"Zillow takes the intellectual property of individual realtors (syndicated residential real estate listings), mixes it together with some other content, and displays it for users. Realtors typically perceive that Zillow is re-branding their listings as its own, and then promptly tries to sell " the lead" (generated by advertising the listing agent) right back to the realtor who generated the listing in the first place. This has been the cause of much of the backlash."
— From Citron Research on Zillow, Sept 25, 2012
Citron believes the balance of power with regard to control of content is the largest structural threat to Zillow's business. Evidence shows that balance of power is shifting right now, and the market hasn't priced in the risks.
Zillow and the other online real estate database sites buy the vast majority of their real estate listings from 3rd parties "syndicators", who aggregate large numbers of listings from brokerage firms. The aggregation and redisplay of this content is unpopular with many agents because firms like Zillow and Trulia sell ad space to other agents (not the listing agent) to these listings, who have subscribed for ad impressions by geographic area, thus burying the listing agent contact data.
There is a serious conflict of interest brewing here, and Citron's opinion aligns with many industry professionals that Zillow is strategically too low on the Real Estate content food chain to control its fate or justify its huge multiple.
The most recent evidence of the shift in the balance of power, which Citron believes has not been reflected by the market, is explained here. It comes from real estate industry news source Inman: :
In a groundbreaking policy shift, Point2, the number two syndicator of RE leads, gives brokerages and MLS's more control over how their listings data is used by publishers like Zillow and Trulia, strictly limiting what publishers can do with data they get. This new policy goes into effect Jan 1, 2013.
"The new policy, set to go into effect Jan. 1, states that Point2-fed listings may not be re-syndicated, must prominently display the listing broker and agent's name and contact information and must not be used to sell leads to other agents or brokers, among other terms. "
"Brokerages who are members of the 300-plus MLSs and Realtor associations that Point2 receives listings from will have to indicate, on a case-by-case basis, whether they wish to send listings to publishers who don't agree to the tighter data-use provisions."
Gregg Larson, one of the authors of the "syndication bill of rights", an industry initiative to regain control of the use of listings for the benefit of RE agents, commented :
"(Point2's new policy) blows up the business models of Zillow and Trulia,"
— GreggLarson, 25 year RE IT vet,
President of Clareity Consulting
In unstated acknowledgement of this looming threat, Zillow begain attemping to sign up brokerage firms for direct submission of listings, in exchange for prominent listing placement and other perks. The broker-direct feed program began in July, and now after 5 months of operation, includes just 48 brokers.
Zillow's CEO had the opportunity to lend clarity to the question on a Bloomberg TV appearance just this morning, but he of course said nothing about this looming threat; instead deflecting questions about insider stock sales and pointing to a slight improvement in US residential real estate, which itself has little correlation to Zillow's 860m market cap.
Comparative sources of Zillow's listings :
Zillow's directly obtained listings
Keep Following the Money
Citron reminds readers that in the two months since its Zillow report, and despite the 25% depreciation in Zillow's stock price since then, the drumbeat of insider sales continues unabated, with no less than 85 new insider sales transactions representing 176,000 shares and over 6 million dollars in cash extracted by Zillow's insiders. This "small" amount, in the CEO's words, represents over 4 times the run rate of enterprise net income when compared to Zillow's most recent quarter, its "most profitable quarter ever". And that's just in the last two months.
Something is really wrong with this picture. Zillow's churn rate is still undisclosed, and there are unmistakeable signs that the balance of power with regard to ownership of Real Estate listings is shifting. While a recent commentator noted that Citron was in the "wrong pew in the right church", it is Citron's opinion that it’s the long-term shareholders in this stock who don't have a prayer.