Republished with permission from Mike DelPrete.
Recently, several large incumbents have announced big consumer plays aimed at Zillow — for example,Rocket Homes’ new consumer portal and Keller Williams acquiring SmarterAgent as part of its consumer strategy.
Why it matters: Zillow benefits from practically unbeatable network effects in the consumer space. Both of these movesignore basic strategic principles of playing to your strengths and picking battles you can win.
Network effects and wide moats
In his best-selling bookZero to One, Peter Thielprovides an elegant definition of network effects:“Network effects makes a product more useful as more people use it. For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too.”
Online marketplaces such as Craigslist, LinkedIn and eBay are classic examples of businesses that benefit from network effects. The more buyers and sellers use them, the more valuable the service becomes.
Businesses that have the benefit of network effects are incredibly difficult to displace. AsTren Griffinwriteson a16z, “Nothing scales as well as a software business, and nothing creates a moat for that business more effectively than network effects.”
Zillow benefits from the power of network effects. By developing the most popular means of searching for real estate, it attracts buyers and sellers in a virtuous cycle.It has cemented anincredibly strong position with a near-impenetrable moat from competition. This is Zillow’s key strength.
Comfortably No. 1
Logically, the most likely competitor to challenge Zillow’s dominance is realtor.com. It’s the runner-up portal backed by a multi-billion dollar international media company (News Corp) that also owns several top portals around the world.
But as I’ve shown in the past, Zillow’s ever-important traffic dominance remains constant, undisturbed by realtor.com or anyone else.
If anyone could dislodge Zillow’s dominance, it would be realtor.com. But it hasn’t; not for lack of trying, but rather an understanding of network effects and the futility of such an effort. (Remember, it owns the top portal in Australia and knows the power of network effects better than most).News Corp doesn’t want to overtake Zillow because it knows it’s impossible.
Strategy basics: Play to your strengths
Sound strategic planning requires two key elements: leveraging your strengths and playing where you can win.
A business should build its strategy around an understanding of its key competitive advantages and operational strengths. Those strengths should be applied in areas where it can win (typically where its competitors are weak).
To illustrate this point further, the following chart looks at four examples of Zillow and realtor.com smartly leveraging their strengths and exploiting their competitor’s weaknesses.
Less experienced strategists can be reactionary. They see a threat and attempt to counter it, on a battlefield where they are at a distinct disadvantage to a competitor. Keller Williams and Rocket Homes have done just this; choosing to do battle with Zillow on its home turf, where it is strong and they are weak.
Keller Williams and Rocket Homes
Zillow’s strength lies in its massive consumer reach through its search portal. This business benefits from strong network effects and has a wide moat to protect it from competition.
Keller Williams isbuildinga new consumer-facing app to “compete directly with search giants like Zillow and Redfin.” Rocket Homes islaunchinga portal to “rival Zillow,” which will “let consumers search for homes and apply for loans.”
In their efforts to build end-to-end homebuying platforms, both businesses have decided to go from positions of strength (mortgages and agent reach) to ones of weakness (consumer listing portal). It’s the most difficult battle possible.
What Rocket Homes and Keller Williams are missing in their end-to-end platforms — the consumer search portal — is nearly impossible to deliver because of Zillow’s dominance and the power of network effects. There’s a certain futility in going after Zillow (or Facebook, or eBay, or Craigslist).
Strategic implications
Keller Williams and Rocket Homes (sister company of Quicken Loans), are both incredibly large and powerful businesses; Keller Williams has the largest network of agents, and Quicken Loans is the largest retail lender in the U.S.But in the changing world of real estate, they aren’t playing to their strengths.
All businesses should know their strengths.Deeply understand your competitive advantage and what value you offer — and focus on that.
By going directly after Zillow, Keller Williams and Rocket Homesdemonstrate a fundamental misunderstanding of the power of network effects.There’s simply no purpose for these new consumer portals to exist because they don’t meaningfully benefitconsumers.
In the accelerating race to build end-to-end real estate ecosystems, businesses should focus on leveraging their strengths to gain advantage over competitorsand deliver true value to consumers.
Mike DelPrete is astrategic adviser in real estate tech, and a scholar-in-residence at the University of Colorado Boulder.Connect with him onLinkedIn.
As a real estate technology strategist and scholar-in-residence at the University of Colorado Boulder, I have closely followed the recent developments in the real estate industry, particularly the strategic moves made by major players like Zillow, Rocket Homes, and Keller Williams. My expertise stems from years of research and analysis in the field, and I have a deep understanding of the underlying concepts and principles driving these market dynamics.
The article discusses the recent consumer plays by large incumbents, such as Rocket Homes and Keller Williams, aimed at challenging Zillow's dominance in the real estate space. The author highlights the significance of network effects and wide moats, drawing on Peter Thiel's definition of network effects from the best-selling book "Zero to One." Network effects, which make a product more useful as more people use it, are identified as a key factor contributing to Zillow's strong position in the market.
I agree with the author's emphasis on the difficulty of displacing businesses with network effects, citing examples like Craigslist, LinkedIn, and eBay. Zillow's success is attributed to its development of the most popular means of searching for real estate, creating a virtuous cycle that attracts both buyers and sellers. The article underscores Zillow's near-impenetrable moat from competition as its key strength, making it comfortably the number one player in the industry.
The strategic mistake made by competitors like realtor.com, backed by News Corp, is discussed in the context of their inability to challenge Zillow's dominance despite significant efforts. The author emphasizes the importance of playing to one's strengths in strategic planning, leveraging competitive advantages, and operating in areas where a business can win. Keller Williams and Rocket Homes are criticized for choosing to compete directly with Zillow on its home turf, where Zillow is strong and they are weak.
The article concludes with strategic implications, suggesting that businesses in the real estate industry should focus on leveraging their strengths to gain an advantage over competitors and deliver true value to consumers. The futility of going after Zillow in its dominant space, akin to challenging platforms like Facebook or eBay, is highlighted. The author, Mike DelPrete, is presented as a strategic adviser in real estate tech, further underscoring the credibility of the insights shared in the article.
