This is intriguing on so many levels. Game theory is being played out live over at REA Group’s realestate.com.au, and we are glued to our screens. Can a business with possession of several competitive advantages, including monopoly power, network effect and the most valuable competitive advantage – the ability to raise prices without a detrimental impact on unit sales volumes – lose its competitive advantage?
As you may know, REA have sought recently to change their pricing model, particularly for the ‘premiere’ ad listings agents place with the site. Ultimately, property advertising is paid for by the property vendors, on top of the commission paid to the agents – so you might wonder why agents are kicking up such a stink. The reason is that the previous package arrangement (we are told) included some quantum of free ads. If agents, however, charged vendors for all the ads they place with REA, this represents a source of additional revenue for agents that will be diminished by REA’s latest move. REA believes it can effectively increase prices by over 35 per cent by moving to a fee structure based on repackaging and on postcodes, rather than a flat rate.
It’s a move that has angered some – if not many – agents. In response, a group of 400 agency members – primarily in Victoria, but including the national group Ray White – have organised themselves to collectively bargain with REA. More recently, they voted to boycott the most expensive ‘premiere’ advertising package. REA is not negotiating however, because some of the agents in the group are part owners of Metro Media Publishing, which is 50 per cent owned by Fairfax Media’s domain.com.au.
As an aside, the large Victorian representation may have something to do with inconsistent pricing by REA. For example, the Sydney Morning Herald observed: “a premiere ad costs $3611 in Double Bay, Sydney, where the median house price is $2.57million, compared with the $8050 price tag in Toorak, Melbourne, where the median house price is $2.62 million. Domain is strong in Sydney’s eastern suburbs so this may limit what REA can charge in those areas.”
Figure 1. REA share price
One of the agents’ major concerns might be that REA is positioning itself as a broker for buyers and sellers, effectively changing the agent/vendor relationship and permanently displacing agents.
But according to Joe Aston in yesterday’s Australian Financial Review, at a relatively recent real estate agent shindig arranged by one of its stalwarts, Rupert Murdoch was remembered and quoted as saying real estate agents are “critical to the property process and critical to [REA’s] strategy, and they always have been and always will be.”
Aston went on to point out that this message contradicted comments made at a Company Directors Conference in May, by REA’s former CEO Greg Ellis, who is quoted in the article as having said: “at REA there were three parts to the property market: people looking to buy, people looking to sell and the real estate agents. And the company had focused on the real estate agents at the expense of the other two…”
[AFR subscribers can read the article here]
With that background in mind, we learned from Real Estate Business Online that Belle Property, Century 21, Harcourts, IRENE (Independent Real Estate Network of Excellence), LJ Hooker, PRDnationwide, Raine & Horne, Ray White and RE/MAX Australia have teamed up to develop a new portal that will launch “imminently”.
“The identity of the real estate networks, independents and franchise groups banding together to take the online listings fight to realestate.com.au have been confirmed.
“Real Estate Business has learnt that Belle Property, Century 21, Harcourts Group, IRENE (Independent Real Estate Network of Excellence), LJ Hooker, PRDnationwide, Raine&Horne, Ray White and RE/MAX have initially come together to develop a new portal.
“It’s also expected others will soon be on board, with the process of finalising shareholder agreements with other agency groups still ongoing.
“Leading the portal will be its recently installed CEO, Nick Christian, who was formerly co-founder of PriceFinder and is a well-known figure within the real estate industry.
“For now, the name of the portal and its official launch date are still under wraps, but expected to be announced shortly.
“Mr Christian confirmed the portal will be 100 per cent owned and controlled by the real estate industry, adding it will be representative of a “vast majority of the industry” not just some of the major groups or networks, and will include independent agent representation as well.
“‘Over recent days there has been considerable media speculation and rumour around an industry initiative. While this is premature, we believe with the current level of discussion and rumour it is important to communicate the imminent launch of a 100 per cent industry-owned and controlled real estate portal,’ said Mr Christian.
“Based on the successful model of New Zealand’s number one real estate portal, realestate.co.nz, Mr Christian envisages the cost to real estate offices being maintained at extremely low levels, with basic listings at zero cost to member offices.
“‘This model will work,’ he said.
All of this is incredibly interesting to us here at Montgomery, but with REA’s share price hovering at near-record highs, we think value investors should devote some time to considering whether an opportunity is being presented.
Australia is replete with real estate portals, including those that are ‘industry-run’ – such as realestateworld.com.au and reiwa.com.au. These have hitherto failed to make material inroads into the dominance of realestate.com.au, simply because the agents have continued listing on the incumbent’s website. With that in mind, we suggest that the only way a competitive site might ever win is if its launch coincides with an en-masse boycott of the monopoly provider. Game theory, however, tells us that it is in the interests of individual agents to break the ‘accord’ and advertise their client’s homes on realestate.com.au when there is less competition for eyeballs. As a result, the accord fails and the competitive advantages of the incumbent are strengthened.
Another issue that’s possible is the anti-competitive behaviour required by agents to co-ordinate a large-scale boycott of one site in order to favour their own. However, experience tells us that while the activity might be seen by some as anti-competitive, the ACCC will also ask about the national interest, and bringing lower prices to consumers could be argued to be in the national interest.
The difficulty facing the new start-up however, is perhaps best encapsulated by real estate agent blog comments that followed the aforementioned article, which were posted on rebonline.com.au.
We leave you to contemplate the following selection of quotes (note we have not sought to correct the agents’ grammar, syntax or spelling errors):
“For the people wondering if independents will have the same rights. Read the article. IRENE is there for the independent agents.”
“For the others wondering how it is going to take over, ask yourself how REA took over? The agents psuehd and promoted it for them! We told everyone we knew about this website and they should go on it. We now have to do the same and back it 100%!”
“Mick I agree REA Might have Billions but they lack one thing US.( People Power and the desire for change) if we don’t support REA what are they going to sell. There sponsors will leave in droves as well. Google will sort the basic stuff out, and the public aren’t stupid today, they research and then research before they buy. If the listing aren’t on REA were are they going to go.?? (They will find our listing). If we do what Brett as mentioned and promote our own industry website, it will only take weeks for the general public to know about it.
As an industry we must employ well over 10,000 people and I would image sending out an average 10 plus e-mail a day. How long do you think it would take if every person put a link on each e-mail promoting our new industry website.!!!
and lets not forget our Data base systems. Regardless of REA Billions ( Lets not forget one major fact here, (WE — GIVE THE BUSINESS TO REA ) and if we stop they don’t exist. REA don’t have the Boots on the ground for this fight.”
“Mick, how will REA keep buyers engaged if we remove our listings, that is the point the only way to beat them is to collectively remove our listings en-mass as a protest (or even better permanently) then watch them crash and burn!”
“If any agent or industry service provider doubts Nick Christian’s vision and ability to pull off this major coup, then ask rpdata, one of the industries largest ever monopolies, if they wish Nick & his team had never started PriceFinder.
Nick is one of the greatest disruptors this industry has ever experienced…and this time I sincerely believe that he and his team will have an even greater impact on the current monopoly.
His industry knowledge, online smarts & ability to disrupt should be applauded and is REAL-LIFE proof that finally the industry portal is about to be a reality.”
“Question? Mr Christian envisages the cost to real estate offices being maintained at extremely low levels, with basic listings at zero cost to member offices?
So where does the money that’s required to promote product and lift usage come from? I find it funny that there is an industry owned portal already in operation which is healthy yet you would rather all start from zero….doesn’t make sense….good luck”
“If it was set up as a “not for profit”, every agent would be happy to include promotion for it in their current advertising (online, print, boards – everywhere) then it could get very wide exposure with minimal outlay.”
“Have a look at the franchise names…. the control will be held by the top 4…. independents and their vendors will still have to pay to keep their listing on the first page, ITS STILL SEARCH AFTER ALL. Do you really think the Ray White guys or Century 21 will allow independents to compete!! their members will crack it.”
“Before you all get too excited I think we need to see what is on offer, The only way to take REA down is to remove your content and re-educate consumers and while we find ourselves in different times industry portals has been tried several times and it would take move like never been seen before in the history of the industry to come off.”
“Here we go again – another Us & Them website. The independent agents of which there are a growing number, will reject this proposal unless it is a level playing field. The Franchise groups can deliver a huge number of offices instantly – BUT if he independent offices do not have the same advantages, they will not join the party. I certainly hope it comes to pass, because I wrote a resignation letter to REA about 6 weeks ago, and I am itching to let it fly.”
“A very interesting point (The Franchise groups can deliver a huge number of offices instantly – BUT if he independent offices do not have the same advantages, they will not join the party.) This is correct lets hope the big players / Franchise have learnt the mistake of REA and look after the industry as a group regardless of the BRAND. We took measure to tell REA TO stick it as well and joined REIWA. I am part of a major Franchise group and your point I will pass on to them.”
“Plenty of negative voices coming up with all the reasons in the world why they think this won’t work. I’m in the other camp. . I think this has a massive chance of success. It just needs some collective heads to come out of their collective posteriors and the ability to see beyond their egos and next commission cheques. Good luck to Nick and his team of groundbreakers. I’ll do whatever I can to help.”
“REA is like a drug dealer and the agents are the addicts. We keep going back for more and more and keep paying more and more. 95% of my enquiries come from REA and I can’t shake it off. It’s too late and REA knows it”
“So are all the agencies and franchises going to pull out of REA? Or is this going to be just another website that agencies have to market through. You will not change the dominance of REA unless all agents move in one hit. I just struggle to see agents getting along across the board to change the domination of REA. I also note McGrath not in the group who are creating the new portal. I am not against the new portal in fact it could work exceptionally well but the key to changing consumer trend will be marketing and marketing Australia wide is expensive.”
“The one thing that REA is holding its breath and waiting for is… division between the agents as to which agent/industry owned portal thjey are going to support – if we as agents get it right then REA will go from hero to zero within 6 months max. Let’s not get cynical and knock things yet, lets see who is going to be the best bet, make a unanimous decision, support it and kill the beast (REA) – oh this is good…And they thought they could act with impunity forever!”
“It can only be better. As an independent in a small country town in western NSW I have been grumbling for years on RE.com pricing & service. Have tried ditching them twice in a 10 year period but the pressure from vendors to remain with them was too great. No exposure on RE.com = no vendor. Lets hope ‘united we stand’ will make for enough exposure!”
“I think it is appropriate to highlight an inaccuracy in this article – in NZ the ‘industry owned’ portal of Realestate.co.nz is not the #1 portal. It is the #2 portal. Trade Me Property is the #1 portal with 3 times the traffic and lead generation.”
“Aspirations by agents to regain the online marketing platform are in my view and experience a forlorn dream – the train has left the station and the collective funds required to challenge the incumbents whether its REA group in Australia or Rightmove / Zoopla in the UK is of the scale that no industry organisation or deep pocketed investor could sustain.”
“The day of REA is over and the sooner the better. Once Ray White, Raine & Horne, LJ Hooker, Professionals and the independent agents get on board and provided this new website, it will be over for REA and there arrogant approach they believe they have over us and our industry. The NZ model works well and as long as the major Franchise groups work with all the independents and provide a even playing field, (Then this will finish REA dominance)”