Zillow: Who Gets the Value?

Zillow, the property-sale platform, exists in between an online and physical world.

Zillow is an online Multi-Sided Platform that connects property buyers, property sellers, real estate agents and brokerage agencies. For-sale property listings are consolidated from multiple databases, and sellers and agencies can create listings on the platform. Buyers can peruse listings, which include the contact details of the seller/agent that can arrange a viewing. It creates value for each of the platform participants in different ways:

  • Zillow offers property buyers the opportunity to search through listings and obtain comprehensive information on properties online. In addition to the time savings generated (from having to visit several properties in person with an agent in order for the agent to triangulate the buyer’s preferences), buyers can choose agents based on properties of interest, and Zillow’s proprietary Zestimates combine public data with advanced algorithms to provide valuations that are comparable across the market. The vast amount of data allows buyers to easily consider a larger range of geographic options than they might if they had to explore options in person.
  • Zillow allows buyers to advertise their properties for sale on its platform. By listing the property online, sellers reach a larger audience of buyers (instead of just those who approach the local brokerage agency), and by creating a single consolidated record of listings, the platform gives For-Sale-By-Owner (FSBO) listings equal visibility to those listed by agencies. Owners can also add further information to the Zestimates generator to make their property valuations more accurate.
  • Zillow creates value for real estate agents by vastly improving their funnel of clients (buyers approach them with properties that they are already interested in) and consequently improving their turn rates. The platform also gives agents access to a broader client base, as buyers from other areas may be attracted to specific properties or areas.
  • Brokers benefit from the Zillow platform in an indirect firm, through the increased productivity of their agents. However, brokers have been vocal about the lack of value created by the platform and claiming that they only participate so as to not be left out. Zillow also increasingly offers the value-added services in closing a sale that brokerages currently offer, such as referrals to mortgage brokers and property valuation. The decreased dependency of agents on their brokerage firm, and the addition of value-added services, is increasingly dis-intermediating brokerages from the process.

Where Zillow currently struggles is their ability to appropriately capture value. Currently, Zillow generates revenue through subscription fees for marketplace and display advertising. The company is currently not very profitable, but faces challenges in charging platform participants, as the success of the platform relies on network effects. Platform theory dictates that the appropriate group to charge is the group that derives the most value from the platform and would be the least likely to exit because of the increased cost. In practice, however, the feasibility of doing so remains questionable.

If Zillow were to charge property buyers or sellers, we can expect that many users would exit the platform and regardless of which group was charged, the strong cross-side network effects between buyers and sellers on the platform would lead to a destruction of network effects. Zillow  already currently charges brokerages, but given that this is the group that benefits the least from participating in the platform, further monetization from this group is unlikely. Right now, Prisoner’s Dilemma is what keeps many brokerages on the platform, but were the group to take coordinated action and exit the platform, the high-quality content in brokerage agency listings (such as photos, measurements and descriptions) would no longer be generated, reducing the quality of information available on the platform.

The group that actually derives the most value from the platform is real estate agents, but there are practical challenges to tracking the value created. Agents connect with buyers and sellers off the platform to arrange property viewings, so there is no way for Zillow to charge on the basis of sales closed, as the rest of the interactions occur off the platform. Regulation prohibits the development of a platform in which properties are bought and sold online, so a commission-based structure cannot easily be implemented. The only way to capture more value would be a fixed-fee or subscription based model, but if agents were charged to list their contact details on property listings, they may refrain from doing so and interested buyers would no longer have a way to organize in-person viewings of properties.

Zillow remains a threat to conventional brokerage agencies, who are less able to compete with platforms in the information economy, but  because of their physical presence in the areas of their properties, they will retain a place in the value network through their ability to create digital collateral (such as photos). Regulation also protects many aspects of the property purchase legal process from going online, which protects the position of brokers, but as more such processes become digitized, full disintermediation may become possible, and Zillow will then be able to build a platform on which interactions cannot occur offline.




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Student comments on Zillow: Who Gets the Value?

  1. Very interesting post! Zillow is in a very tricky spot – all of their listings are also held by others (most importantly MLS which is controlled by the brokerage community I believe) and consumers have no willingness to pay. It seems like Zillow may need to figure out some way to create more proprietary data and possibly monetize through the mortgage / lender market or elsewhere. At this point, its hard to tell whether Zillow makes more sense as a standalone business or better served under the umbrella of Google or another firm that could push through value with advertisements.

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