don't get caught in the hype: zillow and trulia are destined to fail
TRANSCRIPT
2014
Schulich School of Business
11/3/2014
Don’t Get Caught In The Hype: Zillow and Trulia Are Destined To Fail
Overview
On July 28 2014, Zillow’s $3.5 billion all stock acquisition of rival Trulia was agreed upon
unanimously by leadership and cited a series of benefits including faster innovation, better ROI
for advertisers, and cost savings from synergies (BI, July 28/14). If approved, the combined
organization will dominate the market, positioning the company to become the Google of online
residential realty services.
Unfortunately, that’s really just a pipe dream.
Our research and critical analysis of publicly available information led us to a much different
conclusion. Despite their rapid growth, Zillow and Trulia have weak business models and are
alienating the suppliers (real estate agents and brokerages) who are vital to their businesses. The
result is that their supply of listings will start to deplete, and without this content there is no
incentive for consumers to visit.
Therefore we believe shares of Zillow and Trulia should be liquidated and/or shorted almost
immediately. It appears management shares this same belief: many employees at Zillow have
been selling their shares.
Allow us to explain.
Content Is King, and That’s Where The Problem Lies
When Zillow and Trulia first started, they each aspired to dominate to the market for online real estate
listings. As media companies, having the most unique visitors was key to attracting and maintaining
subscription and advertising revenue. A review of their annual reports and press releases confirms they
had similar strategies -- grow audience and agent subscriptions through massive, awareness-driving
advertising campaigns12
.
“we will forgo some profitability in the near term to grow our audience market share...first, we
win audience, then we reap most of the revenue and the profits”
-Spencer Rascoff, the CEO of Zillow (Hagey, 2014)
Our research has found that both Zillow and Trulia’s strategies are both short-sighted and deeply flawed.
A fundamental element to their strategies that cannot be underestimated is access to real estate listings. To
1 Zillow 2013 Annual Report
2 Trulia 2013 Annual Report
Q. Which company is getting the better deal and why?
A. Trulia got the better deal in the short-term, but the deal won’t help either of them.
Q. Does the structure of the deal make sense for each company?
A. Yes, because shared ownership wants to see the merged entity thrive, so an all-stock
transaction gives them the best chance.
Q. What will the futures likely be for each company on a standalone basis if the transaction
fails to close?
A. Both companies will fail.
Q. Based on the companies’ present combined market valuations, what assumptions about
their future would you have to make in order to buy stock in the combined company?
A. A series of next to impossible events would be required, including: brokers and agents not
boycotting the service, decreased competitive threats, and executives demonstrating faith in the
organizations.
Q. What trades, if any, would you recommend around this transaction and why?
A. Short the stocks of both companies.
win in this market, a company must have the most accurate, up-to-date and the largest number of listings.
A closer look reveals that this is where things begin to fall apart for both companies
Disrupting an Industry
To understand the problems with Trulia and Zillow, we first need to provide a quick overview of the
industry.
Currently, brokerages and agents belong to the National Association of Realtors (NAR), an industry
representation body that has pre-negotiated deals with local MLSs (Multiple Listing Services). These
MLSs gather listings from all agents and brokers in a geographic region, creating a one-stop shop for
agents to view each other’s listings (a central hub). The goal of the MLS is to broadly display an agent or
broker’s listings while providing a standardized means to make it simple for them to find and understand
the listings.
More recently, MLSs have opened up a limited version of this information to the public, in order to
increase exposure of the listings. In addition, listing syndicates (such as ListHub) now aggregate multiple
local MLS feeds and distribute the listings across a wide range of online portals (e.g. classifieds, social
media sites). This is where Zillow and Trulia enter the picture, as they are both online portals specializing
in real estate listings, providing brokers and agents with an additional platform to reach consumers.
Here’s where it gets interesting.
Zillow and Trulia aggregate these listings from individual brokers and agents, as well as MLSs and
syndicates at no cost, creating a massive database of listings for individual consumers to browse*. Zillow
and Trulia then sell subscriptions to advertise alongside these listings to anyone willing to pay for a
subscription (in addition to other advertising revenue).
* Note that brokers and agents can choose whether or not their listings are syndicated. At the moment, it
would seem logical to do this - the more viewership the better. But as pointed out below, not everyone
feels this way.
The sale of these advertising subscriptions comprises approximately 80% of their revenue, making it the
main driver of the growth of their business34
. To grow this segment of their business as quickly as
possible, both Zillow and Trulia have extremely aggressive outbound call-centres, tasked with selling
subscriptions to agents across the U.S.
Aggressive, Unethical Sales Tactics Are Used to Acquire New Subscribers
When the merger was announced, Zillow released a statement asserting that both companies had
cultural synergies5. Upon investigation, it was noticed that each of the companies have a
dichotomy of organizational cultures within them: the corporate culture publicized on the
respective websites of these companies is only existent in the non-revenue generating
departments. In contrast, the inner workings of the revenue generating call-centres within both
Zillow and Trulia are worthy of any potential investor’s attention.
Primary Data collected from Sales executives at Zillow and Trulia revealed that both companies
have a strategy of aggressively building sales, most often at the expense of sales employees and
customers. The sales employees (titled “Account Executives” and “Inside Sales Consultants”)
described the work environment as stressful and toxic while stating that the job should be a last
3 Zillow 2013 Annual Report
4 Trulia 2013 Annual Report
5 Business Insider, 2014
resort for anyone (See Appendix 1). Trulia’s culture became increasingly worse once the
company went public and even more so after the merger was announced:
“I watched management slip from a fun startup culture, to a bad impression of a
corporate hack when the company went public, to a full blown shady sales
empire with the recent acquisition news”
-Accounts Executives, Trulia
The worst thing is the turn over...the main thing that shocked me is how
unprofessional it is, managers… have questionable activities that i’ll keep to
myself”
-Inside Sales Consultant, Zillow
Sales staff are pressured into using deceitful pressure tactics to sign contracts with agents. The
approach that the firms take, signal a short-term strategy that focuses on increasing sales
numbers at the expense of the organisation’s reputation and employees’ well-being:
“Sales reps are told to manipulate their words so that agents won't become
upset and file a class action lawsuit against them for selling a product that is not
what was represented originally”
-Account Executives, Trulia
“We are told to sell products that everyone on the sales floor knows will not
benefit the agent, but are forced to convince the agents that we speak to the
product is a great starting point for them and will bring them quality leads just
to get new subscribers in the company”
-Account Executives, Trulia
“The product is hard to sell because so many agents are upset about the
Zestimate”
-Inside Sales consultant, Zillow
“The whole premise of the company is based on misinformation… it's difficult to
get behind selling a product when the listing information is outdated, doesn't
represent reality
-Inside Sales consultant, Zillow
Many of the sales employees seem confused about the careless, brash manner in which the
organization acquires its customers. Under these circumstances, it is not surprising that
employees assert that the organisation is solely looking to rapidly increase its stock price:
“Company cares about the stock of the company more than the value of its
employees”
-Account Executives, Trulia
“The vast majority of the agents you will call on have either already been
burned by Trulia, or work with people who have been burned”
-Account Executives, Trulia
“Trulia has burnt its bridges with a majority of them with a product that doesn't
work. Almost every day I would talk to agents who said that the tried us(within
the past 6 months) and wouldn't use our advertising again”
-Account Executives, Trulia
“(Zillow’s service) only causes headaches for real estate agents... (and) they're
very willing to let you know about that call after call.”
-Inside Sales Consultant, Zillow
Our research looked at over 180 comments from Trulia employees and 250 comments from
Zillow employees. Our calculations showed that 82% of Trulia’s Account Executives
(employees who pitch to agents and deal with existing clients) dislike the organisation, the
product and their jobs. Additionally, the Account Executives stated that, on average, only 4% of
the clients were satisfied with the service that Trulia is offering:
It should be noted that a major source of qualitative information for this report was online
reviews of the company by ex-employees and current employees. This information was then
verified by primary data collected from current/past employees of the organisations through
telephone and email correspondence. It is important to mention that Glassdoor.com, was founded
by one of the co-founders of Zillow (mlive 2013) and their online presence is heavily managed
by Zillow’s administration:
“Don't believe the reviews on glass door that are positive. People are literally
given a severance when they are fired JUST to put good reviews up here.”
-Zillow Employee
The extent to which the company is managing its online presence is evident from the fact that
most Zillow employee reviews are replied to by the CEO. Often the CEO’s supposed responses
are lengthy defences for Zillow. Similarly Abbott Realty group exposed Zillow’s tactics of using
employees to pose as customers of ARG and post negative comments about them online (ARG,
2012).
In an effort to ensure the accuracy of the data collected from ex-employees of Zillow and Trulia,
the data was cross referenced with conversations with Real Estate agents who had either used
Trulia and Zillow’ services in the past, were currently using it’s services or had heard of the
organisation from people in the industry.
“The (consumer visits) are worthless and it frustrates consumers when they
have to go through hundreds of outdated listings”
-Real Estate Agent, New York
“Misleading sales tactics...a worthless service”
-Real Esate Agent, Dallas
“I’m going to cancel my subscription”
-Real Estate Agent, Augusta
Zillow and Trulia Are Biting the Hands That Feed Them
Given their business models rely so heavily on the content (listings) provided by these agents and their
respective brokerages - and the agents and brokers can control whether or not they share their listings -
this approach does not seem beneficial to the long-term.
Zillow and Trulia know that advertisers follow the user base. Yet they have missed a more critical part of
the equation: a user base follows content, and the agents and brokers control the content.
Figure 1 - The listing agent’s names are buried further down the page, where they are not highly visible to browsing users (bottom).
We explained previously that Zillow and Trulia collect their content from 4 sources: agents, brokers,
MLS listings, and syndicates. The individual agents and the brokers can pick and choose what they list on
their own, but they also have the final say as to which sites the MLS and listing syndicates distribute their
listings to. If agents do not actively manage their listings, the result is a massive number of listings on
both Zillow and Trulia that are out of date and/or inaccurate, but are still present on the site.
But why are Agents Willing to Take a Hit on Viewership?
To understand this, we need to dive a little deeper into the offering from Zillow and Trulia. Our primary
research revealed that agents subscribing to both Zillow and Trulia are provided ad space displayed next
to listings which don’t necessarily belong to them, in an attempt to increase their views. When a listing is
posted, a user can find it through its location (i.e. zipcode). If clicked, a set of details about the listing are
displayed. However the contact information for the actual listing agent is tucked away at the bottom of the
page (Figure 1). What’s highly visible, instead, is the ad space, positioned front and centre in the listing.
This space is made available to the highest bidder (Figure 2).
This has three common results:
(1) Non-subscribing agents do not get attention from prospective buyers because users tend
to click on the subscribing agents ads displayed on the side of the listing.
(2) Subscribing agents continuously receive leads from customers that wrongfully approach
them thinking that they are the listing agent of the property
(3) Subscribing agents begin taking business away from non-subscribing agents, due to the
potential for additional commissions by directing clients who contact them away from
another agent’s listing, over to their own (to attain commission as both the listing and
buying agent)
“Nobody sticks with this garbage job”
-Account Executive, Trulia
The last point is further compounded by the fact that existing content is often inaccurate. With
users browsing thousands of out of date listings, agents are continually sent “junk leads” on
listings that are either no longer available or have entirely inaccurate descriptions. Both of these
types of leads make it difficult for the subscribing agent to follow up on. This further causes
frustration to customers and reflects poorly on agents who the listing belongs to because
customers assume they are the caretakers of this information.
Figure 2 - The visible window of a listing from Zillow (left) and Trulia (right) when clicked. Subscribing agents are given prime ad space on listings that aren’t theirs.
As a result many real estate agents and brokers have begun to boycott Zillow and Trulia (making
each of their listings inaccurate). There is currently an awareness campaign being led by the
CEO of Abbott Realty Group to expose websites such as Zillow and Trulia for the damage that
they do to real estate agents, urging other brokerages to boycott them as well.
While these activities have started a trend, there is a similar, albeit much larger, threat to both
Zillow and Trulia.
Realogy, one of the largest real estate holding companies in the U.S, lists approximated 25% of
the entire country’s houses on its database. Currently, the company has an agreement with online
real estate websites such as Zillow and Trulia for advertising it’s listings on their websites.
Zillow and Trulia charge Realogy a fraction of their standard advertising cost in exchange for the
large number of listings that the company possesses. The reason for this preferential treatment of
Realogy is not only the volume of listings, but also the quality. Listings from Realogy are
asserted to have a 280% chance of converting as opposed to non-Realogy leads6.
The CEO of Realogy has spoken of the company’s plans to launch a website rivalling Zillow and
Trulia, where it will post its own high-quality listings alongside those of its competitor’s. It is
assumed that such a site will have self-managed Realogy listings which will make it a reliable
source of information. If the organisation successfully launches its real estate portal, it will
6 Citron Research, 2014
withdraw its listings from Zillow and Trulia, depleting their respective inventories by 30%
(Citron Research, 2014)
With content quality and volume degrading, Zillow and Trulia needed a solution. They needed to
capture more market share (unique visitors), quickly, in order to stop the bleeding and continue
to attract agents to invest in subscriptions and to hopefully boost content/listing quality.
But how?
With Significant Overlap in Ownership, There Was A Clear Incentive To Merge
It turns out, Zillow and Trulia aren’t exactly enemies. Our thorough investigations led to us confirm that
six shareholders own 42% of Zillow and 46% of Trulia (Figure 3). This structure creates a significant
incentive to consolidate, especially in the face of a challenging market dynamic.
Figure 3 - Top 6 Shareholders of Zillow are also major shareholders within Trulia, showing the interest in consolidating the companies.
By combining the two companies, and continuing to operate them separately as two distinct brands (like
Best Buy and Future Shop), the two organizations are hoping to dominate the market, increase pricing
power and achieve their aspirations.
At least that’s the story they are telling the public.
The Acquisition Is Not As Good As It Seems
The proposed acquisition has been said to result in cost synergies of $100M (BI, 2014) . The majority of
their costs stem from marketing and sales, which are attributed to their massive outbound call centres and
advertising campaigns. Given that the companies will continue to run as separate entities and the need for
continued aggressive sales to offset the degradation in listing quality, we find it hard to justify that this
cost will decrease by nearly as much as the companies expect. Adding to this, is the statement from both
companies that there is believed to be a 50% overlap of Zillow’s customers on Trulia, and a 66% overlap
of Trulia’s user-base on Zillow7.
To make matters worse, the consolidation will now make both companies synonymous with each
other, meaning that agents with a bad experience at Zillow, will likely now have an additional reason to
reject Trulia’s services, and vice versa. This will increase the difficulty of both call centres in acquiring
subscribing agents to their sites.
With a significant overlap of user-base and agents, along with the association between
companies, agents may even continue delisting faster, since they will be paying more for nearly the same
user-baser. Research has already determined that agent turnover (churn rate) is currently at 38.7%8! Our
primary research in contacting agents shows a very similar number to this. The high churn rate of agent
7 Business Insider, 2014
8 Seeking Alpha
listings on both Zillow and Trulia is a recipe for disaster no matter how you look at it. With an almost
40% churn rate, and the likelihood that the acquisition will compound this number, there is only so long
that both companies can continue with the excessive growth in subscribers before there are few agents left
to contact that haven’t already been approached (Since many agents that have already opted out are
considered dead leads).
Trulia has burnt its bridges with a majority of (agents) with a product that
doesn't work. Almost every day I would talk to agents who said that they tried
us(within the past 6 months) and wouldn't use our advertising again”
-Account Executive, Trulia
Had this not been the case, their consolidation may have worked in dominating the market and controlling
pricing power. The reality however is that their rapidly degrading content and future threat from one of
their key content providers (Realogy) make it too late for even the consolidated companies to recover and
dominate the market.
But don’t just take our word for it.
C-suite Members Are Selling Their Shares, So Should You
Over the past several months, employees of Zillow have been exclusively cashing in their options.9 Given
the number of analyst reports hinting at the significant pricing power expected from the acquisition, one
would expect the insiders of the company to have significantly more faith in the returns on their
investment. While we can’t speculate whether employees are losing faith because of the agent churn rate,
the threat of Realogy, or the likelihood of synergies being overstated, it is clear that the insiders have little
faith in the long-term survival of the both Zillow and Trulia, and neither do we.
9 Seeking Alpha, 2014
Appendices
(Appendix I)
Methodology for collection of Primary Data
Zillow and Trulia employees: Account Executives and Inside Sales Consultants from both companies
were identified on LinkedIn and contacted for brief interviews over the phone. They were asked to relate
their experiences anonymously and were asked some of the following open-ended questions:
What was your experience at Trulia/ Zillow like?
How would you describe the management’s attitude towards employees?
What is the attitude of the organisation towards its customers?
How would customers describe the organisation you work/ worked at?
After interviewees had answered these questions they were asked to employee reviews collected from
secondary research. This step was done after they had answered the questions on the questionnaire so as
not to influence their responses.
Real Estate Agents: Real Estate Agents were searched for in 3 manners:
(1) Google searches aimed at finding the most well known real estate agencies in major cities
(2) Google searches to identify random real estate agencies
(3) Identifying agents from Zillow and Trulia’s websites
Real Estate agents were asked questions such as:
Have you used Zillow/ Trulia? If so, for how long?
What are your thoughts on their services?
Would you recommend the services of Zillow/ Trulia?
Methodology for Collection of Secondary Data
Secondary data was collected from reviews posted on glassdoor.com from each organisation. Ratings
were compiled by sorting reviews from sales roles to produce statistics on employee recommendations for
the organisation. Comments from negative ratings were studied in detail to find insightful information as
seen below:
REFERENCES
Hagey, 2014 - http://www.inman.com/2014/02/21/zillow-trulia-realtor-com-set-for-2014-
consumer-marketing-arms-race/
BI, 2014 - http://www.businessinsider.com/zillow-halted-2014-7
Mlive 2014 - http://www.mlive.com/business/west-
michigan/index.ssf/2013/10/the_man_behind_expedia_zillow.html
ARG, 2012 - https://www.youtube.com/watch?v=P4pZ0zJdfAY
Graham & Ripps, 2014 - Zillow - July 15, 2014 - Canaccord Genuity
Seeking Alpha, 2014 - http://seekingalpha.com/article/2134013-zillow-playing-roulette-in-online-
real-estate
Insider Monitoring, 2014 - http://www.insider-monitor.com/trading/cik1334814.html
(Citron Research , 2014)http://www.citronresearch.com/wp-content/uploads/2014/07/Zillow-
Trulia-final-b.pdf