The way everyone is buzzing about the merger between Zillow (NASDAQ:Z) and Trulia (NYSE:TRLA), you would think it’s the biggest things since Comcast (NASDAQ:CMCSA) agreed to acquire Time Warner Cable (NYSE:TWC). It’s not. It’s not even in the same ballpark.
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The deal will not disrupt or even change the dynamics of the U.S. real-estate market one bit. It will have zero impact on consumers and real-estate brokers. Which raises the question, why are they merging? That’s where things get at least a little bit interesting.
But first things first. Zillow and Trulia are Internet portals that rely on various Multiple Listing Services (MLSs) for information. For that, they pay licensing fees. They in turn sell ads and provide leads to real-estate brokers. That’s the business model. Neither company has anything to do with buying and selling homes. They are media companies. Very small, very specialized media companies.
To put that in perspective, let’s look at other online media companies. Google’s (NASDAQ:GOOG) annual online advertising revenue is somewhere north of $50 billion. Facebook’s (NASDAQ:FB) is about $10 billion. Yahoo’s (NASDAQ:YHOO) is in the neighborhood of $4 billion.
The combined annual sales of Zillow and Trulia, on the other hand, is a paltry $340 million. Neither company is currently profitable. They have all of 2,000 employees between them. These are not big numbers.
The two Web portals are, in fact, dwarfed by a handful of giant brokerage firms. Realogy Holdings – which owns Century 21 and Coldwell Banker – boasts annual sales of over $5 billion, over $400 million in net income, and 10,800 employees, worldwide.
Zillow says that real-estate brokerage companies spend about $10 billion a year on advertising, including both traditional and online. If digital ad sales account for about half, that means the total available market for the company is $5 billion in ad revenue and I don’t think that’s expected to grow much over time.
That’s not a very interesting number as market ceilings go, and even less so if split between a gazillion websites. The only way to change that, to grow market share, is to consolidate. That’s why the companies are merging. The newly formed Zillow will have more market share, bigger scale, and at least some increased clout with brokers.
Who wins and who loses?
Both company’s shareholders are winners. More market share is always a good thing and even a modest increase in pricing power is better than none at all.
As for synergies, that’s a bit more complicated. Since the companies compete head-on and there is considerable overlap, they have to retain both brands to maximize their combined market share. So operating synergies will be harder to come by which means the $100 million Zillow expects to save by 2016 – one third of the combined company’s total expenses last year – may be a little on the aggressive side.
Clearly, Wall Street likes the deal. Ever since rumors of the merger started circulating, shares of both companies have soared. Of course that makes sense for Trulia since Zillow is paying an enormous premium (overpaying is more like it). But shares of Zillow have nearly doubled this year and a jaw-dropping price-to-sales ratio of 28 is so over the top it’s even higher than all the inexplicably overvalued cloud companies.
As for real-estate brokers, that’s sort of a wash. Large brokerage firms have nothing to fear from the merged company. That is, unless the Internet portal decides to go head to head in the far more lucrative brokerage fee business – a market that I estimate to be roughly $30 - $40 billion annually, give or take.
But don’t hold your breath for that to happen anytime soon. Zillow’s value to consumers depends on MLS data that comes from, you guessed it, real estate brokers. Sure, brokers like the sales leads, but I’m thinking they have all the leverage in that equation.
Some fear that smaller firms and lower-producing agents might get squeezed by Zillow’s somewhat bigger ad clout, but that’s nothing new. It happens every time there’s a housing market downturn. There are probably more fair weather brokers than any other profession, except maybe home construction contractors and speculators.
Lastly, as always, comes the consumer. Don’t panic; nothing will change for consumers. Those Trulia and Zestimates we know and love – or love to hate – will still be just as hit-or-miss as they are now. And whichever site you prefer will remain one of the two most visually appealing one-stop data aggregators for all your house-hunting needs.