CoStar's Portal Failure

A long road to nowhere in particular

At the close of business Thursday afternoon, it was announced that CoStar Group had made a bid for Domain Holdings Australia Limited (Domain). Per the Australian Financial Review:

American real estate giant CoStar is proposing to acquire Domain after buying up a 20 per cent stake in a deal that would mark the biggest change to the country’s real estate market since the start of online listings.

The bid, which is expected to be confirmed on Friday, will force Nine Entertainment, Domain’s controlling shareholder, to accelerate a decision on the company’s future.

This is, of course, a continuation of CoStar’s push into residential property portals globally. There’s only one issue with this: Their strategy is almost certainly doomed to financial mediocrity at best, and capital incineration at worst. This is not to say that Domain is a bad asset - it isn’t. It’s just not a great one, and it operates in a winner-take-most environment where it is not, unfortunately, the winner. To appropriate a Mungerism - they’re like a one-legged man in an ass kicking contest.

I penned a piece early last year that discussed CoStar’s move into the United Kingdom’s portal market by way of OnTheMarket (OTM). It seems that they have learnt very little from their experience so far.

The Source of the Misunderstanding

In late 2023, Andy Florance, CoStar’s visionary founder and CEO, made a couple of interesting statements in conjunction with the announcement that CoStar would be acquiring OTM. Firstly:

We believe that Real Estate Portals across Europe will soon be entering a period of consolidation.

Secondly:

We see OnTheMarket as an important step in expanding our Homes.com residential network not only in the UK, but across Europe. We believe the market opportunity in Europe is over $10 billion, and we intend to participate aggressively in developing and expanding our residential marketplace network.”

From the outset there seemed to be a fundamental misunderstanding of several important dynamics that characterise these markets outside of the United States. Perhaps this was because CoStar is primarily a North American company, but I suspect also because their own proprietary data edge was built in commercial real estate. In any event, residential property portals in Europe are networked businesses first, something that precedes any perceived proprietary data advantage. Although one could be forgiven for conflating the two.

In North America, property portals are a commodity layer in the advertising of residential real estate. The so-called Multiple Listing Services (MLS) preceded the internet, and so pre-existing pools of listing information were aggregated before any one property portal could do this. The result? A property portal has their relationship with the listings essentially intermediated by a proprietary data aggregator who has no interest in being superseded by that portal. To put this into perspective, Zillow, the leading portal for residential home listings in the United States, has made no serious money net over their life as a public company.

Source: FinChat

As I alluded to above, this state of affairs is virtually exclusive to North America. In most other “Western” geographies (Western Europe, Scandinavia, Australia, etc) a leading property portal was able to get to both an organic traffic advantage and a listing advantage without need to supplicate to a collection of data aggregation bodies. It shouldn’t be a surprise that most of these businesses are proverbial economic goldmines with the unilateral ability to price their advertising products as they see fit.

I’d make the case that a leading property portal is a purely regional phenomenon. Users come to the site for a pretty understandable reason (to peruse property listings) and vendors also come for a straightforward reason (to advertise a property for sale). To steal a phrase and turn a line, a dominant property portal is a discreet network; it’s not a cog in a wider network. The likes of Schibsted and Baltics Classifieds Group (BCG) both parrot this idea, to some extent, that their collection of various classifieds businesses comprise something of a concentric circle. For example, a property portal might also feed traffic to an automotive portal. Where this is achieved on a single site, this is more believable than where the sites are distinct and separate (take Finn versus BCG’s agglomeration of classifieds). This claim has slightly more legitimacy when this supposed traffic sharing is happening within a singular geography. Of course, the true partitioner of internet traffic is Google, and to some lesser extent the emergent LLM chat facilities.

In CoStar’s example, an unholy union of corporate buzzwords (think “greed is good” meets a superficial understanding of what a network effect is) is to blame for pretty bad corporate development policy. Thinking that operating a third or fourth-rung property portal in the UK and a second-tier property portal in Australia is going to infer network benefits to each property is nonsense. Likewise, assuming that there will be consolidation in this market doesn’t necessarily mean the economics are going change for those also-ran portals. As should be pretty clear by now, the economics of a portal are determined by its organic traffic position, and by its subsequent aggregated listing share. Where share (both listing and traffic) is extreme, so too become the economics.

The Also-ran Portals

CoStar’s foray into the world of residential property portals began with their $156M acquisition of homes.com in 2021. Homes.com was a first-mover in home listings in North America back in the infancy of the browser-based internet. Due to some of the innovative tactics and products of emergent competitors (Zillow and co) during the late 2000s, their competitive position was lost and management looked to pivot the business into ‘adjacencies’.