The Power of Online Monopolies – UK Housing Market

The Power of Online Monopolies – UK Housing Market

June 19th, 2014 // 12:27 pm @

selling-your-homeOnline advertizing is proving to be a massively profitable business, if one can achieve market dominance, and if one understands how in such a media business profit can be driven from such leadership.

Rightmove and Zoopla, who between them have two thirds of all the time home seekers spend online, dominate the online advertizing of UK homes for sale.

The market leadership they have achieved has feed through to there financial results:

Rightmove who are the biggest turned over just short of £140m in 2013, and made a profit of £97 million on that number, a remarkable operating profit for any company.

Zoopla the smaller of the two makes about a third of Rightmove’s profit but is still a very profitable organization

Two key things allow these companies, and particularly the market leader Rightmove to turn market leadership into profit.

Firstly in pricing, Rightmoves list price for one advert for one month is £885, for an advert that has no incremental cost for them to put on there web site. Estate agents have little option but to pay, as Rightmove has by far the most house hunters viewing their adverts. And against there fee of 1-2% on an average house at £260,000, means their revenue is on average £2,600 to £5,200, so even at full rate the Rightmove advert makes commercial sense.

Secondly their costs are proportionally lower. The web site is a relatively fixed cost, whether it has one house for sale or 100,000. Their major costs will be marketing to house hunters and sales costs to estate agents. Rightmoves marketing will be efficient, as they are well known as number one already, house hunters going to their site are likely to go back as they have the most homes for sale making investing in getting new visitors efficient.

Zoopla do not split out their marketing costs but they are likely to be close or even above Rightmove’s as they have less homes for sale so the natural home seeker momentum will always be to go to whoever has the most homes for sale. And to overcome that as number two, one has to spend disproportionately more on Marketing.

Sales costs will be similarly driven. Rightmove can afford their sales costs, as each incremental sale is almost all profit. Zoopla again will probably have to spend a similar amount on sales as RIghtmove to reach all the market.

Therefore Rightmove as clear market leader is very profitable, and Zoopla as number two is still very profitable but will always struggle to get close to the market leaders level of profitability. That said even as number two it is a valuable company who hope to float shortly with a value of £1 billion.

This market demonstrates very clearly the profit potential of online advertisers who can achieve market leadership. In few businesses is the power of leadership such a key driver of profit.

This leaves estate agents with a number of very critical business issues, as well as the inherent ones in the changing way we buy houses.

Traditionally estate agents had close to a monopoly, they were the only realistic way to sell your home, as they were the only link between sellers and buyers. Their fee’s reflected this, not the work that went into selling homes. This is a position, which is being eroded by new online organizations that will sell your home for a fraction of what a traditional estate agent charge. Emove the market leader charges £349 against an average estate agent in the thousands.

Emove, help value the property, visit to take professional pictures, produce a floor plan, and advertize your property online. With this they offer advice via the phone rather than the personal service of a local estate agent. And while such companies have only around 5% of the market today, this will rise, as their value proposition is tempting against traditional estate agents. These new inexpensive operaters will put pressure on estate agents to lower prices and therefore profitability

Secondly estate agents have little option but to advertize on sites such as Rightmove at whatever price, and this power will only increase and prices will and have risen for such online adverts.

Estate agents understand these problems and are starting their own online advertizing company to be launched early 2015. Their key selling point is significantly lower prices to estate agents than Rightmove.

Taking on an incumbent market leader in online advertizing is a daunting prospect. The new company has to get estate agents to list their properties for sale, even if it is free, in the early days they will have few house hunters viewing the adverts so even the time involved in placing the advert may seem like a poor investment. If one wishes to charge from day one this issue becomes even more challenging.

The marketing costs of getting home buyers to view your site will be expensive, and in the early days you will have few properties so keeping home seekers will be difficult. Moving home seekers from the two incumbents to a completely new site with less for them to look at is an expensive marketing challenge.

Tackling an incumbent is possible, it is however expensive, revenue will be low until you get significant home seeker traffic, that would justify charging estate agents. And the costs of marketing will be proportionally high as you need to get homebuyers even when you have few homes for them to look at.

The new estate agent site, provisionally called Agents Mutual has £6m in opening capital. Even if all of that were spent on marketing, one would still be spending a fraction of what Rightmove does.

Agents Mutual’s job has been made more difficult by two key restrictions that have been imposed on it.

Firstly they will not take adverts from online estate agents such as Emove. This will restrict the number of homes they have for buyers to view, and cut revenue. While it is understandable that the traditional estate agents who are funding Agents Mutual wish to restrict the growth of online competitors, the new company will simply not have the market muscle to influence online estate agents growth, and hindering the new organize in an attempt to do so seem shortsighted.

Secondly if estate agents wish to use Agents Mutual they must agree to drop either Rightmove or Zoopla. This is more understandable and points to what is possibly the real goal of Agents Mutual which is to supplant not Rightmove but Zoopla and thereby put pressure on Rightmove to limit their pricing, as even as market leader there is a limit to how much one can charge over ones competitors before your business starts to erode.

Agents Mutual has one powerful plus, estate agents want to have a competitor to Rightmove. Therefore Zoopla the real target may be vulnerable, but it will cost a good deal more than the £6m so far allocated.

The profit potential of online advertisers if they can achieve clear market leadership is huge, whether it is homes, job, cars or a host of other products.

Market leadership drives profit by:

·      Allowing high advert prices with no incremental cost of actually putting such adverts online

·      Low proportional marketing costs as consumers are naturally drawn to whoever has the most supply of relevant adverts for them

·      Low proportional sales costs, as if you can offer the most relevant traffic to advertisers they will pay more for that privilege.

I forecast:

Estate agents will struggle to their present market dominance, pricing and profitability, and we will therefore have less local estate agents.

Agents Mutual will struggle unless estate agents are prepared to fund it in a more aggressive attack on Zoopla.

Online advertisers with market leadership will remain profitable and very valuable assets.

The Internet is growing up and the power of market leadership in many sectors is feeding through to the financial results of such organizations.

 


Category : Business Strategy &Companies

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