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The 900-lb Gorilla Cometh

December 12, 2008

There are really very few voices in the I respect more than Russell Shaw‘s. I mean, this is a guy who not only talks the talk, he actually walks the walk. His insights and ideas are great in and of themselves, but they are that much more credible in my eyes because he’s a tremendously successful practitioner of the craft as well.

So when Russell speaks on something I’ve written, and criticizes it, that criticism is something I take seriously. He writes:

In some of the posts on various blogs and also on Inman there has been discussion of IDX vs. VOW and how perhaps a national MLS is needed and that some fantastic company using really wonderful technology is going to attract loads and loads of business, pay the agents less and sort of take over. I contend that if such a thing were possible it would have already happened. Zip or Redfin would be making a ton of money (instead of endlessly feeding their companies with investor capital that is not likely to ever come back to them). I don’t think it makes any difference to any big company if only IDX or only VOW is used. About the only people who it will ever make a significant difference to are those agents (not “companies”) who primarily work buyers. They use other people’s listings (via IDX or VOW) as bait to attract buyers who aren’t working with any agent yet.

Desk-fee agents are not only not going away, they ARE the future of our industry. Don’t believe it? Look at the actual trends for the past decade. Our industry is shifting from a totally broker-centric model to 100% companies. Right now, in most parts of the country it is the big national 100% companies who dominate (in terms of numbers of agents). Take a closer look at where 100% started (Phoenix) and you see a very different picture: most of the agents are with 100% companies and the “traditional” companies have changed their splits to the point that they may as well be 100% companies. But it is the less well-known 100% companies that have the largest number of agents. Hint: they charge less. A lot less. My prediction is that these companies and teams of agents (with a rainmaker, mentor) are the future of our business. We will have fewer agents and I believe that is a good thing. A very good thing.

My only defense to this powerful line of criticism is that “past performance is no guarantee of future results.” Let’s get into depth a bit.

IDX, VOW, and Bait

I think Russell is surely correct when he says that buyer agents use other people’s listings, whether over IDX or VOW, to attract buyers. But I submit that if you go a level deeper into this “bait” concept, the difference between IDX and VOW are significant, and that the incentives as currently structured point the way towards a very different future.

It is worth noting that very knowledgeable people think I’m nuts. 🙂 I say, time will tell.

But this whole discussion is being driven at base by the continued shift of consumers to the Internet. That trend is not likely to reverse, as the demographics of the consumer continually changes.

And while Russell is right that buyer agents use other people’s listings as bait, I believe that the trend even for sellers is to look at effective online marketing programs by the listing agent. I mean, could you even walk into a listing presentation today without an integrated online marketing strategy?

So whether you’re talking about bait to attract buyers, or bait to get sellers to list with you, you’re still talking about the Internet and effective online marketing.

Now, throw into this volatile, changing environment these facts:

  1. IDX, while tremendously successful, is a pain to implement due to variety of local rules.
  2. VOW, while tremendously open, has that “signup” provision that is a major barrier to consumer engagement.
  3. Only public facing MLS websites (and possibly are free of either restriction, under the NAR-DOJ settlement.

What is the likely outcome?

To me, it appears that the future looks something like this:

  • Public-facing MLS websites become the primary consumer destination sites, with perhaps (depending on how the NAR-DOJ settlement is interpreted vis-a-vis being the primary national real estate portal (possibly to each MLS site).
  • Brokers (and agents) have enormous marketing advantages if they can convince consumers to signup with them in some way.
  • Ergo, brokers (and agents) who have extremely robust, powerful, and consumer-useful CRM systems married to an effective, consumer-friendly, and content-rich online marketing strategies win the battle for consumers. And winning that battle leads to wining the listings battle, as those brokers (and agents) are able to tell the seller, “We have a database of 95,000 homebuyers, married to our awesome website, and an integrated marketing approach.”

Perhaps it won’t happen this way, but I think the logic is valid.

End of Desk Fee Brokerage?

For what it’s worth, I didn’t come up with the title for my Inman interview. I’m not sure if desk-fee brokerage is going the way of the dodo bird. What I do wonder about, however, is what stops a Third Party Platform (such as Trulia or Homegain or whoever is left standing) from getting brokerage licenses, and leveraging their overall lower cost of operations (from economies of scale) and rolling out a national, desk-fee model, but featuring lower fees for all services that desk fee agents currently receive from their brokerages.

Sperry Van Ness has tried to do this in commercial real estate to some success, and that’s a business that isn’t all that friendly to a desk-fee model. Why it wouldn’t work in residential is something I’m waiting to find out.

Furthermore, as I mentioned above, what happened in the past is not a great indication of what is likely to happen in the future. At some point, especially in what appears to be a historic down market, the extremely thin profit margins of these various brokerages are going to catch up to them. Do they maintain the 100% desk fee model that is yielding less than investment into Treasuries? Or do they at some point decide it’s not worth all the hassle and the risk?

The Connection to Brand

What’s even more interesting is that Russell points out the unfortunate truth: real estate brands have lost so much equity, so much brand identity, that most of them don’t stand for anything:

Take what is currently, factually, the really biggest real estate company in the world, Realogy: other than Sotheby’s what brand do they have that matters? Try none for an answer. What meaningful difference does the general public or even the agent public see between Century 21, ERA, Better Homes & Gardens, or Coldwell Banker (just to name a few)? Which one of those is a “good brand”? (yes, yes, I know, Coldwell Banker is supposed to be their “premier brand”)

Is Coldwell Banker a better brokerage firm to the public than Century 21? Do people across the nation think to themselves, “It would be so great if we could buy our next home from a Coldwell Banker agent”? Ever? Does anyone, anywhere, ever think that? How about, ERA? Does anyone say,”I only want to do business with an ERA agent”? If not, what are those “brands” worth? Not much. Why? They don’t stand for anything. To matter, a brand must mean something in the mind of the public and few national real estate firms have ever done that and then managed to hold on to their position.

So, to start off, general agreement on all points. The big brands in real estate have lost most, if not all, of their brand equity.

Brand awareness is not the same thing as brand equity. So for Century 21 to claim that they are #1 in brand awareness, as they recently did, is actually somewhat meaningless unless the brand itself is connected to a real identity.

However, brand awareness is important. It takes years, decades, and really serious money to build up brand awareness in the minds of consumers. To even get people to recognize a particular logo and see it as being familiar takes real effort. And it does provide tangible benefits. In the case of C21, it meant that at least in a survey, consumers responded that they were most likely to choose C21 to buy or sell a house.

Furthermore, if you have a familiar brand, it takes far less effort to turn it around and give it a real identity. It isn’t easy, but it is doable.

What Russell does not take into account, however, in the brand story is how the brand equity was lost. Perhaps the full story will require far more study and research than my little blogpost here, but I submit that the main way that brand equity was lost by Big Brands was through loss of control over the agents.

Best Buy can put out all the TV ads in the world showing smiling, friendly salespeople talking about some sweet holiday story. I set foot into a local Best Buy, deal with one Best Buy salesperson, and all of that branding effort is wiped out if the salesperson is rude, surly, and a moron. It’s happened to me often enough that I no longer shop at Best Buy unless I absolutely must.

Same thing applies to retail. Bloomingdales was once seen as the creme de la creme of American retail — a true luxury with incredible customer service. Yeah… have you set foot in a Bloomingdale’s recently? Do you feel catered to? Special? Luxurious?

All the branding in the world cannot overcome a bad customer touchpoint, and the people who wear the brand is quite possibly the single most important customer touchpoint.

Take a look at the care with which service-driven industries, such as luxury hotels, select, train, and monitor their frontline staff from the check-in clerk, to the over-the-phone reservation people. If I feel that I’ve been treated less than perfectly at a Westin, I’m pretty sure I can get that employee fired. But at a Best Western? I seriously doubt it.

So in the world of real estate, which big brand really enforces brand discipline down through the ranks to the agent level?

For that matter, how many large brokerages — especially the 100% desk fee models — truly enforce brand message and brand discipline?

If the official brand statement is that “our agents are truly knowledgeable experts”, how many brokers fire agents who aren’t?  How many even test agents to see just how expert they are?

And the 100% desk fee models contributed directly to, and was simultaneously symptomatic of, that loss of control.  With a 100% desk fee model, the broker doesn’t care so much about the consumer, or his brand, except insofar as it would help him bring in agents who pay him fees.  The real customer is the agent, not the consumer.

Sort of tough to “control the agent” and “enforce brand discipline” when that’s the case.

The Gorilla Cometh

So when I predict the future coming of the Big Brokerage, it is based on certain fundamental assumptions and observations.

Brokers will not stay in a 3% profit business forever; either the profit has to go up, or they will get out.

We are currently at the tail-end of an agent-centric industry model pioneered by Remax.  The current shift is away from an agent-centric model towards a web-centric model, because the key to the whole industry is Who Holds the Consumer Relationship?

If Third Party Providers win that battle through superior technology, superior marketing, and superior web-based applications, then they will enable the “desk-fee’ing” of the entire real estate brokerage industry.  At that point, the brokerages might as well go out of business, because the agents don’t need you; they need the Third Party Providers far more.  This is the CoStar/Loopnet future of real estate.

What argues against this outcome is the simple fact that most Third Party Providers are losing money in a rough investment environment, and may not survive to see this beautiful future (for them).

If Brokers win that battle through real investment into technologies that enable a web-centric model, then they can and will absolutely reduce the cost of labor.  They have to in order to make back their investment on the one hand, and to raise the profitability of the business on the other.

What argues against this outcome is that most Big Brokerages do not yet seem to understand this, and in the current market, are likely to be very gunshy about investing in anything.

My current stance is that it is easier for the guys with the money — Big Brokerage — to make the investment, gain control over their agents, gain control over their brands, drive brand discipline through the ranks, and emerge far stronger than they ever have been, empowered by technology, than it is for the guys with the technology to find ways to make money.  Hence, I believe the 900-lb gorilla cometh.

But… I could be wrong.  And it could be the 900-lb bear that cometh instead.

(The agent, by the way, is simply not a player in this battle.  They don’t have the money, and don’t have the infrastructure.  They will use whatever tools are provided by whomever, and decide who the winner will be, but they themselves are not in this fight.)


12 Comments leave one →
  1. December 29, 2008 9:54 pm

    I totally agree we are moving towards a web-centric model but I don’t see many major brands leading the way into this spectrum. If you search Google or Yahoo for phrases consumers search, like, Las Vegas Real Estate, you don’t see any major brand in the top 10. You see, Yahoo and individual real estate agents holding these valuable top 10 positions.

    If you ask me, these agents that hold these top positions are more valuable than the company they hang their license with. These agents are providing free branding for their firm and because of their positions in the search engines, they have a large reach. These agents could easily move to another firm very easily without it affecting their business.

    Major real estate firms in Las Vegas went out of business or filed bankruptcy this year even though just a few years ago they were bringing in millions of dollars. Their mistake was not investing in the Internet. This is why will begin to see new firms emerging like Redfin that will become a “Brand Name”.

  2. December 30, 2008 12:01 pm

    @Tony –

    Thank you for the comment. As it happens, I completely agree with your analysis of the situation. Given consumer behavior, holding a top ten SERPS ranking in Google for major key phrases, like “Las Vegas Real Estate” is probably worth more than the brand or brokerage company. And as it happens, I completely agree that those agents who hold such rankings can easily move their license to any broker and do just fine. Finally, I agree with you that the reason why major real estate firms went bust was because they failed to invest in the Internet.

    I think the only place where I differ with you (and a vast number of really smart, knowledgeable realestistas) is what happens going forward. You and many others believe that the Old Dinosaurs are on their way out, driven to extinction by nimbler, smarter, more tech-savvy upstarts, like Redfin. That may very well happen.

    I just believe that the Old Dinosaurs aren’t quite as old, nor are they quite as doomed for extinction. I rather think of many of them as sleeping giants who haven’t woken up just yet… but this market will force many of them to do some serious soul-searching, and serious strategizing for how they stay alive. Many of them will come to the correct conclusions about where to shift their investment. And when they do, they have the resources to make it work in ways that a venture-backed firm that is still burning investor capital does not.

    True, many of them will fail to wake up, and still others will fail to execute properly, and they will be phased out. Creative destruction has ever been the way of the capitalist economy. But to write off all big brokerages is, I think, a bit premature. The next few years will be very, very telling.


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