What follows is my opinion. I have no stake in Zillow and I am not a member of NAR. I just help others who are in the industry succeed online. (so technically I am a competitor, but in a works from my basement vs a $5B oops stock price dropped…$4.8 Billion company…oops 4.7 Billion..that was quick.) sort of way)
I have had no less than 20 people in the real estate industry ask what my thoughts were on Zillow’s move to buy Dot Loop. They all want to know whether I think it was a good idea. They want to know whether Wall Street will buy it and this will propel Zillow back in an upward trajectory after a tough past couple of weeks. So here’s my take:
EVERYONE IS LOOKING FOR A COMPLEX EXPLANATION FOR ZILLOW’S RATIONALE.
IT IS SIMPLE.
It is a DESPERATE move made by a company that is not profitable and that is falling out of favor with the industry that HAS to show something to Wall Street because they have neither profitability nor dominance. And I predict it will backfire in a BIG way. Here is why…
1) Zillow in the coming days will report less than appealing profitability numbers. Their CFO is leaving and if they do NOT get some profitability by Q3 (They report in the first part of November if memory serves, they DANG sure are not going to get profitable during the winter months when advertising in the real estate space wanes.
2) As if the lack of profitability problems are not enough, they have traffic problems as well. Their traffic problems are WORSE. The folks at Inman (and Wall Street as well) virtually wet themselves with glee 12 months ago about the online dominance potential of the combined Zillow / Trulia juggernaut. It was great reporting at the time but it just has not turned out to be that way. Quarter one and Quarter two 2015 COMSCORE traffic data has been much lower than year over year for last fall and winter. This is a CONCERN for Wall Street because if there is not dominance and traffic growth there MUST be profitability. Z has neither. And those of us who had not drunk the Kool Aid in the industry could kinda see it coming.
3) Then came the distraction of ListHub alongside that. The industry was starting to fight back against Extreme Makeover Syndication Edition. Transition year indeed. Just 8-10 months after the coronation of Zillow as the king of real estate internet, the numbers have waned.
3) So Zillow needs SOMETHING besides profitability to get Wall Street happy and they cannot use traffic growth because…and..well..they…are not growing at near the pace they were. **re-read my opinion in point #2** Seriously. Click on the links and READ IT.
4) In order to keep the Street’s attention you need to either be profitable OR crushingly dominant and a good bet to increase in stock price in the short term (read: Amazon). If you have neither of those things, my humble opinion is that you better be pretty good at Wall Street poker. And that is EXACTLY what I think happened here.
5) Then the CFO quits. Enough said.
6) Zillow still (to my knowledge) has NOT disclosed their CHURN rate to Wall Street. I think the churn is much worse for them than the street thinks. I talked to more than a few REALTORS that are Zillow customers this past month. Not one was increasing their spend. All were decreasing or going to Pay per Click with Google. Anecdotal evidence for sure, but enough for me to smell blood in the water.
7) Zillow’s board recently proposed to do a move that Google did in terms of offering a new class of shares traded under a new stock symbol. This gives yet MORE control to the founders / managemetn and LESS control to shareholders. Again not appetizing to Wall Street. This also has the added benefit (from Zillow’s point of view) of making it harder for the casual stock investor from realizing that Zillow is trading at just over $80 per share when it was at $164 at the peak, but don’t think for a minute that savvy investors did not see that for what it was.
Zillow needed an aqcuisition that Spencer Rascoff could SELL to Wall Street on the first week of August and the first week of November that would be marginally profitable (maybe) and something that whoever the new CFO is that he can sell to the street as well. And then well the winter is the winter and then they can HOPE for success in the spring.
That seems like a big fat gamble to me with the acquisition of DotLoop, but WHY they did it seems obvious. They got nothing else. Right?
Again this is only my opinion. But here is why I think that it will backfire.
1) Dot Loop is much easier for average REALTORS and BROKERS to leave than many on Wall Street would realize. A REALTOR who does not like Zillow (and there are a LOT of them) can easily switch from DotLoop to any number of other folks. Docusign comes to mind. Mark my words that BEFORE the deal closes with Dot Loop, competitors in online real estate marketing will be offering a ton of “switch to us for a discounted rate” sort of loss leader deals that have proven to be highly profitable and more importantly to QUICKLY erode whatever profitability or revenue stream that Dot Loop had. If (by the time I write this) the guys at Docusign are not already talking to the guys at Keller Williams, it would surprise me. It is going to be a race to the bottom price wise for those companies, since Zillow sounds like they are planning on using Dot Loop as a loss leader as well. Again, this further erodes the profitability (and prevents Zillow from being successful profitability wise in the short run.
2) The transaction management side of the Real Estate Industry is TOUCHY. Real estate brokerages are skittish about who holds their data. And the thought that Zillow owns the systems that their clients documents reside on is ALREADY starting to create chatter among the tin foil hat crowd in the industry. This makes it even MORE LIKELY that REALTORS will migrate away from Dot Loop towards competitors that REALTORS view as more reliably independent and not owned by someone that Brokers and Agents often perceive as a competitor at worst and an aggregator that sells to their competitor at best. This just cemented that animus in place in a very open way. That is a big price for Zillow to pay because that animus is now more apparent than ever to Wall Street and the average investor.
Bottom line is that this is a fairly EASY target for REALTORS to show their disapproval with Zillow and I think DotLoop will be a shell of what it once was in a few short months.
So effectively the winner in this deal is Austin Allison (CONGRATS!). The other winners will be Agents because the downward pressure on the transaction management pricing model just got ratcheted up…BIG TIME. The Loser? Methinks Zillow.
I welcome your thoughts and opinions.