AnalysisIndustry News

Why Zillow Group is not quite a global leader — yet

Financial details from portals around the world can shed light on how the U.S. measures up
  • Zillow Group dominates the U.S., but their profitability lags far behind compared to international peers.
  • Globally, property portals are extremely profitable businesses.
  • The international property portal market leaders -- and a window to the future -- are in the U.K. and Australia.

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Many Americans, myself included, tend to think that the U.S. is the leader when it comes to online businesses.

With established tech giants like Google and Microsoft and emerging players like Uber and Airbnb, we can’t be blamed for thinking the U.S. is the home of online.

But this is not the case for my area of specialization, online property portals.

The market leader in the U.S. is Zillow Group, but what may come as a surprise to many is that it is not the global leader in the space. In fact, the U.S. market is significantly behind other markets like the U.K. and Australia when it comes to business model maturity.

It is not my intention to disparage Zillow. My point is to properly place them in a broader international context, and to acknowledge that they (and the U.S.) are not market leaders in this space.

Comparison on a global stage

I included the following financial snapshot in my previous article on the investment and acquisition strategies of the major property portals around the world:

Subsequently, I asked the rhetorical question, “Why is Zillow so far behind in terms of profitability?” That’s exactly what I decided to take a look at today by digging deeper into a few areas of comparison.

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The profitability question

Zillow Group has the highest revenues of the major property portals around the world, but significantly lags in profitability. In fact, on a standard cash-in/cash-out basis, they are not profitable.

I prefer to look at full year results, as it’s a longer time period and presents a more complete picture than quarterly results. In 2015, its last full financial year, Zillow reported revenues of $644 million and expenses of $794 million.

In other words, they only collected $81 for every $100 spent.

Rightmove, the market leader in the U.K., collects $350 for every $100 spent. It is an exceedingly profitable business.

And I’m not just cherry picking by comparing Zillow to Rightmove. For every $100 spent, REA Group in Australia collects $266, Trade Me in New Zealand collects $277 and Zoopla in the U.K. collects $183. These are all profitable businesses that represent a positive return on investment.

So why is Zillow lagging so far behind?

Revenue growth

The U.S. market is significantly bigger than the U.K. and Australia. So perhaps Zillow is just earlier on the growth curve, right? Let’s take a look.

Again, based on the last full year’s financial results, Zillow’s pro forma revenue (which reasonably includes Trulia) grew by 18 percent, compared to Rightmove’s 15 percent and REA Group’s 17 percent (for their Australian operations only; total group was 20 percent).

So on that basis, the growth curves are not wildly different at all.

But if you go more granular and dig into Zillow’s last six quarters, you get a different picture of accelerating revenue growth. The real test will be to look at the company’s full 2016 financial results.

On a full year basis, it is are basically growing at the same rate as the other big international portals. But its recent quarterly results suggest faster growth in 2016.

Employee count

Another aspect to look at is the average revenue per employee.

At last count, Zillow employed around 2,500 people compared to around 400 at Rightmove. That’s about $260k/employee at Zillow compared to $600k/employee at Rightmove.

If Zillow were to achieve the same level of efficiency by doubling their revenues on the same cost basis (extremely unlikely), they would be collecting $162 for every $100 spent — a big improvement!

Monetising their customers

One last area to examine is the monthly average revenue per advertiser (ARPA) — effectively, how much their customers pay for their services.

It’s difficult to get matching time periods, but here are the most recently reported ARPA numbers for Zillow, Rightmove and REA Group in the 2015/2016 timeframe. Clearly, the international portals are able to better monetize their services than Zillow.

I would argue this is a factor of business model maturity. All markets have significant competitive tension.

In Australia, REA Group greatly benefits from a vendor-funded marketing environment (where home sellers pay for marketing directly). But clearly, Rightmove and REA Group simply have more experience and expertise around monetization.

Followers, not leaders

Many people don’t realize that the U.S. is behind in the property portal space. Zillow is not on the leading edge.

The clear market leaders are not in the U.S., but the U.K. and Australia, and there is a lot we can — and should — learn from them!

Mike DelPrete is an adviser and consultant who lives in Bolton Landing and works in New York, LA, San Francisco, London and Amsterdam. Connect with him on LinkedIn.

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