Who could buy Zillow?
Bloomberg reports that Zillow is suspending its I-Buying business for 2021.
The schadenfreude is palpable. There are lot of “I told you so” comments going around.
But perhaps the negativity is a little misplaced.
I-buying is a market-making business and market-making businesses are hard to get right, especially when it comes to real estate.
In financial markets, they develop in situations where A wants to sell and B makes an offer, hoping to sell to C at a mark up.
To make offers on assets in scale, it helps if the product or asset is as standardized as as possible.
I-buying has worked reasonably well in the Sand States like Arizona, where property is cookie cutter. It is yet to be proven in areas with more diverse real estate.
Capital requirements also scale up very quickly with market-making business models.
The US real estate market is huge with $1.7tr of value changing hands in 2020 (median price of house x number of units sold). That means an I-buying company with just 1% market share would need about $4.25bn in capital assuming a three-month holding period. (My math might be off but it is a BIG number).
Zillow definitely took on a lot when it decided to launch Zillow Offers in April 2018.
It has stumbled but it doesn’t mean its strategy has failed in anyway.
Real Estate is Ripe For Big Change
Two things have been disruptive over the last 5 years in the real estate industry: the rise of I-buying and the centralization of big data.
I-buying, the process of a tech company making an offer and closing on a house within a few days seemed outlandish in 2014, when Open Door first passed around its pitch deck.
Despite the teething issues, it is now a fast-growing segment of the US market. And it represents a new way of doing things. It gets rid of all the things that complicate buying a house. It makes an offer, and, on acceptance of the offer, it closes quickly.
Capital is being made available for the strategy too.
Open Door, Zillow’s main competitor, can now borrow as much as $9 billion though non-recourse asset-backed facilities.
Big data centralization was the other disrupter in real estate.
The real estate sales industry, like the travel industry, had a great number of data points that were not managed well. The MLS was private and run by real estate agents. Public records were maintained separately.
Zillow painstakingly collated all the various data sources into one platform, while integrating into the value chain of the industry like a trojan horse over the last 5 years.
In 2015, Zillow was still sitting on top of an existing industry and acting as a lead generation tool only. In 2020, Zillow is now involved in mortgages, title insurance and other adjacencies. It even announced it was starting a brokerage last September.
Zillow has become a very attractive asset in an industry ripe for disruption. As Ben Thompson, the tech analyst, notes, there is no platform yet like Amazon or Facebook in real estate. Zillow is the closest thing to it.
Why would Big Tech care about houses?
The FAANG stocks are huge companies. And they have been getting into each other’s gardens since 2016.
They therefore need to find a huge industry to disrupt next.
Scott Galloway argues that the next industries to be disrupted will be healthcare, education and real estate.
The real estate sales industry is particularly interesting as transaction costs remain high and it’s very fragmented.
It is also the gateway to the global smart home market opportunity for Google and Amazon, which will be a $135 billion industry by 2025 (ResearchAndMarkets.com).
Amazon or Google are not necessarily interested in the buying and selling of homes but in the potential of the data that comes from making more homes smart.
The market cap of Zillow is close to $20 billion. That’s only $5 billion more than the price Amazon paid for WholeFoods and it’s a lot cheaper than the $39 billion Square paid for Paypal.
If an acquisition happened, the real estate industry would become more centralized overnight, with one major platform dominating the others.
The site could become global giving Amazon and Google’s reach. There is no global portal currently.
I-Buying would also become more widespread. Not only would the algorithms improve, but Google and Amazon’s balance sheets could facilitate a lot more capital lines, one would imagine.
They could handle the losses better than Zillow as they would be betting on the smart home profits rolling in.
Google or Amazon — which one?
For now, my bet is on Amazon making a move.
Zillow’s CFO, Allen Parker, is the old CFO from Amazon and both Zillow and Amazon are based in Seattle. One wonders what conversations are being had in the local Starbucks.
Perhaps the only thing holding everyone back is Lina Khan at the FTC.
She is cracking down on the recent surge in Big Tech mergers. We know that Zillow’s $500 million acquisition of ShowingTime is already under the spot light.
Time will tell but with interest rates so low, it’s hard to see the boom in mergers and acquisitions not continuing.
Goldman Sachs’s investment banking division just saw its second highest quarterly net revenue number ever.
Zillow is a brand name in a huge industry. It’s practically a verb. With its 245mn visitors a month and its vertically integrated strategy, why wouldn’t it be a target?
@discussthetape; https://discussthetape.substack.com/
