When Algorithms and Advertising Collide

You may remember when real estate listings firm Zillow first burst on the scene back in 2006. While there are many online real estate listings sites, Zillow distinguished itself with its “Zestimates,” an algorithmically-derived valuation for every house in the United States. Many Americans amused themselves throughout 2006 checking Zestimates for their own homes, as well as the homes of neighbors and friends.

Zestimates were never intended to be appraisals. After all, Zillow has no idea what is on the inside of any home. But the Zestimate algorithm does use many of the same approaches as appraisers use, including comparisons of recent sale prices of similar houses and historical sales trends. To the average consumer, they sure looked and felt like appraisals, and in a sense, that’s what really matters.

While Zestimates were unquestionably a brilliant way to launch a new website in a crowded vertical (Zillow become one of the highest traffic websites virtually overnight), Zestimates have always been an awkward fit with the Zillow business model. That’s because Zillow is an advertising-based business.

Think about it from the perspective of the real estate agent – the advertising buyer. The agent is attracted by Zillow’s huge traffic numbers and pays for an enhanced listing to get even more prominence. But Zillow automatically (and prominently) displays its Zestimate right near the asking price. Imagine asking $1 million for a home when the seemingly authoritative Zestimate pronounces the value of the home to be $700,000. As an agent, you’re not going to be happy.

Zillow’s stance is basically, “hey, it’s just an objective data point.” But advertisers don’t want to hear it. And that’s the essence of several recent lawsuits. In one lawsuit, the plaintiff argues that Zillow damaged her selling prospects by posting a lower Zestimate near her asking price and doing so without her permission. Another lawsuit goes further, saying that Zillow agreed with certain real estate agents to “de-emphasize” (read: hide) the Zestimate within the listing, meaning that some agents were getting a more attractive listing presentation, and those that didn’t pay an advertising fee were being disadvantaged.

This may sound like a problem peculiar to Zillow but it’s not. Yelp has dealt with a similar issue for years. In short, Yelp is finding it hard to sell advertising to customers whose listings are chock full of negative reviews. Yelp has been repeatedly accused of “de-emphasizing” (read: hiding) these negative reviews to satisfy advertisers.

The simple lesson here is that objective data and advertising don’t always mix, and that creates complexity and legal exposure unless you are aware of the issue and identify a solution that works for everybody. Those solutions can be hard to find.

How Zillow Spends Zero on Advertising

Doubtless everyone reading this is familiar with Zillow. We honored them as a Model of Excellence in 2006 .

They’re now a real estate listing behemoth that sports a market capitalization of $5 billion. We all know what Zillow does and how successful it’s been. But did you know that Zillow launched with virtually no advertising budget?

In a fascinating interview, Zillow’s Chief Marketing Officer, Amy Bohutinsky, explains Zillow launched with the classic “sell data with data” strategy. Using data to promote your data is – unsurprisingly – a marketing tactic available only to data publishers. And it’s a tactic well worth exploiting to the maximum.

Zillow launched itself with press releases aimed at the consumer mass market. It offered free access to data that was catnip to almost every consumer: instantly find the estimated value or your home, or anyone else’s for that matter. Zillow, after collecting and normalizing property assessment records from all 50 states, had developed an algorithm that looked at recent sales and area demographic data to calculate a home price valuation. Sure, it was necessarily imperfect, but the data was credible if not authoritative, comparable (all homes were evaluated the same way) and of course free. This quickly drove millions of page views, allowing Zillow to execute on its business model of selling listing enhancement to real estate agents.

But Zillow didn’t stop with this single gambit. Instead, it allowed consumers to sign up to receive email updates to their home valuation – every time the estimate changed, Zillow would send an email. This created critical ongoing engagement (important because the average person doesn’t buy or sell a home all that frequently), brand enhancement, and an important advertising vehicle (the email also presented information on nearby homes for sale).

Beyond this, Zillow regularly mines its own data to find newsworthy statistics that keep its brand front-of-mind and implicitly credential it as an authoritative and central industry player. It issues press releases on everything from the standard reports on where homes are selling most quickly and slowly, to offbeat data on the “10 biggest homes” or “10 most expensive homes,” and the like. Obviously there’s no shortage of material.

As we noted earlier, you’re most likely to get media coverage if you can provide facts and statistics. That’s hard news as opposed to opinions or transparent gimmicks to try to attract attention. More importantly, every piece of data you release reinforces your central market position, your authority, your knowledge and your expertise. You become generally understood to be the “go to” place for data in your market. There’s no better positioning than that, and best of all if you do it right, it’s practically free.

You can hear how another Model of Excellence winner, Capterra,  pulls of this trick when its CEO Mike Ortner joins us for our infamous “Excellence Revisited” panel at this year’s Business Information and Media Summit. Hope to see you there.

Does Co-Dominance Spur Disruption?

Outspoken Zillow CEO Spencer Rascoff made headlines this week by using an industry event to publicly describe his arch-rival, Murdoch-owned Move Inc., as “a crappy company.”

There’s no love lost on the Move side either. Move, which operates the Realtor.com real estate listings site, has previously cut off listing fees to Trulia right after Trulia was acquired by Zillow, and now has Zillow in court over its merger with Trulia.

Certainly, the stakes in the real estate listings data business are huge, so bare-knuckle competition isn’t surprising. What is surprising is that both companies are finding success with radically different business models.

Realtor.com has what I view as a very conventional “just the facts ma’am” user interface. It offers basic parametric search, with listings displayed as summary listings, each offering fast access to listings detail. Real estate agents can pay to advertise themselves or highlight specific listings, and are provided with sales leads as well.

Zillow, as you may recall, burst onto the scene with its “Zestimates,” its estimate of the value of every home in the country. This got Zillow immediate interest and tons of traffic, and it quickly became a major player in the market. Zillow also distinguishes itself with a map-based user interface and somewhat different listing detail than Realtor.com. But the “Zestimates” that helped Zillow rocket to the big time are a two-edged sword. Sellers almost always feel they should be higher, and buyers tend to assume they are much more authoritative than they really are. Zillow also sells advertising to real estate agents with essentially the same suite of offerings as Realtor.com.

Does it make sense that both can thrive? Certainly, we see examples of “co-dominance” in many very large BTC markets simply because they are so large. But while more subtle, it appears that the biggest weakness of both sites – neither has 100% of all listings – may be a strength. That’s because lots of people use both products, leaving real estate agents uncertain about where to place their advertising dollars.

It’s the same situation we saw play out in the heyday of the yellow pages industry. Independent yellow pages directories sprung up everywhere as lower-cost competitors to big, established telephone company directories. But advertisers, rather than cheering and running to advertise in the new, cheaper upstarts, found themselves confused and fearful. Which directory did their customers use? Did they use both? Well, the safest course for many advertisers was to advertise in both directories, meaning their cost to reach the same market went up significantly. Not surprisingly, advertisers were not happy with this outcome.

There are rumblings of discontent in the real estate market as well. Indeed, a new initiative called National Broker Portal Project, meant to be run by and for real estate agents and brokers, is gaining steam. It wants to create a major site that will be both dues-funded and run according to rules developed by the brokers themselves. It’s a long shot to be sure, but it shows once again that being the dominant player in a market is tricky, and sharing that dominance is even trickier. We must all remember that disruption in any industry is not inherently a one-time event.

Reviewing the Reviewers

You are likely familiar with Yelp, the local business ratings and review platform. It's been a phenomenal success, but it also has a large number of detractors, in large part the businesses that are the subject of those ratings and reviews. Yelp is a business that, if examined dispassionately, really should never have succeeded. The primary reason was its business model: let anonymous users pick apart businesses in published reviews, then try to sell advertising to those same businesses. Yelp made this challenged business model even tougher by introducing a secretive filtering algorithm that would decide what reviews got published. The objective was to weed out spam, but all it did instead was to spur conspiracy theories among businesses that felt good reviews were being swallowed while bad reviews always seemed to get published.

Tough business, right? Well it gets tougher, particularly because Yelp showed little interest in mediating disputes (for example, there are documented cases of restaurants getting bad reviews on dishes they have never offered), essentially admitting it was too much work. Mix into this the inexperienced sales force Yelp fielded, giving rise to stories of reps offering to make bad reviews disappear  in exchange for advertising, with a raft of lawsuits claiming extortion quickly following.

Things seem to have calmed down for Yelp in the last year or so, but it's hard to imagine that the rift between the business community and Yelp has fully mended. Yelp is more powerful than ever, and can make or break a business. Yet it maintains as a core principle that it is a consumer empowerment tool, even though Yelp generates no revenue from consumers.

That's why I find it surprising that Yelp just announced the acquisition of Eat24, a service that lets people order food for home delivery. Yes, the company that controls the reputation and success of restaurants now wants to control their order flow as well. I see nothing to suggest that Yelp has become a friendly, trusted brand to the average local restaurateur. Yelp brings scale, but a lot of baggage as well.

What is the correct business model for a ratings and review business? There is no easy answer, especially as the consumers who typically provide the reviews show little appetite to pay to access them. One exception is Angie's List, which sells subscriptions, but even Angie's List now makes more money from advertising than subscriptions. Fortunately, Angie's List found a middle path that allowed this revenue pivot without compromising its credibility and integrity.

TripAdvisor is another reviews site with many of the same issues as Yelp. But TripAdvisor makes most of its money by selling eyeballs, a traditional media model. This means its doesn't have to rely on hotels for revenue, though it recently started to push in this direction.

The real estate website Zillow posts its estimate of a home's value right next to the (almost always higher) asking price. One can presume that's not helpful to making the sale. Awkward? Well, Zillow now asks consumers to rate and review the real estate agents to whom it sells advertising.

In many respects, the jury is still out on what does and doesn't work for review sites. What we've seen to date is that if you can build a big enough audience, the advertising dollars will follow, no matter how upside-down your business model. But just because they pay you doesn't mean they have to like you.  And this may come back to haunt these companies, if not in their core business, then by ultimately limiting their growth and expansion potential.

How Many Ways Can You Monetize Data?

I watch the real estate sales vertical with great interest. There’s a lot of data, and money here, which in turn means a lot of innovation and competition. Companies like Trulia, Zillow (which are poised to merge shortly), Move (which operates the Realtor.com site) and a host of fascinating and scrappy regional players such as PropertyShark makes for endless creativity and impressive user experiences. The first thing you notice about all the online real estate information services is that none of them is trying to disintermediate real estate brokers. Indeed, these services typically have business models that depend on agents for revenue. Thus what has happened in this very unusual market is that customers have taken on the primary work of discovery (formerly a big part of the agent’s job), even though agents haven’t reduced their commissions to reflect this.

The second thing you notice is the wealth of structured data that is available for parametric searching. Search by zip code, price range, bedrooms, lot size, and much, much more. In fact, such powerful searching is table stakes now. Map integration? Done. Alerts? Done. Rich multimedia? Done. So what’s left to innovate?

Zillow burst onto the scene (beautifully timed to coincide with our late, great real estate boom a few years back) with its audacious system that put a price valuation on every home in the country. That brought it tremendous visibility, but also introduced consumers to the power of predictive analytics.

Trulia later upped the ante by overlaying neighborhood crime statistics on its database. Not to be outdone, its competitors overlaid school district boundaries to map the schools nearest to each home. Trulia then upped the ante again, licensing data from our Model of Excellence winner GreatSchools.org, that showed the relative quality of each school. And that’s where the market seems to be headed today – qualitative assessments of neighborhoods, along with more predictive analysis.

As you might expect, qualitative assessment starts with Census demographic overlays. Real estate site Movoto.com is already there, with zip-level income, education and ethnicity. Some other sites are hesitating because of the vagaries of real estate anti-discrimination laws. But that is not an impediment to third-party data providers such as Onboard Informatics, which provides a raft of local data, including an innovative “lifestyle search engine.” Other sites like neighborhoodscout.com provide sophisticated demographic views of local areas. And we’d be remiss not to acknowledge diedinhouse.com for those who need to know if former home occupants left on their own power or not.

But what’s most fascinating is that this lifestyle analysis of neighborhoods has even been elevated to a personalized, consultative model. The New York Times recently profiled a New York area firm called Suburban Jungle that helps homebuyers target areas based both on demographics and deep market knowledge. Suburban Jungle doesn’t sell real estate; it refers its clients to real estate agents in exchange for a fee-share, another great example of how many different ways data can be monetized.