The real estate industry is abuzz with the reverberations of the National Association of Realtors (NAR) settlement, prompting a need for strategic reevaluation, particularly for online home listings giant, Zillow. Boasting an immense user base, Zillow has long been a dominant force in the online real estate realm, drawing in a staggering 105 million unique visitors in December alone, outshining the likes of Netflix and LinkedIn.
Zillow's revenue streams have exhibited diversity, encompassing lead generation, advertising, and software services tailored for agents. However, a substantial 75% of its revenue in 2023 stemmed from services provided to brokers and agents in the residential market, a reliance that now faces potential challenges in the wake of the NAR settlement.
This proposed settlement may necessitate a thorough reconsideration of Zillow's business model, particularly its dependence on monetizing buyer leads and agent services. In contrast, CoStar, a significant competitor, has strategically positioned itself to navigate potential changes stemming from the settlement. Unlike Zillow, CoStar, the parent company of platforms like Homes.com and Apartments.com, refrains from selling homebuyer leads to buyers’ agents, instead opting to charge seller agents for enhanced listing placements.
This distinction assumes significance as it shields CoStar's revenue from potential impacts on buyer agents, a fact reflected in its stock performance, which has seen a surge in investor confidence following news of the settlement. CoStar's revenue structure diverges markedly from Zillow's, with its residential segment accounting for a mere 2% of its revenue.
Moreover, CoStar's recent introduction of subscription memberships aimed at prioritizing listings in search results underscores its adaptability to evolving market dynamics. By offering seller agents the opportunity to boost listing visibility without compromising buyer agents' commissions, CoStar demonstrates a proactive stance in navigating potential regulatory shifts.
In contrast, Zillow may need to reassess its revenue streams and explore avenues for diversification to mitigate risks associated with the NAR settlement. This could entail reducing reliance on revenue from agent services and exploring alternative revenue streams such as rental listings and mortgage origination, which have been less prominent in its revenue mix.
It's worth noting that while the NAR settlement prohibits seller’s agents from listing compensation for buyer’s agents on the MLS and that it also prevents NAR members like Zillow from setting up alternative channels for doing so, it doesn't preclude offers of compensation elsewhere. Thus, there's a potential opportunity for Zillow's competitors to gain market share by offering an alternative venue for cooperative compensation. However, the fear of legal repercussions might deter them from fully exploiting this avenue. Workarounds, like those mentioned in Kukun’s earlier article about the NAR settlement, might offer their competitors the best of both worlds---a chance to become “the new MLS” while avoiding litigation by allowing compensation offers to be communicated indirectly and privately through direct messaging or some other means. For example, instead of listing the offer of buyer commission compensation directly, their competitors could put in place a system of automated messaging that allows the buyer’s realtor to receive that information in an email or a DM. It seems by joining the NAR, Zillow may have taken on a near insurmountable competitive burden.
Overall, while the NAR settlement presents challenges for online real estate market players, it also catalyzes innovation and adaptation. In line with our earlier blog post, we think industry players will eventually concede that the old setup was better, but Zillow and other incumbents in the industry may end up recalibrating their business models, at least temporarily.
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