As many longtime readers know, Andrew Flachner is a good friend of mine, and a wonderful young technology executive. I like Andrew, I respect Andrew, and I thought both of those things while not singing drunken karaoke with the man.
That is not to say that we haven’t had our (intellectual) disagreements. I find that I tend to have spirited disagreements with my friends. So for example, when RealScout announced its New York Buyer Graph initiative, I wrote:
Let me see… the seven largest and most powerful brokerages in NYC who have significant “market power” have combined, agreed, coordinated… one might even say conspired (a term filled with legal meaning under the Sherman Antitrust Act)… to create a “groundbreaking cooperative” that will be a total game changer. One of the explicit promises, a core value proposition, of this cooperative is that it will “lock down” buyer data and prevent “leakage” into the portals.
No, that doesn’t sound problematic at all, said no antitrust attorney ever who wasn’t paid to say such a thing.
I’m going through deja vu, as Andrew just published an article first on Inman and then on LinkedIn that is getting a ton of attention. Its title is “How Market Share is Creating Competitive Superpowers in Real Estate” and I do recommend you read the whole thing.
Well, in my first post, I wrote, “May you find what you are seeking” which is one of the three ancient Chinese curses, which can be translated as “Be careful what you wish for, as you might get it.” This is another such a case.
Are RealScout and the brokerages who are working with RealScout really looking for a civil war within the industry in pursuit of this “competitive superpower”? Because that’s where y’all are headed.
If the various MLSs and the brokerages who make up the vast majority of the “market share” today allow RealScout and its band of super friends take over and build this superpower to put all of them out of business, well, then they deserve every bit of what’s coming to them. On the other hand, if self-preservation is an instinct you possess, then all of you various MLSs and brokerages who are not part of the RealScout Superfriends Network should seriously consider whether you will act now, today, or wait until RealScout has gathered all of the Infinity Stones and can kill half of you with the snap of a finger.
Either way, it’s civil war in residential real estate. Is this really what you’re looking for?
Let’s do this.
Frankly, as erudite as Andrew’s examples of how market share leads to “competitive superpowers” are, they are almost completely irrelevant to real estate… except perhaps as unintentional object lessons. The point, though, behind those entertaining and interesting anecdotes is to push something that Andrew and RealScout have been pushing for a while now: the benefits of “network effect” in which the presence of sellers brings buyers which then brings more sellers which then brings more buyers, etc. etc. This is really what RealScout has been selling the past couple of years, to some success, and God Bless!
As Andrew puts it:
To reach a position of dominance and compounding growth, companies must first reach a tipping point in market share which enables two critical superpowers:
- Superpower #1: With enough market share, companies can literally make the market because they control so much of it.
- Superpower #2: Dominant market share also enables a company to leverage data to differentiate and dominate.
Those superpowers are activated when a company achieves some “Minimum Viable Liquidity” which Andrew defines as, “the amount of supply and demand that you have to control to be able to make the market by yourself.”
I have to admit that I’m completely confused as to the use of the phrase “make the market” in this context, since it brings to mind actual market makers who set the prices on both the buy and the sell side, providing liquidity to the entire marketplace. That makes sense for an iBuyer, but I just don’t understand how “making the market” applies to either AirBnB (which does not “make the market” in any sense of the term) or Google Assistant (which is just a competitor to Alexa, and does not “make the market” in any sense of the term) or real estate brokerage….
If the article ended there, I would have just moved on and said, “Self, you just don’t understand what Andrew is talking about.” But it didn’t end there. It continued.
Andrew on Real Estate
First, Andrew points out that due to the existence of the MLS, residential real estate hitherto had not seen the creation of an AirBnB or a Google or similar dominant company, but that dominant company can emerge because of buy-side data:
The real estate industry hasn’t yet encountered a company that’s captured enough market share to reach the market share tipping point. One key reason is that the MLS has leveled the listing data playing field so that no one has been able to gain a competitive advantage with data. In other words, supply side is visible to everyone.
The demand side, on the other hand, has been largely invisible, because consumer behavior is either not captured by the brokerage community (see below)–or, when it is, it remains proprietary.
It goes without saying that RealScout’s core business is somehow helping brokerages gather, leverage, and use this proprietary and invisible demand side data. Not a coincidence, I imagine.
Compass the Bogeyman
Andrew’s first example is Compass, which has been on a market share land grab tear using the money it has raised from investors like Softbank:
Compass has realized that market share makes their brokering power bigger. With more listings and more buyers, they can bolster your exclusive “coming soon,” “off-market,” and “in-house” transactions that the competition can’t match, creating a “FOMO” (“fear of missing out”) effect in both customers and agents.
If you’re a consumer or an agent looking at the screen below from compass.com, which shows Compass’ exclusive off-market and coming soon listings, how could you not work with Compass?
These tactics fuel the incentives for buyers to work with Compass because Compass has the exclusive listings. And that means sellers have to work with Compass because they have all the active buyers working with their brokerage. And finally, agents will have to work with Compass because that’s where the action is. Boosting agent recruitment then brings in more listings and buyers, fueling that superpower growth loop.
Interesting. What else?
The second “example” Andrew provides is a naked sales pitch to the brokerages in Miami to follow what brokerages in Orange County, CA, and New York City have done by partnering with RealScout to “pool their network and data”:
Now, the big question is: How can smaller brokerages, who don’t have the same level of financial resources as their venture capital-backed peers, compete effectively? To answer this question, let’s shift our focus across the country from San Francisco to a very different market: Miami.
Miami presents a very different picture from San Francisco. No individual brokerage has more than 10% of the market. So what’s the right growth tactic in this case?
As we’ve seen, Airbnb used the Craigslist growth tactic and Google used the GOOG-411 growth tactic to propel their company/service to the tipping point. The most practical growth tactic for smaller market players is to pool their network and data with others in their market to get to the minimum levels much faster. You — in concert with other firms in your market — already have the market share. That’s your advantage. You just have to take advantage of that advantage.
Huh, I see. Andrew brings up Realogy, but just to note that Realogy brands have 25% market share in San Diego. I don’t know what Realogy is supposed to do with that, but okay, that’s cool. We already knew Realogy was big, especially in San Diego.
What’s the Goal?
What’s the point of all this hand-wringing about market share, superpowers and demand aggregation? Helpfully, Andrew tells us:
To know when you’ve achieved the Minimum Viable Liquidity that unlocks the market making superpower, two key things have to happen:
- Clients/agents feel you have enough in-house buyers and exclusive listings to switch to your brokerage.
- Sold prices for proprietary listings are comparable to those sold on the open market. [Emphasis added]
Izzat so? And while these companies partnering with RealScout are busy creating in-house buyers and exclusive listings, and putting together a sold database for proprietary listings that will one day be “comparable” to those sold on the open market, the rest of the industry will be doing… what exactly?
Andrew seems to believe there are only two options for brokerages. They can join forces (i.e., work with RealScout) or watch others join forces:
You can watch it happen, as big players make their moves to rapidly acquire agents and brokers, companies, and market share to become dominant players.
Or, you can make it happen by joining forces with other brokerages. When brokerages come together in new ways, they can unlock value for agents and consumers that no new entrant into the market is capable of.
Either Andrew does not think there’s a third option, or believes that brokerages and MLSs and the rest of the real estate industry would not be ready, willing or able to take that third option: brokerages can join forces to kill this superpower-making initiative before it gets going.
Pro tip: If you’re going to fight Thanos, you might want to do that before he gathers all of the Infinity Stones. Similarly, if I’m an MLS, I have to look hard at strangling RealScout in the crib, now, today, before it grows into a market share superpower-commanding arch-nemesis.
The MLS Is Not a Birthright
I’d hate to point out the obvious, since it is something that simply doesn’t occur to anybody in the real estate brokerage industry, but… membership in the MLS is not a right. Brokerages are Participants, and they’re used to thinking that the MLS is by them, for them, and of them. The struggle over membership in the MLS is the struggle between brokerages and “them” — those third-party interlopers, like Zillow or Opendoor or Redfin (despite the fact that Redfin is a brokerage like everybody else) or franchises or what-have-you. But a licensed brokerage? Why, the MLS is a birthright of having a brokerage license!
Except it isn’t. Here is the NAR MLS Handbook §2, which defines “Participant”:
Mere possession of a broker’s license is not sufficient to qualify for MLS participation. Rather, the requirement that an individual or firm offers or accepts cooperation and compensation means that the participant actively endeavors during the operation of its real estate business to list real property of the type listed on the MLS and/or to accept offers of cooperation and compensation made by listing brokers or agents in the MLS
I could easily argue that engaging in widespread “coming soon” or “exclusive listings” and “in-house buyers” in a programmatic way is not “actively endeavoring to list or to accept offers or cooperation and compensation.” And if I could do it, I guarantee that the President of MLS XYZ who isn’t part of RealScout’s private club of Superfriends can make the same argument.
The MLS is Not a Suicide Pact
Furthermore, while the MLS tries very hard to be fair and neutral to all Participants, tries very hard not to engage in anticompetitive activities (or it gets smacked down by government authorities who are watching the MLS like a hawk), the MLS is not a suicide pact. There is no requirement that the other brokerages who make up the MLS continue to allow those brokerages who want to create what is effectively a separate MLS (“Sold prices for proprietary listings are comparable to those sold on the open market?” What the hell else would you say that is?) to continue to be part of said MLS.
Let’s use Compass as an example, since Andrew used it. Compass now has 36% of the market in San Francisco, which Andrew thinks is close enough to the tipping point for its superpowers to be triggered. Okay, but that means the brokerages who aren’t Compass have 67% of the market, and there is no duty, no requirement, no obligation of those brokerages to continue to allow Compass and its agents to have access to the MLS while they keep their listings in-house and off-market in a programmatic way.
If you look at that and just shrug and say that well, there’s nothing you can do, because Coming Soon is a valid strategy and the MLS can’t do anything about it… just understand that you are choosing to commit suicide. There is nothing in the structure or rules of the MLS that says you can’t do anything about it. You’re just choosing not to do so for whatever reason.
The MLS is concerned with fair play and fostering cooperation amongst competitors. It is not a suicide pact.
Similarly, RealScout is a vendor to many an MLS because of its core product: a brokerage website that has listings (from the MLS, from all these other brokerages) that generates all this buyer activity and buyer data that it wishes to leverage on behalf of the superfriends to unleash their superpowers. Again, there is no requirement anywhere that the MLS continue to allow RealScout access to its data, to its brokerages, to its subscribers, in order to help RealScout create a separate institution that will weaken and destroy it.
Given the plentiful advance warning that Andrew has provided about the ultimate endgame of its Buyer Graph initiative, of its attempts to leverage buyer data, of its attempts to create superpowers by leveraging market share… well, the MLS and the brokerages who aren’t part of the superfriends network are well within their rights of survival to decide not to let those companies play ball.
Is this what you were wanting?
The MLS Guarantees Fair Play, Not the Right to Form a Conspiracy
Finally, when the MLS has gotten into trouble in the past with antitrust, it’s because it overstepped its proper bounds: a cooperative venture by competitors who want to derive mutual benefit by ensuring fair play in sharing data and sharing commissions. Prohibiting brokerages who don’t have physical office space from joining the MLS is a no-no because the motivation behind that was to protect the incumbents. Preventing new and novel business models of individual companies is not about fair play.
I think that calculus changes when we’re talking about a conspiracy, rather than an individual company or its business model. And yes, that’s exactly what RealScout and its Buyer Graph initiative is — a conspiracy in the antitrust sense of the term. From the United States Department of Justice:
Conspiracy or Agreement: The conspiracy or agreement to fix prices, rig bids or allocate markets is the key element of a Sherman Act criminal case. In effect, the conspiracy must comprise an agreement, understanding or meeting of the minds between at least two competitors or potential competitors, for the purpose or with the effect of unreasonably restraining trade. The agreement itself is what constitutes the offense; overt acts in furtherance of the conspiracy are not essential elements of the offense and need not be pleaded or proven in a Sherman Act case. [Emphasis added]
Maybe “unleashing superpowers” and “dominating” and acquiring “competitive advantages that the rest of the market can’t replicate” won ‘t be considered by the DOJ or the courts as “unreasonably restraining trade.” If I’m the MLS litigation counsel, I’m willing to take that question to court.
But whatever the courts might say, if I’m the MLS, I say that I can’t and won’t discriminate against individual brokerage company’s business model, but I don’t have to enable a conspiracy amongst two or more brokerages in concert with a third party technology company who is a vendor to my system, to help crush the rest of my Participants. That is very much within the bounds of the principles of fair play and neutrality that the brokerages who make up the MLS want.
The Object Lesson of Craigslist
Finally, let me return to the object lesson of Craigslist which Andrew cited as an example of how AirBnB grew to its dominant market share superpower position. As Andrew relates:
As an early-stage company, Airbnb’s dominance was by no means assured. Growth was slow at first, and the company commanded a sliver of market share compared to competitors.
On the contrary, Craigslist had a massive user base in those early years. Further, Craigslist was the place where people who wanted alternative accommodations (besides hotel rooms) looked for listings—which is Airbnb’s exact target market. So, Airbnb performed what has now become a legendary growth tactic by creating a bot that automated posts on Craigslist, unbeknownst to Craigslist and contrary to its terms of service. The ploy worked, helping Airbnb quickly grow its listings and users at almost no cost on its rapid rise to the tipping point.
So AirBnB broke the rules of Craigslist to grow, and now that it has captured the traffic and leveraged network effect, it’s a “Look how smart we were!” I’d bet that if Craigslist could go back in time, it would do some things differently as it came to AirBnB.
Well, the MLS and the rest of the brokerage community has now been adequately warned. Notice has been served. You are in the Craigslist position, and RealScout and its superfriends are in the AirBnB position. If you do nothing, then you deserve everything coming your way. Your call, your choice, but the object lesson of Craigslist should be lost on nobody.
Is this what you wanted?
Be Careful What You Wish For….
I imagine that Andrew and RealScout have not thought this far in advance, because frankly, Andrew is a really nice guy. He’s not quite as cynical or as tactical as I might be. Maybe he figures that this is a cool article, and if it helps sell a few more licenses to RealScout, why, that’s fantastic business development! And besides, the MLS is a birthright of brokerages, and these major brokerages with significant (but not enough) market share would love to unleash superpowers and grow explosively, right?
All I can say is, be careful what you wish for, as you might get it. What Andrew and RealScout are wishing for is to grow their network of brokerages joining forces to aggregate buyer data, so as to create insurmountable competitive advantages for those companies.
Well, you just might get what you wish for. But I’ll ask again, is this what you want?