ZipRealty + Zillow Could Be a Winner

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Includes: CD, LEDR, LOOP, MOVE, ZIPR
by: Sramana Mitra

Not so long ago, Google launched an offering called Google Base. In April 2006, SEO consultant Shimon Sandler reported that Google has launched what he termed "Google Real Estate" in secret beta, on top of this platform. Indeed, as Shimon pointed out, a search for the term ‘homes for sale’ in Google fetched the top result that offered options to further drill down search by location, property type, distance, price, and even bedrooms and bathrooms.

The revelation created a stir among online real estate watchers, with apprehension that publicly traded real estate companies including ZipRealty (NASDAQ:ZIPR) may become a victim of Google’s move. David Jackson of Seeking Alpha voiced his concerns on the issue.

Later Danny Sullivan, who was then with SearchEngineWatch, clarified in his comments to David’s post that Google’s supposedly real estate secret beta is in fact search results from Google Base’s housing category.

As the brouhaha dies down, it is time to take a closer look. It becomes clear that Google Base may not affect ZipRealty that much, simply because while Google’s service ends with providing just the search results, ZipRealty’s starts from the search, but ends with actually uniting the real estate buyers and sellers. In other words, ZipRealty helps with the transaction (Commerce), provides relevant Content, and is much closer to a full-fledged Web 3.0 offering. (Our recent review of ZipRealty is here.)

From being a closely held private company, ZipRealty (ZIPR) debuted on Nasdaq in November 2004, but so far its numbers have lacked luster. Its Q1-07 net revenues were $23.4 million, a 22% rise on $19.2 million reported in Q1-06. However, the company suffered net loss at $3.1 million compared to $0.8 million loss in Q1-06. Analysts’ opinion is incidentally tilted in favor of holding the stock than buying afresh with no suggestion of selling.

So what is likely to happen to the company? As we have discussed earlier, online real estate is a $3 Billion industry. The $11.6 Billion real estate ads business is fast moving online, and according to Borrell Associates, online ad spending on realty sites is forecasted to reach 32.1% of overall Real Estate ads in 2010 from the current 17.7%. All this is good news for ZipRealty, which is #9 on the list of top realty sites, and is itself growing at a very decent clip.

As the verticalization of the Internet continues, those large Internet companies who don’t have a position in Real Estate could acquire ZipRealty in short order. It is an extremely affordable investment. On the other hand, it could also be used as the trunk for a roll-up in the category. Newer sites like Zillow, Trulia, Roomster, LoopNet (NASDAQ:LOOP) are all related offerings, and can be part of such a consolidation. ZipRealty’s problem would be its lack of currency momentum due to a depressed stock price. However, a private equity player could buy a bunch of these companies and engineer the roll-up outside of the public market.

Zillow, perhaps, is the most interesting of these. It is funded by ZipRealty’s original investor, Benchmark Capital. The trouble with a company like Zillow, however, is that it has raised $57 Million in venture capital, and unless it proves out a business model to support its investment thesis, the company, despite its enormous traffic volume garnered via a well-marketed coolness factor, will remain a largely unmonetized asset. At that point, merging Zillow into ZipRealty may be one of Benchmark’s exit options. This will give ZipRealty huge traffic, which, when slapped on top of its existing (proven and relatively successful) business model of taking transaction commissions, would be a good win:win.

Bottom line: there are still question marks around Zillow’s business model. ZipRealty, however, has a good business model that works. Zillow has strong traffic. Why not combine the two and accelerate both? The thought has surely crossed Bob Kagle and Bill Gurley’s minds!