First, the real value of Zillow Offers is mostly about expanding target addressable market through adjacencies. Zillow is also positioning itself more at the center of transactions.
Second, I assess the threat that Redfin compresses the size of the commissions market, and there by hurting both companies.
Third, I think what's happening is Zillow is abiding its time. It's letting Redfin blaze the trail in disrupting the real estate market, but can eventually shift to Redfin’s model.
Quick Reminder of Business Model Differences
• Zillow: Attracts buyer and seller to its website. Agents pay Zillow to advertise their services.
• Redfin: Home seller and buyers hire Redfin directly. Sellers pay Redfin 1-2% fee. Agents are employees of Redfin.
Zillow’s Upside – TAM expansion and Subtle Role Shift
Traditionally, Zillow’s Premier Agent serves as advertising for buyer’s agents.
With the Zillow Offers (their iBuyer offer), they now can expand to seller/listing agents. The idea is Zillow shows a low ball offer to the seller, and says “by the way, these listing agents here can help you get much higher prices, why don't we connect you?”
This doubles Zillow’s target addressable market. I think possibly more. Since listing agencies are more valuable jobs than buyer agencies, Zillow might be able to extract more value. (Listing agents are guaranteed to get his 3% commission, as long as the house gets sold. Buyer’s agents might pitch several houses to clients and end up getting nothing. Which job would you prefer?)
Zillow Offers also provides more opportunity to push the company’s mortgage offerings.
Not only did Zillow double its TAM, it’s also subtly shifting its role with consumers and agents.
On the sell side, the "Zillow Offers to seller leads" strategy let Zillow deal with home sellers before they get a listing agent, not after. On the buy side, Premier Agent 4.0+ includes lead qualification. Again, Zillow interacts more directly with consumers before handing off the job to agents.
By creating more touch points with consumers, Zillow is positioning itself to displace agents at the center of transactions.
Now let’s take a step back. At least for now, Zillow basically monetizes by taking a cut of agent’s commission pool via advertising and lead generation. So for seller listing, if seller agents make 3% commission, Zillow might be able to take 0.5-1% by providing leads.
The problem is Redfin compresses the size of the pie with their low fees. It's a big risk for Zillow. How can Zillow charge 1% for leads when seller agent only makes 1%? They can’t.
Keep in mind Redfin is bleeding cash at these prices, yet they keep on doing it. In fact, they’re ready to ramp up advertising about the 1% fee service.
This looks like a lose/lose situation. Redfin can end up compressing industry commissions to the point where Zillow, Redfin, and traditional brokerages all get hurt, while home buyers and sellers benefits.
But How Far can Redfin Go?
There's a limit to Redfin's creative destruction though.
First, Redfin’s price is not really 1%. That 1% is their basic listing service. They have a more complete Concierge service that charges 2%. And that’s just for seller agents. If buyers have their own buyer’s agent, they get paid commissions as well.
So at the end maybe Redfin gets the total commission down to say 3%-4%. It’s not going to be zero. That’s still a huge cut percentage wise (20-50%) from the current 5-6% commission, but there’s a floor some where.
Second, unlike Zillow, Redfin is bleeding cash. They’re pushing a low cost strategy, but don’t really have the balance sheet to do it. How much lower can Redfin go? How long can they keep this up? How much longer can they convince investors to fund this strategy?
Investors are willing to fund loss making, cash flow negative companies because of growth and operating leverage. But operating leverage here is limited, because unlike a pure software company, Redfin’s costs are not truly fixed.
Each agent can only handle so many customers before Redfin has to hire another agent. Redfin's limited ability to scale will eventually make it hard for Redfin to fund their low cost strategy.
I think Redfin is in land grab mode right now, but any pricing pressure they exert on the industry (and Zillow by extension) will take time, and that pressure will eventually let up.
Online Platform Gains Leverage Over Agents
So it would seem that Redfin’s low cost push has a limit, perhaps say cutting industry commission to 3-4% of sales price.
Price cuts are only part of Redfin’s disruptive strategy though.
Just as importantly, it’s shifting the way people buy and sell homes. Instead of going to individual agents, and let them hash out deals with other agents, people use an online platform like Redfin and Zillow to not just get a price estimate, but also directly sell their homes, or let the platform assign an agent to them.
The online platforms, Redfin and Zillow, then become the center of the transaction, instead of a collection of agents.
The subordination of individual agents to online platforms is already under way. Redfin obviously already does this by interfacing directly with home sellers, with agents being mere interchangeable employees. As I mentioned earlier, Zillow is making a similar move with their seller leads business and Premier Agent 4.0+.
The explosion of the iBuyer model, by quickly providing sellers a “quote”, should further position online Platforms as the center of home sales transactions, away from agents.
Alternative Ending - Both Redfin and Zillow Wins
This increased leverage over agents increases the likelihood that Zillow can further shift their monetization model in the future.
If Zillow can take control of seller listings, lead qualification, and decide which listing agents to connect with sellers, the next logical step would be just to hire those agents as employees.
That puts them not very far from Redfin's model.
The exact route of Zillow's shift will vary, but it's happening.
Redfin is at the forefront of industry disruption, but they do it in an unsustainable way. At the same time, Redfin's success helps Zillow’s hidden agenda – which is increasing platform power over agents.
Redfin is blazing the trail by burning cash. Zillow is following behind, abiding their time with a revenue model that leads to positive cash flows.
When the time comes, Zillow’s monetization model can converge to that of Redfins, and they settle at a 3-4% total commission while taking a much larger market share.
