On Tuesday, the Wall Street Journal published an insightful essay on how the airline industry in the last 25 years fended off progress and innovation to protect its dominant position and its established monopolies. The result was higher prices for its best customers, poor service and a slew of industry actions that ultimately bankrupted once-great airline companies. The seminal moment that sparked this deep, dark economic slide was de-regulation of airfare rates in the late 1970s.
The lessons for the real estate industry are profound. How it is responding to its own defining moment will shape the prosperity and relevance of the business for decades to come. Indeed, the entire industry as we currently understand it may be at stake.
The seminal moment for the real estate industry is not de-regulation. Instead, it is the Internet and more precisely, the publishing of property listings on the Web. The Internet has turned inside out an industry that thrived for nearly 100 years on private information and mysterious economic contracts and bonds among competitors around MLS data. The Internet is about private information becoming public, challenging the very core of the real estate industry.
Today, technology and a slew of well-funded and successful innovators are rocking the real estate world. The industry’s reaction to this monumental change has evolved in phases similar to the five stages of grief: denial, anger, bargaining, depression and acceptance.
After a couple of years of denial about the power of the Web, the first industry reaction was defensive. Real estate brokers, franchises and the National Association of Realtors slipped into a fierce self-protective posture, working zealously to resist and then control the inevitable changes the Web inspired.
Captured by a promising story that NAR peddled, the industry tried to consolidate the publication of property listing data to one single company, Homestore. NAR found itself in bed with Homestore rather accidentally because of some fluky events associated with a previous blown technology venture, dubbed the Realtor Information Network. While NAR revisionists describe the history as a courageous defense against Microsoft’s Bill Gates’ foray into real estate, the reality is that the keys to the Realtor name and NAR’s endorsement were handed over to some young and smart hot shots who seemed anxious to enrich themselves and build an Internet kingdom. There is little evidence that they were inspired by the mission of home ownership and the role the average Realtor played in making that happen.
Meanwhile, everyone was muscled into playing along. Take real estate brokers. Instead of building their own online capacity with the listing data, big real estate brokers were wooed with stock options in exchange for letting Realtor.com become the industry’s sole home-listing provider. The decision built up the Homestore brand, revenue and market capitalization but left brokers vulnerable to the online company’s successes and failings, its business practices and a horde of online real estate companies that were not constrained by capital or contracts with Realtor.com.
In 2001, Homestore imploded and the franchises and brokers ran for cover at a key juncture in the innovation cycle. The surviving dot-coms and technology companies were quick to seize the opportunity and offer alternative ways to capture consumer enthusiasm for real estate information on the Web.
With Homestore crippled, the industry vainly attempted to regulate away innovation, by pushing NAR to adopt overly restrictive and potentially anticompetitive rules to prevent unlimited publication of listings on the Internet. But consumer market demand and business innovation in the wake of Homestore’s troubles was impossible to stop.
Moreover, the U.S. Justice Department and state Attorney Generals began to question whether the industry had crossed the line of business fairness. In the last year, it has become clear that the industry can no longer operate in a vacuum and expect to control innovation. The Web has not only opened up the property listing data, it pried open the door of business practices that for too long have been hidden.
Now, there seems to be a new turn in this 10-year history of reaction. There are hopeful signs that more and more real estate companies realize stopping inevitable events is impossible. Instead, they are choosing to compete for Internet customer mind share and offer more compelling solutions themselves.
At the RIS Media real estate conference last week in New York, big brokers were buzzing about Weichert Realtors’ new Internet lead venture. The New Jersey brokerage is building the capacity to capture and convert Internet leads online. Instead of complaining about someone else stealing “my” customer, Weichert Realtors is investing in technology and acquisition costs to reach out to the customer first. Cendant is now doing the same for its brokers.
The alternative is the fate of the airline industry. When United, American and USAir shunned innovation, it opened the door for upstarts like Southwest and JetBlue, which the industry made fun of when they launched. Now, these new airlines are cleaning up as established firms scramble to survive with their legacy systems and outdated attitudes.
Consider that the fastest growing real estate company is ZipRealty, the industry’s version of Southwest and JetBlue. Five years ago at an Inman News Real Estate Connect conference, the real estate establishment scoffed at Zip for only closing four transactions.
Today, Zip has grown to become one of the largest 25 brokerages in the country with larger margins than most brokers. That means it surpassed thousands of other firms, deploying a new business model, technology and a spirit of innovation, NOT entrenchment.
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