Opinion: Is Andy Florance Winning the So-Called 'Portal Wars'?

In October 2023, CoStar Group CEO Andy Florance took to the stage to say he wanted to put a bigger percentage of CoStar's investment in Europe. A "$9 billion war chest" was quoted more than once.

When I asked him what he was looking for from Europe acquisition targets, Florance told me it was about bringing in the right people and the right tech.

Two months later CoStar snapped up UK Challenger OnTheMarket for $100M, marking the Group's first serious foray into Europe.

But here's where I got it wrong. When Florance referred to tech, I foolishly assumed he meant European tech; actually, he said no such thing.

Rather than invest in European tech, CoStar has kept things closer to home with the to-be-confirmed $1.6 billion acquisition of 'digital twin' tech specialist Matterport, one of the biggest names in US real estate tech.

Has Andy Florance's CoStar Group taken the lead in the so-called Portal Wars?

Here are some thoughts...

Matterport, CoStar and Zillow in (financial) context

Matterport, for all its industry-leading technology, isn't profitable. Despite strong revenue growth in Q4 2023, the firm still recorded a $98.5 million loss for the quarter, more than three times its Q3 loss. For the year, it lost almost $200 million.

Meanwhile, Q1 filings released in the same week as the acquisition announcement revealed that CoStar boosted revenues by 12% to an impressive $656 million from January-March 2024, while its residential portal Homes.com has been quick out of the blocks since its monetization in February.

In short, CoStar has more than enough money to handle Matterport's continuing losses for the foreseeable future. Nevertheless, there will be financial pressures on Matterport to significantly trim losses to avoid becoming an unwelcome headache further down the line.

The question is... have they overpaid? Simon Baker seems to think so...

Meanwhile, Zillow continues to struggle to turn a profit, with Q1 2024's financial results highlighting widening net losses of $23 million, a slight increase on the same period in 2023 ($22 million).

Nevertheless, revenues went up 13% year-on-year, so let's not write off Zillow as anything other than an institutional powerhouse that isn't going anywhere.

Since the publication of this article, Matterport has released financial results highlighting how the firm trimmed losses by 33% in Q1 2024 compared to 2023, while also surpassing one million paid subscriptions for the first time.
 

Andy Florance says: Zillow and Realtor.com will be "Stressed" by NAR Settlement

In a double whammy for CoStar, last week also saw a federal judge provisionally approve a $418 million settlement offer by the National Association of Realtors (NAR) that will eliminate buyer-broker commissions as soon as July 2024 and cause havoc for CoStar's rivals.

In last week's earnings call after CoStar's Q1 results were published, Andy Florance was quick to highlight that the outcome will significantly dampen revenue per listing for rivals Zillow and Realtor.com:

"With recent seismic legal settlements in the real estate industry, we believe the portals that rely on the lead diversion models could become stressed.

"Legacy portals rely on MLS data feeds that provide them with information on offers of compensation to buyer brokers so these portals can take a significant portion of the buyer-broker commission from the diverted leads.

"Under the terms of the settlement, those feeds can no longer include buyer-broker compensation fields.

"We believe that the lead diversion model is very unpopular with homesellers, agents, buyers and brokers, which may be why it has not been very profitable.

"We are increasingly confident in our ability to build out the number one residential marketplace in terms of traffic, revenue and profitability in the years ahead."

In short, while CoStar will be relatively unaffected by the upcoming changes, Zillow's and Realtor.com's respective executive teams are likely scratching their heads right now: If we can't take a slice of a buyer commission that no longer exists, what can we take a slice of instead?

How will CoStar use Matterport to challenge Zillow and ShowingTime+?

CoStar's public war against Zillow is taking place on two distinct battlefields—the marketing department, and now the tech/data offering. To prove his seriousness, Florance has committed $2.6 billion to winning those battles so far.

After Homes.com launched its Superbowl ad, CoStar asserted that it would spend $1Bn on marketing itself as the portal of choice, while a further $1.6bn has already been earmarked for Matterport.

This is cash Zillow doesn't have to hand—its cash reserves sit closer to the $2 billion mark and the firm can't realistically stump up such a large portion of its money on acquisitions—but the good news for Zillow is that it already has the industry-leading AI-powered listing experience. ShowingTime has proved to be a valuable acquisition—Zillow shelled out $500 million for it in February 2021 and it appears to have delivered value.

The latest iteration of the product, ShowingTime+, provides users with an immersive, AI-powered experience available only through its app.

According to Zillow research, listings on Zillow that include an interactive floor plan receive 79% more 'saves' (for return visits) than homes without, and are 10% more likely to go 'pending' within 30 days.

As added context, Vacasa (a partner of the soon-to-be-CoStar-owned Matterport) said it boosted bookings on its vacation rentals marketplace by 12% powered by Matterport.

If Homes.com can replicate that success by successfully integrating Matterport tech onto its platform, the race for technologically superior home buying experience in the US will get real feisty, real quick.

But the reality for CoStar is that achieving this integration isn't as simple as giving every home seller in America a free Matterport camera. They're expensive, bulky as hell, and aren't necessarily value for money if you're listing a one-bedroom apartment in Louisiana for rent.

But if CoStar can effectively use Matterport tech via a user-friendly mobile experience, that's where I would be putting my R&D resources. It already has a well-established functionality on the iPhone launched in 2020—I expect a laser-focused project on making some version of Matterport available to every Homes.com user in the next 12 months. Expect some ad spend, too.

Finally, the vast database of property information tucked away in Matterport's servers will be of significant interest to CoStar, which is adamant that it will offer the most technologically savvy experience for buyers and sellers. As a data-first company, Matterport gives CoStar unprecedented access to valuable knowledge about real estate across all segments of the market: residential, commercial, hospitality, and more.

As Malcolm Myers suggested in a recent episode of the PPW podcast, CoStar has done an excellent job in packing huge amounts of information into listings on Homes.com. Matterport integration increases Homes.com's capacity to squeeze even more value out of data-driven listings.

Will Matterport land in the UK? Does Rightmove care? What about Zoopla?

The Matterport acquisition isn't a done deal yet, so OnTheMarket users in the UK won't be able to take a Matterport-powered home tour anytime soon. However, when it comes (and it probably will), Rightmove will have a rival with a technologically superior offering that (as of today) can't be matched. And that's when things get interesting.

Make no mistake, Rightmove is no slouch when it comes to investing. It committed £8 Million to buy rental reviews platform Homeviews in February and took an undisclosed stake in Coadjute—a proptech company that connects people and data to reduce transaction times—in April.

But do these investments move the needle enough for Rightmove given how its noisy neighbour has closed two deals worth a combined 1.7 billion dollars in the past four months alone? I'm not so sure.

Matterport is trusted by agents and users alike. Its tech slashes transaction times by letting buyers tour properties virtually, an offering that is nowhere near as utilised in the UK, where virtual tours are a novelty.

The bigger question is, does the prospect of the integration of Matterport technology into a rival portal leave Rightmove shareholders crying themselves to sleep at night? Again—not so sure.

Meanwhile, the name Zoopla keeps popping up as a potential acquisition target for CoStar. It makes sense for three reasons.

The first is the simplest one—unite the number two and number three portals, and you have a bigger chance of catching up to number one. OnTheMarket is done, why not take Zoopla as well, especially given it's probably available at a cut-price deal after enduring some difficult years.

Secondly—and this only became apparent after the Matterport acquisition announcement—we now know that CoStar is comfortable acquiring a loss-making business. Matterport lost nearly $200M in 2023, which dwarves Zoopla's net losses of £6.2 Million in 2022 (the most recent numbers we have). If any of us presumed that CoStar wouldn't touch a business making heavy losses (and would therefore avoid Zoopla), that theory is now obsolete.

The third reason is that Zoopla prides itself (rightly) on offering a wide range of datasets, products and services to ease the home-moving experience. It even has its own PropTech investment arm to snap up the best, emerging technologies from the UK's real estate industry. If CoStar is serious about having a tech-savvy portal, Zoopla is nicely aligned in much the same way Matterport is.

Where next for CoStar?

I was starting to get worried that Andy Florance wasn't being as bullish as he implied when he waved his nine billion dollars around on stage in Madrid.

True, the OnTheMarket deal came out of the blue, but it's been all quiet on the European front ever since.

Now we know why—while Jason Tebb hit the road with OnTheMarket's PR Roadshow, CoStar's Florance turned his attention towards the best tech in the world. He found it, he bought it, and my best guess is that he'll be back in Europe, signing cheques sooner rather than later. I'd be surprised (and disappointed) if Costar doesn't announce another major acquisition before the end of the year.

The question is, where? Idealista has been named as a potential suitor. Zoopla continues to do the rounds. Malcolm Myers, meanwhile, told the PPW podcast (see above) that Aviv Group or a similar conglomerate of portals across borders could be a more attractive and efficient use of resources.

What I do know is that the Matterport story came out of the blue just like the OnTheMarket one did. I won't hold my breath waiting for a clue for when the next CoStar-branded bombshell will land.

But, while we're here... how about Zoopla in 2024, Idealista in 2025, and Aviv Group in 2026? Don't put any money on this, by the way!

Is Andy Florance winning his war against market-leading portals?

As easy as it is to drum up headlines and column inches, it's still too early to tell whether CoStar Group's recent activity has had enough time to have a tangible impact on its standing on the macro level. This is a ten-year strategy, at least, and we're barely 10% through the mud as of the time of writing.

As Simon rightly pointed out in the special podcast we recorded last week (linked again here), OnTheMarket isn't firing on all cylinders, and the reality in the United States is that Florance will need to invest aggressively to even get in the ring with Zillow, let alone deliver a knockout blow.

Nevertheless, momentum counts for something. In previous years, Online Marketplaces' news coverage has been heavily weighted towards all things Zillow, but the last 12 months have seen a significant shift towards CoStar, which has deliberately upped the ante in terms of PR and significant financial investments.

While it is admirable that CoStar is now fighting on two fronts in the US and Europe, part of me wonders whether the Group has the focus to reach critical mass in two major markets. The Group certainly has the financial firepower and leadership to push hard in one direction—but in two? That's why this one is so hard to call, and that's why the jury remains out for now...