In December of 2020, CoStar Group announced their acquisition of Houses.com which signaled their intentions to enter the residential side of the real estate industry. Up to this point, CoStar was primarily known as a commercial real estate powerhouse. Later in April of 2021, CoStar acquired Homes.com, which would go on to be their flagship residential portal, and the organization they would focus on the most. In addition, CoStar also has a strong multifamily residential presence with Apartments.com.
The problem CoStar faced in early 2021 was that the online presence they had in residential was tiny. Homes.com at the time of the acquisition was only getting 5 million users a month in an industry in which their competition Zillow was getting 150 million and Realtor.com was getting 60 million users a month. Homes.com would have to 10X their monthly traffic to even be in the conversation, and that is not easy.
Most companies when faced with competitors with this much of a lead would look to possibly acquire one of the leaders in the industry, and this is precisely what CoStar thought as well. At the end of 2022, Zillow’s market capitalization was approximately $7.8 billion but had been as high as $45 billion in 2021. If you add an acquisition premium on top of their valuation, it would be a huge transaction to pull off. And don’t forget any regulatory approvals that may have been an issue.
So buying the number one player in the market was a non-starter, what about acquiring number two? Realtor.com is owned by News Corporation and is considered a central piece of their residential property strategy. Newscorp bought Realtor.com for $950 million in September of 2014 so maybe they were willing to part with it at a price that made sense to CoStar. It appears it indeed did make sense.
Despite CoStar being coy about their efforts to buy Realtror.com, News Corporation disclosed to the Securities and Exchange Commission (SEC) on January 24th, 2023 that they were engaged in discussions with Costar regarding the potential sale of Realtor.com. Rumors placed the valuation of Relator.com in the neighborhood of $3 billion. Game on!
On the surface, this seems to make strategic sense for CoStar:
- Immediately gets you scale with 70+ million monthly users to monetize
- You get ~$600 million in annual revenue and a proven business model
- You get the well-known and valuable brand name of Realtor.com
- A Reasonable price of ~$3 billion
All of those features and benefits of the acquisition seem to make sense. If the strategy is right, the price is right, and CoStar had the ability to fund the acquisition, why did it not happen? The reason it did not happen is because after CoStar thought about it, they realized that almost none of that made sense! Let me explain.
1. Gets you 70+ million users
Yes, acquiring Realtor.com at the beginning of 2023 would get you 70+ million monthly users, but that would not help Homes.com at all. Those 70 million website users were generating leads that were being sold to buyers agents. However, CoStar already told everyone in the world that they would not sell leads to buyers agents. Realtor.com does not generate significant revenues from listing agents and only recently launched a toolkit to help listing agents get more listings.
CoStar probably did not have the relationships in place with listing agents at that time to even be able to service the leads they would receive from the 70+ million monthly users. Finally, spending $3 billion to get 70+ million monthly users is an extremely expensive way to get users. CoStar has spent a fraction of that to generate traffic and has already ramped to 100 million users by the third quarter of 2023. We will get into the topic of why the 100 million users is not what it seems in the next article in this series.
2. Gets you $600M in revenue
CoStar would have driven the existing Realtor.com revenue to nearly $0. As mentioned before, Realtor.com makes almost all of its revenue by selling home buyer leads to buyers agents. CoStar has mentioned quite forcefully they find this unethical and would never do this. This means CoStar would have to essentially shut down the very business model that generates all of the revenue. They couldn’t pivot and begin selling those leads to listing agents because they announced during their Q3 2023 earning call they were not monetizing their leads business until Q2 2024. It would be kind of tough to get your head around buying a company for $3 billion and turning off all of the revenue. I am sure the CoStar investment community would also have had a few concerns.
3. Getting the Realtor.com name
This point seems like a straightforward win but ends up also being problematic. It is not widely known that the National Association of Realtors (NAR) actually owns the rights to “Realtor.com” and licenses that trademark to Move Inc. which is the parent company of Realtor.com. Inman has reported that Move Inc. pays approximately $2 million in royalties each year to use the name. It is unknown if the NAR would have been willing to sign an agreement with CoStar or open up that process to bidding since it is probably worth much more than $2 million. Without that licensing agreement, the deal makes no sense at all as you will see in our next article.
4. $3 billion is a reasonable price for Realtor.com
If the rumored $3 billion valuation of Realtor.com is true, it would be a reasonable price if not for the significant problems outlined in points 1-3. Paying $3 billion for a company that would effectively have no revenue and non-permanent ownership of the valuable brand name is kind of a non-starter. As mentioned in point #1, spending billions just to get 70 million users would seem like a bad idea.
“Zillow is no longer a relevant player. We have done a million dollars of market research in the last couple of months. And we have found that Zillow is not the leader in the space. Zillow is actually not used by many homebuyers.”
Andy Florance, CEO of CoStar
In conclusion, everything that could make this a viable deal falls apart if you look through a strategic lens. I am surprised this conversation even got to the level requiring News Corporation to report the discussions to the SEC.
But, there is something that Realtor.com and Zillow have that CoStar will desperately need in the very near future that will make them a true threat in this industry. What they need is a solution to home buyers’ Fear Of Missing Out (FOMO) dynamic. This is a solvable but significant problem for CoStar/Homes.com and will be explained in article #3 “Why Homes.com 100 Million Unique Users Isn’t What It Appears”.
Warren Walker is the Managing Partner of SpringRamp Consulting and has over twenty years of strategy consulting and analysis. Connect with him by email at info@SpringRamp.com or www.SpringRamp.com
SpringRamp Consulting Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of any entities mentioned in the article or of any platform that publishes this article. This article represents an opinion on the possible actions, activities, impact, and results of various companies and should not be considered statements of facts.
