Zillow |
On the one hand, sure, I can see why someone might consider this a problem:
When executives at Zillow Group Inc. pored over the company’s earnings in the spring, they saw a problem: The real-estate firm was making too much money.
On the other hand, it does feel like a problem that I would happily take off Zillow’s hands? There are worse problems than making too much money! Making too little money is a worse problem, for instance. Losing money. These are the problems. Making too much money is just interesting.
That was the first sentence of the Wall Street Journal’s postmortem about how Zillow ended up losing a bunch of money buying and flipping houses and had to shut down that business. The problem was that “the company’s algorithm, which was supposed to predict housing prices, didn’t seem to understand the market,” and was generating prices that were too low.
This had two effects. First, most people declined its offers, which were too low: “Only 10% of people who asked for a Zillow offer and eventually sold their home ended up selling it to Zillow,” and “Zillow was also behind on its target for home purchases” in the first quarter.
Second, when people did accept Zillow’s offers — because they were in a hurry, or didn’t have a good sense of the market — Zillow made a ton of money:
The first quarter delivered home-sale profits that were more than twice as high as anticipated, the company said. Zillow expected to make money primarily from transaction fees and from services such as title insurance—not from making a killing on the flip.
Zillow executives looked at this state of affairs and said, well, this state of affairs is bad, we need to grow our market share and make our algorithms more accurate. We are looking to be a first-choice market maker in home-selling, and we can’t do that if our prices are too low. So they tweaked the algorithms to generate higher prices. Those prices also turned out not to be particularly accurate, but in the other direction. If you systematically bid too low, you will not do many trades, but you will make a lot of money on each trade. If you systematically bid too high, you will lose money on each trade, and also you will do a whole ton of trades. This is much worse.[1]
You could imagine being in that meeting and saying, hang on a minute, are we sure about this? Sure, it’s bad that our algorithms are inaccurate, and it would be better if they were more accurate. But that seems hard. We have smart people working to make them accurate, and so far they have failed. If we tweak the algorithms to generate higher prices, that may just make them inaccurate in the much worse direction.[2] On the other hand right now we have a business that buys houses at below-market prices, flips them, and makes a big profit on each one. A lot of people would like to have a business like that! Sure it would be better if we could do more trades like that, but you’re realistically not going to find tens of thousands of people who will sell you their homes for below market value. But we have found thousands! That’s pretty good!
I don’t know, it’s a weird story about technology and scale, about how many businesses — in particular, many public companies — aim to maximize not profit but size. In concept, a business model like “send everyone in America a bid on their house that is too low, and then buy the houses from the minority of suckers who take your bid” seems … obviously … lucrative?[3] Like, I would be happy to do that business? I don’t have the capital for it, but I’m sure there are hedge funds who would do this business if they could.
But the only way to actually do it — to generate millions of plausible-but-too-low bids, and to get them in front of potential sellers — is to have the scale and reach and technology of a big online home-information company like Zillow. And once you’re at that scale, doing a few thousand dumb lucrative transactions almost isn’t worth it for you; the only way to justify it is to scale it up until it’s larger, smarter and less lucrative. (Or, in Zillow’s case, larger, equally dumb and disastrous.)
Also you probably got to that scale by being a popular trusted source for home information, which is valuable for your main business of selling ads on the internet; sending people lowball bids to try to sucker them into selling to you might not be great for that business. As Ben Thompson wrote: “Because the company felt compelled to push Offers, it was actually leaving most potential sellers with a bad taste in their mouth; this is a big problem given that an Aggregator’s advantage is the fact the end users like it and go there first.”
And so Zillow could not do this business model, because the business was too small for Zillow. And I could not do this business model, because I am too small for the business. But for a little while, it was kind of a good business!
No comments:
Post a Comment