Home for Sale Sold

As if traditional offline real estate brokerages weren’t already looking over their shoulder in fear of online listing portals – and they were – the situation just got markedly worse this morning with the online giant Zillow announcing plans to beef up through the acquisition of its nearest competitor Trulia. The $3.5 billion all stock deal is expected to close in Q1, with Zillow CEO Spencer Rascoff expressing doubt that it will face any regulatory pressure.

The move will result in the combination of the two companies’ 83 million and 54 million monthly unique visitors respectively across Web and mobile (many of which likely overlap), making it far and away the largest force in online real estate. More interesting is what the deal means for the services and features the post-merger company can offer. Zillow-Trulia might be compared to Amazon in the publishing industry, as it now controls inventory, pricing, merchandising, and the customer relationship. This full ecosystem approach makes the company a major threat to any smaller or less well-situated competitors.

If you consider the likes of Keller Williams and Coldwell Banker the Borders and Barnes and Noble of this scenario, it doesn’t portend a happy ending. The primary difference between selling homes and books, of course, is that consumers are not yet buying homes entirely online (in the vast majority of scenarios) and real estate agents are still a part of most transactions referred by Zillow and Trulia. But with increasing control and value-add in every transaction, the newly combined Web giant will be able to exert increasing pressure on agents’ transaction fees and overall involvement. Zillow, however, considers traditional brokers as its channel partners and advertisers and adamantly denies having intentions of “entering the transaction,” prefering to be considered a media company.

[Editor's note: Following publication, a Zillow spokesperson provided Pando the following comment:

I want to make it clear we are not competing with brokerages, and Coldwell Banker and Century21 don’t have reason to be concerned. They are partners, and, in fact, pretty positive of the potential because they view us as a distribution and marketing platform that will become more effective over time to reach more consumers. Zillow does not get involved in the transaction, no piece of it all nor will we.  

And later:

There is no way to do this, we provide marketing and branding exposure to help agents get more clients. These are highly complex, expensive transactions that happen once every seven years, on average. We don’t see the real estate agent’s involvement diminishing, we see their role evolving as consumers become smarter about real estate.]

Zillow and Trulia have also been edging out industry insider Realtor.com (backed by the National Association of Realtors) for both traffic and mindshare, rendering the once leading Web portal largely irrelevant in today’s industry. This merger should only exacerbate that situation, a point that the politically savvy NAR may raise should it choose to seek regulatory protection against this deal consummating. Don’t expect much sympathy from antitrust regulators, however, given the relatively small slice of real estate advertising revenue that Zillow and Trulia now claim.

It’s not terribly surprising that Zillow and Trulia would merge, given the similarities in their businesses and the economies of scale or so-called “synergies” available – not to mention the cost savings of not having to compete in the digital advertising market. Also, as Rascoff tells Techcrunch, Zillow attracts home shoppers earlier in the funnel than Trulia does, making the two a complementary pair and giving the combined entity even greater control over the home-buying process.

Nevertheless, today’s news marks an underwhelming end to Trulia. Now 10 years after the company was founded, and after years of grand promises of industry disruption, very little has changed in the way people buy and sell houses. Perhaps the increased scale of this merger will allow the combined entity to further innovate and drive change in the decades old process. Perhaps it will just mean more display and social ads for consumers.

Zillow has been on a bit of a mini-acquisition spree of late, snapping up Canada’s Retsly Software earlier this month for an undisclosed sum (Editor’s note: This article previously reported an eronious price of $166 million for this transaction.) and StreetEasy in August 2013 for $50 million. For its part, Trulia acquired Market Leader in May of last year for $355 million. If the newly combined giant wants to get serious about bringing real estate transactions online, for my money the next item on their shopping list should be digital document signing startup DocuSign.

At the close of trading Friday, Zillow’s market share was $5.33 billion, compared to Trulia’s $2.08 billion. The acquisition offer values Trulia at a 25 percent premium to this closing price (and includes the assumption of outstanding convertible notes), meaning that Trulia shareholders will own an estimated 33 percent of the combined entity. The company will continue to operate both brands in the marketplace.

Zillow reported first quarter revenue of $66.2 million, while Trulia reported $54.5 million over the same period. Each company saw this figure rise dramatically year over year, with Zillow growing 70 percent and Trulia more than 100 percent, suggesting the appetite for online home listings continues to rise. Benchmark Research posits that the combined company could generate $721 million in 2015 revenue, which would be more than double their combined 2013 total of $341 million.

Unfortunately, neither company has been able to turn all that traffic into profit, with Trulia losing $13.3 million in the quarter ending March 31 and Zillow bleeding $16.9 million during the same period. As a result, large portions of each company’s shares were shorted leading up to this sale – 52 percent for Trulia and 45 percent for Zillow – suggesting not everyone was convinced of their strength. Both companies saw a run up in their share price last week as rumors of this deal swirled, however only Trulia continued to rise today now that it’s been officially announced, up some 12 percent as of this writing, while Zillow is down more than 2.5 percent.

The key to reversing this money losing trend likely lays somewhere in extracting more fee-based income from real estate transactions – broker commissions or referral fees for ancillary services like insurance, title, escrow, and contracting – rather than simply increasing ad-revenue. Zillow’s Rascoff, however, has repeatedly denied the desire to move in this direction. Nonetheless, this merger alone should eliminate duplicative operating expenses and also reduce the cost of customer acquisition for the combined company by removing the largest competitor for each.

Consumers should notice little difference in the short to mid-term, as this deal winds its way through regulatory scrutiny and the two companies begin integrating. That’s a bit disappointing given all the things that could stand to change in the home buying process. But the one group that’s got to be sweating a bit this morning is the real estate agent and broker community. For an industry which views headshots on their business cards and creatively shaped fliers on doorknobs as innovation, it’s a challenge that’s been a long time coming. Let the real estate Hunger Games begin.