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Zillow’s chicken and egg problem: the natural monopoly of the quaint MLS

Kevin Boer, Broker Owner, 3 Oceans Real Estate, Inc. ()

December 7th, 2006 · 4 Comments

Today I blog from Seattle, the epicenter of online real estate, and also the home of my sister, whose family I’m visiting. After a fun evening of bonding with my adorable nephew and niece, it’s time to sit down and put to paper some of the thoughts that have been ruminating in me.

chicken-and-egg.jpgGalen’s post nailed it on Zillow’s chicken and egg problem, the same problem that all new entrants into an established exchange’s terrain go through. An exchange — a physical or virtual place where buyers and sellers meet — is a classic natural, self-propogating monopoly. The reason you sell your pez dispensers on Ebay is because that’s where pez dispenser afficionados hang out, and they in turn congregate there because that’s where they expect to find pez dispenser sellers. It’s a simple, elegant, and powerful system — and one that’s brutally difficult to fight against, as the odds are overwhelmingly in favor of the incumbent.

Historically it’s proven very difficult to topple a natural monopoly. There are probably far more efficient ways of trading stocks than the combination open-outcry/electronic system favored by the New York Stock Exchange, and many players have tried to unseat them, and yet the NYSE remains quite firmly entrenched, as it has for well over 200 years. Wheat, pork bellies, and other agricultural commodities have been traded in Chicago for a long time, and will probably remain there for another long time; the New York Mercantile Exchange, meanwhile, is where much of the world’s oil is traded, while the coffee trade is dominated by London’s International Futures Exchange. The exchange of our business is simply the MLS, and it too is a natural monopoly.

Difficult, however, does not mean impossible. If at least three conditions are met, a newcomer has a much better chance of a successful coup d’etat:

  1. The incumbent is slow to change and stuck in the past
  2. The new exchange is significantly easier and less expensive to trade on
  3. Neither the owners, nor the purchasers, nor the intermediaries of the goods being exchanged have a vested interest in the status quo

How has Craigslist so successfully eviscerated the newspaper classified ads system in such a short time? Simple: newspapers were loath to tinker with what had long been a cash cow; posting on Craigslist was significantly less expensive (read: “free”) and easier for both buyers and sellers; the owners of the goods (cars, iPods, tax services, what have you) saw no advantage to themselves in keeping the classifed ad business alive.

Zillow has 1) and 2) above going for it; it’s item 3 that will be the proverbial sticky wicket.

  1. Check. MLS systems, by and large, are not very open to change; much of this is due to the plodding nature of bureaucracies, which most MLS systems are.
  2. Check. As of last night, we can now post our listings on Zillow for free, without the sometimes extortionate quarterly dues our MLS’s charge us. Easier? Definitely — with the caveat that part of the greater ease is simply because MLS systems require the entry of literally dozens of fields of data, and this richness is part of the MLS system’s staying power.
  3. Half check. Home owners have no vested interest in MLS’s staying alive; they just want their homes sold and would be quite content to have their homes listed on Zillow if that’s what it took. Home buyers likewise could care less about keeping MLS’s around; they just want a marketplace with enough inventory. The intermediaries, however, (that would be us), see it differently. Most MLS’s are owned either directly or indirectly by the intermediaries, and they correctly view control over the MLS’s and their data as key to maintaining control over the market, the buyers, and the sellers. The problem is that the Internet has made it nearly impossible to keep information hostage, so the question has changed from “How do we keep control of the data?” to “Now that we can’t control the data, how do we still maintain relevance?”

Personally, I predict Zillow’s listing inventory will follow the same trajectory as Google Base’s: rapid growth to about the 1 million mark (ie 1 million listings across the U.S.) as early adopters, listing aggregators, and other third parties syndicate their listings, then a flattening at the 1 million mark as the rest of the industry, including unfortunately Alain Pinel, my brokerage, adopts a “wait and see” attitude.

When Google Base came out, I pushed hard within Alain Pinel for us to publish our listings there automatically, but I got nowhere. Our management made the strategic (and, I believe, incorrect) decision to not publish our listings to Google Base, and since Alain Pinel has a 30%+ market share in many local communities, Base will never have more than 70% of the local listings unless our management changes its mind. I predict the same will happen, unfortunately, with Zillow.

Which will buyers prefer: A wicked-cool exchange with at most 70% (and more likely much less) of the inventory, or an old-fashioned MLS with 100% of the inventory? I’d predict the latter, as long as the brokerages like mine have their way.

The only way I see this changing is if the public demands that their listings be put on Base and Zillow, and that time may be far off. Even in my home market of Silicon Valley, the public continues to clamor for that $500 full color weekend ad in the paper…and not — at least yet — for Base and Zillow.

Image courtesy of moot.typepad.com

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Tags: Real estate

4 responses so far ↓

  • 1 Vince Talerico // Dec 11, 2006 at 12:46 pm

    Hello Kevin! Zillo is really stering up quit a buzz through the real estate blog industry. I had yet to read the projected growth of Zillo, until I popped up on your blog. I think your predictions seem ligitimate with Zilo’s inventory reaching the 1 million mark in the near future. However, they are in thier beta phase and with this came high frustration levels for me. I tried to add a few of my listings and after wasting about 30 minutes (trying to add pictures and such), came out with nothing. I also analyzed a few sold properties with the Zestimator and found that tool to be off the mark a bit. Just thought I’d add my 2 cents!

  • 2 Blue Collar Agents - Zillow good for discounters // Dec 12, 2006 at 12:28 pm

    [...] There has been a tremendous quantity of commentary written about Zillow over the past week, with many great posts. Speculation abounds on how Zillow might or might not affect the traditional MLS model. I’ll tell you why I think Zillow is likely to trump Realtor.com and open doors for discounters. [...]

  • 3 True Gotham // Dec 12, 2006 at 1:26 pm

    The Power of a Blog in Good Hands…

    Being fairly new to the blogosphere, I am just beginning to fully realize the power of the blog and the incredible quality of real estate information and insight now available online if you’re willing to do some poking around. There……

  • 4 Blue Collar Agents Blog - Zillow: Good for Discounters // Feb 14, 2007 at 7:26 am

    [...] There has been a tremendous quantity of commentary written about Zillow over the past week, with many great posts. Speculation abounds on how Zillow might or might not affect the traditional MLS model. I’ll tell you why I think Zillow is likely to trump Realtor.com and open doors for discounters. [...]

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