. While not every portal is seeing success, the shift is clear -- and unyielding. Axel Springer's bet on online hybrid agents, in direct competition with its real estate agent customers, is the latest example of this evolving strategy.

Purplebricks' H1 2019 Results

Last week, Purplebricks released its half-year financial results. The top line results include an overall group loss of £27.3 million for the period, with a slight reduction of its full-year revenue guidance. But the top line numbers don't come close to telling the full story (hint: it's not as bad as it sounds).

Why it matters: Purplebricks' core U.K. market continues to grow and is meaningfully profitable, proving that the model works. Key performance indicators in its other three markets reveal a deeper story of investment, growth, and challenges.

Continued growth in the U.K.

The popular narrative is seductive, but factually incorrect: With massive losses at Purplebricks and the demise of online agent Emoov (which, by the way, was not the second largest online agent in the U.K.), the entire online agency business model is near collapse. Not quite.

Purplebricks is an international collection of businesses at various stages of growth. In the U.K., Purplebricks' most mature market, it continues to grow revenues and operating profit. At maturity and scale the business model absolutely works; there is no evidence to support otherwise.

Yes, growth is slowing in the U.K. But at nearly 80,000 instructions per year it can't be expected to keep growing at historic rates. The key is that even in a challenging economic climate, growth continues.

Bumpy ride in Australia

While progress in the U.K. is consistent and positive, Purplebricks' Australian operation has endured a turbulent year. Senior management changes, a business model pivot, and its fair share of negative press has resulted in a "bump in the road" over the last six months.

Revenue growth is up year-on-year, but down from the previous six months, with a corresponding hit in operating profit.

One data point does not make a trend, so all eyes are on the next six months as Purplebricks executes its Australian turnaround plan with a new team and new pricing strategy.

Deep investment in the U.S. market

Purplebricks continues to invest heavily in its U.S. rollout. Over the past six months, it has spent over $20 million on sales and marketing across seven States -- more than double what it spent last year.

Purplebricks managed between 1,200 and 1,400 instructions in the U.S. over the past half-year, or around 200-230 per month. The cost per instruction has dropped from around $21,000 to between $14,000 and $17,000 (each instruction is worth $5,205 in revenue to Purplebricks).

At the current rate, Purplebricks will need to go from 200 to 650 instructions per month to reach breakeven with its sales and marketing costs, and to 1,000 instructions per month to reach profitability.

To achieve profitability, Purplebricks will need to get all of its launch markets performing well, not just L.A. One example is the lackluster performance in Phoenix, as I wrote about last week.

Marketing efficiency

At its core, Purplebricks is as much an advertising company as it is a real estate company. The business model relies on a massive marketing expenditure to generate leads for its network of agents. Thus, one of the most important metrics for the business is marketing efficiency.

For every £1 spent on marketing, Purplebricks generates revenues of £3.60 in the U.K., £0.92 in Australia, £0.36 in the U.S., and £4.38 in Canada (Purplebricks' Canadian acquisition was a fantastic deal).

Strategic implications

The core Purplebricks business model -- and profitability at scale -- is sound. The market failure of smaller players, or the fact that Purplebricks is deeply investing in new markets, doesn't diminish that fact.

From a competitive standpoint, the most dangerous thing about Purplebricks is its investment risk tolerance. It is willing to invest tens-of-millions of dollars year after year to build market share -- incurring big losses along the way. If you're a traditional real estate agency, or a listed company, are you willing to do the same?