Mobile contact form analysis

Inspired by a recent talk on the importance of mobile experiences, I've conducted an analysis of the mobile contact forms for the big real estate portals. These are the forms that turn visitors into leads.

Why it matters: Mobile is huge. My research of the top real estate portals shows that, on average, 70 percent of leads come from mobile. Mobile contact forms should be optimized to be as efficient as possible.

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Notable UX highlights

Pre-selecting checkboxes is a real-world example of behavioral science (specifically nudge theory) in action. In the U.S., Zillow and realtor.com take different approaches to encourage (or discourage) users to request additional financing information. Overseas, Propertyfinder, PropertyGuru and Otodom do the same when it comes to signing users up for property alerts.

Trade Me has the unique distinction of having the easiest and most difficult mobile form. On the positive side, it is the shortest form from my survey, simply asking for a message. On the negative side, it requires users to sign in to send a message. Luckily, almost the entire population of New Zealand is a member of Trade Me, but in the case of a new user (or someone who isn't logged in), this introduces a significant form completion hurdle.

The more required fields, the more difficult to complete a form. I know Germans can be formal at times, but does salutation really need to be a required field for ImmoScout24?

Redfin has split its form across three screens, each quite simple. But the additional effort to click a submission button three times instead of one, plus additional page load time, adds significant (and unnecessary) overhead.

Hemnet has decided to do away with forms all together and simply list an email address, leaving communication entirely in the user's hands!

Mobile usage

Many thanks to the portals that were willing to share their data with me (both anonymously and on the record). The collective intelligence is a benefit to all!

The percentage of leads that come from mobile (native app or mobile web) varies greatly: from 40 percent in Poland (Otodom) to 91 percent in Singapore (PropertyGuru). 

The biggest markets average somewhere in the middle: around 65 percent in the U.K. (Zoopla) to 72 percent in Australia (Domain).

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On average, around 70 percent of all leads come from a mobile device, underlining the importance of a smooth mobile user experience.

User experience best practices

Best Practices for Mobile Form Design is an incredible resource for designing simple and effective mobile forms. Looking at the mobile forms from this survey, there are several best practices to remember:

  • Avoid dropdown menus (dropdowns are especially bad for mobile).

  • Don't slice data fields (when asking for a first and last name).

  • Mark optional fields instead of mandatory ones (don't use asterisks).

A number of real estate portals do a great job at keeping the mobile experience simple and easy by following best practices and keeping the form as short as possible. My hope is that next year the forms will be even easier for users to complete. And if you're wondering just how important leads are, just ask Zillow.


Before entering the high-octane world of real estate tech strategy, I was a product guy. My master's degree was in human-computer interaction, and I spent the first years of my career as a user interface designer. So I'm passionate about great design!

Why incumbents can't beat Zillow (and the power of network effects)

Recently, several large incumbents have announced big consumer plays aimed at Zillow: Rocket Homes' new consumer portal, and Keller Williams acquiring SmarterAgent as part of its consumer strategy.

Why it matters: Zillow benefits from practically unbeatable network effects in the consumer space. Both of these moves ignore basic strategic principles of playing to your strengths, and picking battles you can win.

Network effects and wide moats

In his best-selling book Zero to One, Peter Thiel provides an elegant definition of network effects: “Network effects makes a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too.”

Online marketplaces such as Craigslist, LinkedIn, and eBay are classic examples of businesses that benefit from network effects. The more people that use them -- buyers and sellers -- the more valuable the service becomes.

Businesses that have the benefit of network effects are incredibly difficult to displace. As Tren Griffin writes on a16z, "Nothing scales as well as a software business, and nothing creates a moat for that business more effectively than network effects."

Zillow benefits from the power of network effects. By developing the most popular means of searching for real estate, it attracts buyers and sellers in a virtuous cycle. It has cemented an incredibly strong position with a near-impenetrable moat from competition. This is Zillow's key strength.

Comfortably number one

Logically, the most likely competitor to challenge Zillow's dominance is realtor.com. It is the runner-up portal backed by a multi-billion dollar international media company (News Corp) that also owns several top portals around the world.

But as I've shown in the past, Zillow's ever-important traffic dominance remains constant, undisturbed by realtor.com or anyone else.

 
 

If anyone could dislodge Zillow's dominance, it would be realtor.com. But it hasn't; not for lack of trying, but rather an understanding of network effects and the futility of such an effort (remember, it owns the top portal in Australia and knows the power of network effects better than most). News Corp doesn't want to overtake Zillow because it knows it's impossible.

Strategy basics: play to your strengths

Sound strategic planning requires two key elements: leveraging your strengths, and playing where you can win.

A business should build its strategy around an understanding of its key competitive advantages and operational strengths. Those strengths should be applied in areas where it can win (typically where its competitors are weak).

To illustrate this point further, the following chart looks at four examples of Zillow and realtor.com smartly leveraging their strengths and exploiting their competitor's weaknesses.

Less experienced strategists can be reactionary. They see a threat and attempt to counter it, on a battlefield where they are at a distinct disadvantage to a competitor. Keller Williams and Rocket Homes have done just this; choosing to do battle with Zillow on its home turf, where it is strong and they are weak.

Keller Williams and Rocket Homes

Zillow's strength lies in its massive consumer reach through its search portal. This business benefits from strong network effects and has a wide moat to protect it from competition.

Keller Williams is building a new consumer-facing app to "compete directly with search giants like Zillow and Redfin." Rocket Homes is launching a portal to "rival Zillow," which will "let consumers search for homes and apply for loans."

In their efforts build end-to-end homebuying platforms, both businesses have decided to go from positions of strength (mortgages and agent reach) to ones of weakness (consumer listing portal). It's the most difficult battle possible.

What Rocket Homes and Keller Williams are missing in their end-to-end platforms -- the consumer search portal -- is nearly impossible to deliver because of Zillow's dominance and the power of network effects. There's a certain futility in going after Zillow (or Facebook, or Ebay, or Craigslist).

Strategic implications

Keller Williams and Rocket Homes (part of Quicken Loans), are both incredibly large and powerful businesses; Keller Williams has the largest network of agents, and Quicken Loans is the largest retail lender in the U.S. But in the changing world of real estate, they aren't playing to their strengths.

All businesses should know their strengths. Deeply understand your competitive advantage and what value you offer -- and focus on that. 

By going directly after Zillow, Keller Williams and Rocket Homes demonstrate a fundamental misunderstanding of the power of network effects. There's simply no purpose for these new consumer portals to exist, because they don't meaningfully benefit consumers.

In the accelerating race to build end-to-end real estate ecosystems, businesses should focus on leveraging their strengths to gain advantage over competitors and deliver true value to consumers.

Opcity, lead conversion, and the journey down the funnel

Last week, News Corp, owner of realtor.com in the U.S. and the majority owner of REA Group in Australia, announced the $210 million acquisition of lead qualification service Opcity.

Why it matters: With this acquisition, realtor.com dives deeper into the lead conversion funnel in a major way. Opcity features a referral fee business model where customers are worth 36x more than a lead -- which highlights why the U.S. portals are diving deeper into the funnel.

Lead generation vs. lead qualification

Zillow and realtor.com are both lead generators. They drive traffic to their web sites, advertise real estate agents, and generate leads in the form of consumers who are looking to buy a house. This is the lion’s share of their revenues and the core of their business models.

The conversion of leads to actual, paying customers is left up to individual real estate agents, and nominally occurs offline. But this is changing.

In Zillow’s last earnings update, it shared its goal of "moving beyond lead generation and actively evolving toward being a deeper funnel real estate industry partner.” It launched a new, super-charged concierge service where Zillow sales reps qualify leads before matching them with a premier agent.

News Corp’s acquisition of Opcity is the same move: deeper down the funnel. Opcity takes raw leads, qualifies them, and then matches them with an agent. It does not charge per lead, like Zillow or realtor.com, but charges a referral fee for any leads that turn into paying customers (typically 30%-35% of a buyer’s agent commission).

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The cost per lead on Zillow ranges from $20 to $220. I estimate the average to be around $55 per lead. For Opcity, assuming a $250,000 home, a buyer’s agent commission of 2.75%, and a 30% referral fee, each customer is worth around $2,000 — or 36x higher than the value of a lead.

Providing a superior experience, to everyone

The rationale for Zillow and realtor.com to move deeper down the funnel is simple: a better experience.

In the case of both Zillow's concierge service and Opcity, consumers are able to speak to a human being faster, and are matched (not just sent) to an agent faster. Agents are matched with pre-qualified consumers, saving them time and energy. Plus the return on investment for the concierge model is far superior to simply buying leads.

At first glance the Opcity and referral fee model may seem like a bad deal. Why would an agent pay 30%-35% of their commission (around $2,000 for an average transaction) for a referral when they can buy leads for a fraction that price? 

It comes down to the math. Buying leads and converting them to customers costs an agent, on average, around $7,500 per customer -- compared to $2,000 for a customer through Opcity.

It all comes down to the conversion rate. Operating at scale and singularly focused on doing one job, Opcity and Zillow have the scale and technology advantage to convert leads more quickly and efficiently. They have call centers, teams, data, and a long list of agents if the first one contacted doesn’t answer the phone. It's no surprise their conversion rate is higher.

A big revenue opportunity

So how big is the opportunity from a revenue standpoint? (The analysis below is based on Zillow, simply because there is so much more data available, but the same logic applies to realtor.com and Opcity.)

Back in FY16, when Zillow last reported the figure, it generated around 17 million leads during the year. If we assume Opcity’s 4% lead conversation rate (between 3x-5x the industry norm of 1%) and a 30% referral fee, those 17 million leads are worth $1.4 billion in revenue to Zillow (about 50% higher than the ~ $930 million in current premier agent revenues today).

Both Zillow and realtor.com can better monetize their leads if they qualify them and adopt a referral fee structure. Realtor.com now has that option through Opcity.

Given the industry upheaval it would create, it's unlikely that Zillow would change its fee structure. Rather, it will likely approach the same commission rate through the existing premier agent program and share-of-voice bidding system (similar to Google AdWords). Zillow will get there in the end, but through a different path: by providing more value to agents and growing the revenue per lead.

Implications for real estate portals

The core of this entire model is the buyer lead, which only works in markets where there are buyer’s agents. In international markets like the U.K., Australia, and New Zealand — where there are only listing agents — buyer leads are not nearly as valuable.

A similar lead qualification service still has merit for seller leads, when consumers are looking for a listing agent (see HomelightOpenAgent, or REA Group’s Agent Finder service). But real estate portals generate significantly fewer seller leads with a lower intent.

To sum it up for portals: Pay close attention to lead qualification if you operate in a market where you can monetize buyer leads. It's a superior experience with a big revenue opportunity.

Strategic implications

For anyone involved in this sector, there are a number of key takeaways:

  • A concierge, lead qualification model provides a superior experience for consumers and agents. And for agents, it delivers a superior return on investment.
  • Real estate portals like Zillow and realtor.com can monetize qualified leads much better than raw leads. More value to agents = more revenue.
  • The recurring theme here, which I discuss often, is the importance of people in the process. Augmenting -- not replacing -- humans with technology is the winning formula.
  • Lead conversion is important! Small teams can't compete, but the larger platform plays (Keller Williams, Compass, etc) can absolutely build products (technology + people) that improve lead conversion at scale. But are they?

If you work for a real estate portal or lead generator and want to capitalize on the lead conversion opportunity, I can help. I currently advise a select number of real estate portals on an exclusive basis (to avoid competitive issues). Drop me a line if you’re interested in exploring the opportunity for your market.

Analyzing the top portals' financial results

Over the past month, a number of the biggest real estate portals around the world have released financial results: Zillow Group, REA Group, Domain, News Corp, Scout24 Group, and Trade Me.

Why it matters: While the results themselves are fairly dry and self-congratulatory, it does give a glimpse into business performance. When viewed as a whole, the results show a number of interesting trends, and give me a chance to highlight the insights behind the numbers, and the numbers behind the story.

Revenue growth comparison

Overall revenue growth sets the foundation for this analysis, and it's quite varied around the world.

The Australian portals are seeing exceptional growth due to the magic of vendor-funded marketing. In the U.S., both Zillow and Realtor.com are starting to slow down, with Zillow investing in adjacent revenue streams. And in Germany, ImmobilienScout24 sees a positive result after a period of relative flatness.

What blows me away, however, is the massive result in Australia. REA Group and Domain recorded huge revenue gains, and nearly all of it from depth products.

The growth strategy isn't rocket science. REA Group generated $100 million in additional revenue by selling bigger photos.

It's worth noting what is driving the revenue growth in each market: more customers, or a higher average revenue per advertiser (ARPA). In the case of REA, Domain, and Trade Me Property, it is all ARPA, which are customers (agents and home sellers) paying more for each listing. However, IS24's revenue growth is entirely driven by an increase in customers and flat ARPA.

In other words, the portals in Australia and New Zealand are fully penetrated but can still raise prices. In Germany, IS24 is struggling to increase revenue per customer, but still managed to sign up more customers over the past six months.

In my latest report, The Future of Real Estate Portals, I introduced the following portal value curve. In essence, it states that product development is becoming more expensive, delivering less value to customers.

The key takeaway is where the revenue growth is coming from: low effort, high value products that promote agents and properties (essentially larger photos displayed more prominently). That's where the big gains are coming from.

The higher-effort products (predictive analytics, lead qualification, etc) aren't a significant contributor to revenue.

Catching the leaders

On a recent call with an investment analyst, we discussed the opportunity for a runner-up portal to overtake the leader. Can Domain take market share from REA in Australia? Can Realtor.com catch up to Zillow in the U.S.?

The evidence suggests that the answer is a resounding no.

The data from the past two years shows an uncannily steady state between the leading and runner-up portals in both markets.

In the core residential listings business, Domain has remained at 27% the size of leader REA. Both business are growing at the same rate; nothing is changing.

In the U.S., the runner-up portal, Realtor.com, has actually lost a small amount of ground when it comes to growth. Zillow is growing revenues faster.

In the important realm of traffic and consumer eyeballs, Zillow and Realtor.com have remained constant for the past three years. Even with all of the hoopla against Zillow for raising prices in NYC, agent revolts, and increased pressure by Realtor.com, it hasn't meant a thing in terms of overall traffic and revenue numbers.

There's a big difference between a catchy headline and the facts of a situation. Always look for the facts.

Mixed results in adjacent revenue streams

The final area of interest is around portals' expansion into adjacent revenue streams. If you follow my work, you know this topic is of particular interest to me. You may read more of my thoughts, specifically around Zillow, in my analysis of Zillow's Strategic Shift.

The question is no longer whether real estate portals are expanding into adjacent revenue streams, but how they are doing it. There are a variety of strategies at play, with vastly different results.

In Australia, both REA Group and Domain are expanding in different ways. REA bought a mortgage broker in 2017, Smartline, while Domain has launched a trio of new services (mortgage, insurance, and utility switching) via joint ventures. The financial results couldn't be more different.

Both business units are generating decent revenues (more so in the case of Domain, because the overall revenue base is smaller), but only one is profitable. REA's acquisition of an existing business running at scale is returning immediate profits, while Domain remains in the start-up zone of continual (and significant) investments: $27.1 million in FY18.

A deeper look at REA and Domains' mortgage products highlights one final observation. Both are quite similar: well-integrated on the listing pages, a robust loan calculator, and then...

Spot the difference? REA's (top) call to action is a phone number, while Domain's (bottom) call to action is the start of a long online form (without even the first field pre-populated like it was on the calculator -- shame!).

This highlights the importance of consumer psychology in transactions of this magnitude, a topic I recently wrote about in How Psychology is Holding Back Real Estate Tech. REA recognizes the importance of actual human beings in this process, and puts them front and center.

If you have an interest in Zillow's recent acquisition of a mortgage brokerage, look no further than REA Group's Australian acquisition to see how it might play out. Purchased over a year ago, the business is profitable, generating good revenue at good profit margins.

Strategic implications

These latest financial results highlight a few key takeaways:

  • Revenue growth is still primarily driven by core premium products that increase exposure for agents and property listings.
  • The runner-up portals are staying in the runner-up position. There is no data to suggest they are catching the leaders in their markets (this shouldn't be a surprise).
  • Launching into adjacent revenue streams is not a sure thing. Initial investment is very high with no guarantee of success. There are a number of different paths to take, and the initial evidence suggests acquiring existing businesses is the most effective strategy.

A Deeper Look at Zillow's Instant Offer Numbers

Zillow's Q2 financial results include some insight into its Instant Offers business and traction to date, but the data is five weeks old. Let's take a look at the most updated data; it's more interesting.

All of the data below is for Phoenix, is based on public records, and is accurate as of August 8, 2018 (yesterday).

A quickly growing business

Zillow announced that it bought 19 homes during the second quarter (through June 30). The current total is 62. That's an additional 43 homes purchased in July and the first week of August. A good ramp up.

Of those 62 homes, 10 have sold, with the remainder either under contract, for sale, or coming soon.

Zillow is purchasing more expensive homes than its iBuyer competitors in Phoenix (Opendoor and Offerpad). The average purchase price for the 62 homes Zillow purchased is $324,000, 25 percent higher than Opendoor.

It's worth noting that the median purchase price is materially higher than the estimates being used by analysts and what was suggested in Zillow's Q1 announcement, $257,000.

For the iBuyer model to work, the home must be sold for more than its purchase price. I call that price appreciation. As a percentage, the price appreciation on the 10 homes Zillow has sold is 3.3 percent.

But because Zillow is purchasing more expensive homes than its competitors, when translated to a dollar value the amount is about equal to Opendoor at $9,600 per home.

Keep in mind that this number is not the net profit per transaction. It does notinclude any of the costs associated with buying and selling a home, including agent fees (which are considerable), buyer concessions, finance, holding, and repair costs.

Moving fast

The 10 homes Zillow sold moved very quickly. The sample size is small so it shouldn't be used as an assumption for the business at scale.

Having said that, of those 10 homes it has taken an average of 20 days to get a contract, and an additional 22 days on average to close. These sales are not indicative of long-term numbers. They are quick sales by definition so they have unusually low times on market.

Strategic implications

A few takeaways to keep an eye on:

  • Zillow is ramping up fast, buying 43 homes in the last five weeks. It's serious.
  • Zillow is buying more expensive homes than its competitors and what the market predicted. It's still early days, so let's see if this changes over time.
  • As a dollar value, price appreciation on the ten homes sold is in line with expectations and local competition.

Real time data

You may have noticed the market reacting strongly to Zillow's Q2 announcement, which contained five-week-old data. If you're a serious investor and don't want to live in the past, drop me a line.

Zillow's Strategic Shift

Zillow announced its Q2 financial results today, along with the acquisition of a mortgage broking business.

Why it matters: This is another big move that signals Zillow's clear intent to get closer to real estate transactions.

A major move into mortgages

In my opinion, the most interesting part of today's announcement is Zillow's acquisition of a mortgage broker, Mortgage Lenders of America LLC.

Why? Two reasons:

  • This is exactly the same move REA Group pulled off in Australia last year when it acquired the mortgage broker Smartline (both businesses even have roughly the same number of employees).
  • In addition to its Instant Offers program, this is another huge example of Zillow moving closer to the transaction in a big way.

Closer to the transaction

In my latest report, The Future of Real Estate Portals, I provide a strategic framework for how to think about portals expanding into new businesses. There are two ways: getting involved in more of the transaction, and getting closer to the transaction.

There are two big examples of real estate portals making big moves to get closer to the transaction: Zillow's Instant Offers program, and REA Group's acquisition of mortgage broker Smartline.

Zillow's announcement today is yet another major -- and not unexpected -- move in that direction. That's a big deal; it's a clear signal of intent and strategy, and one that no other portal is matching around the globe -- yet.

A strategic shift

What we are seeing is the result of a strategic shift at Zillow, likely started in 2017, and now moving full speed ahead. It is an intentional move to get closer to the transaction is all areas of the business, and move away from simply being a marketplace that connects buyers and sellers. 

As I mention in my report, it is a move from search engine to service engine. And it's a move to larger revenue pools. Zillow's existing mortgage lead gen business generates about $4 per lead. Mortgage origination can generate hundreds to thousands of dollars per customer.

It is a big move. While all the iBuyers talk about providing mortgage solutions to streamline the process, no one has purchased an existing mortgage broker. This isn't testing the waters; it's jumping straight in and hoping for the best.

Premier agent growth as catalyst 

I believe one of the big drivers of Zillow's strategic shift was the slowing growth of its flagship premier agent program. As I've written about in the past, it is naturally slowing down.

To Zillow's credit, with slowing growth in its main revenue driver, it did two things:

  • Made the aforementioned strategic shift to get closer to the transaction through Instant Offers and Mortgage lending.
  • Made significant investments into its premier agent program to improve lead quality and value to agents.

The first action opened up new areas of growth. The second arrested the decline and stabilized the premier agent program.

Strategic implications

There are a number of key takeaways from Zillow's latest move:

  • Moves to get closer to the transaction are people-intensive. At scale, Zillow's Instant Offers will have hundreds of employees on the ground. Mortgage Lenders of America has around 300 employees. Unlike a classic marketplace business, these new growth areas are expensive and low margin.
  • This is going to happen everywhere. Expect every major real estate portal to get deeper into the mortgage and finance space.
  • Zillow is not standing still. Its business today looks quite different than it did 12 months ago. Does yours?

Rightmove's Growth Continues to Slow

Rightmove announced its half-year financial results today, with revenue growth continuing to slow (down to 9.7 percent).

Why it matters: This is a continuation of the "Rightmove dilemma" of a narrow strategy with slowing growth, and no other revenue streams. It's neither good nor bad, but a fact that investors (and my readers) should be aware of.

A narrow strategy with slowing growth

Rightmove, the U.K.'s leading real estate portal, is a company that I frequently analyze. It is a global leader in the field with a unique, focused strategy.

In my latest report, The Future of Real Estate Portals, I discuss the Rightmove dilemma extensively. Unlike many other portals, it has not diversified its products or revenue streams beyond the core listing advertising business.

The strategy has served the business well for the past decade, but the strategy is beginning to show limitations. Revenue growth is slowing, and today's announcement shows a continuation of that trend.

The two key numbers

The key narrative is growth, with two key numbers: revenue growth and ARPA (average revenue per advertiser) growth.

Once an additional decimal is added, Rightmove's results show annual revenue growth of 9.7 percent (which it rounded up to 10 percent). This is the lowest number in years, and is the first time it has dipped below 10 percent.

Because Rightmove has not diversified its revenue streams, revenue growth is almost entirely driven by ARPA growth (how much it is able to charge its customers). This number, too, is dropping.

ARPA growth for the half-year is down to 8.3 percent, and is projected to stay at that rate for the full year. Once again, this is the lowest number in years. Rightmove can only raise its prices so much.

Implications for Rightmove

This is not the demise of Rightmove. It is still an incredibly strong business, with nearly-impregnable network effects that will likely protect its core business for years. The dilemma is about growth, and the right strategy to match its ambitions. Its growth prospects are challenged.

Rightmove is bumping up against the glass ceiling of price rises; growth is slowing. Slowing revenue growth is leading to tighter cost control, which could inhibit its ability to invest for the future.

Rightmove has not diversified its revenue streams. Nothing new is taking up the slack in the revenue slowdown. It has been promoting new premium features and new products for over a year, but they are not stopping the decline in growth.

Implications for real estate portals

For other real estate portals, there are a number of takeaways to this story:

  • Despite your market dominance and powerful network effects, there is a limit to how much revenue you can extract from your customers each year. It will slow over time.

  • Additional premium products and services take more effort to build, and are valued less by your customers.

  • Continued revenue growth comes from diversification into adjacent revenue streams.

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.

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.

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.