Yesterday Zillow announced their Q3 financial results. This is a company that has been one of the few that benefited from the market conditions in 2020.

The company has grown to 5,000+ employees. They had a record quarter in Q3. On their earnings call the company shared a perspective on the overall balance of supply / demand that many investors don’t often pay attention to.

The pandemic has turned the market on its head and it’s difficult to make sense of what we’re seeing in the market. The abrupt changes are the result of many contradictory forces, both headwinds and tailwinds as we’ve talked about on recent shows. The folks at Zillow pointed out on their investor call that there are 5 million more people in their prime home buying age in the market than there were in 2010. Demographics suggests that the low number of home buyers over the past decade in the wake of the financial crisis has created a wave of pent up demand which is only now starting to get satisfied.

Zillow offers is a service the gives a seller cash offer without having to open their house to showings.

Zillow closing services is providing closing services for 98% of their transactions of their zillow offers business. Sellers to Zillow make up 0.2% of their total transaction volume.

On today’s show we’re talking about what can happen when you compete with your customers.

This is a business lesson that many companies learn the hard way. Last month Zillow announced that they were getting into the brokerage business.

Back in 2014, Greg Schwartz, Zillow’s then-chief revenue officer, stated Zillow was “a media company that helps people find homes.”

How does Zillow make its money? They don’t collect real estate commissions. They sell the leads collected on their website to licensed realtors who pay a fee to Zillow for those leads. It’s up to the real estate agents on the ground to do the heavy lifting, to drive the buyers to showings of the properties.

But the marketing fee for the leads is small compared with the real estate commission earned by the real estate agents who actually transact the deals. In a buyer’s market, the majority of the work is performed by the buyer agent.

For now Zillow is only using in-house agents on the properties is buys directly.

Zillow is only interested in buying specific types of homes. They look for homes that are relatively new, in good condition, and that are within what they consider to be “high opportunity” markets where the chance of a quick re-sale is possible.

Dominance in a segment doesn’t mean absolute power. Remember, platforms rely on all their stakeholders in order to be successful. The company has three main lines of business.

Entering into the brokerage business means that Zillow is now competing with their customers. Real Estate Agents who have benefited from getting leads from Zillow in the past have recognized that zillow has become too powerful in the market and will eventually replace their partner agents with salaried in-house employees who carry a real estate license.

So the question is will the agents allow their newest and largest competitor continue to be their partner? Some will rationalize that Zillow doesn’t really compete directly with agents. But as they learn, grow and mature as a brokerage, they can shift their focus quickly.

History has shown competing with your customers to be an unstable practice.