For many months I researched and profiled various companies looking for an opportunity to build a product/service that would provide an opportunity for me to build and scale a business. After an exhaustive search, I finally landed on an idea: real estate. Specifically, I saw an opportunity to service real estate agents as they struggle to establish an online presence.
The particular opportunity that I felt I saw was an innovation vacuum due to 6 years of low revenue in the industry. In an overly saturated online World where angel funding is thrown at every college student with an idea, I was hoping to find a niche where no one was looking. Real estate seemed perfect since it isn’t really ‘sexy’ after so many years of struggle. Equally important however, marketing solutions for real estate agents is a massive billion dollar a year industry. The quality of services and products is not that high and margins seemingly healthy. Once I finally stumbled upon the niche, it appeared it was all systems go!
But there was a massive under-current forming underneath me and I didn’t realize what it was until 2 weeks ago. Apparently Zillow.com, the major online media site for real estate search and content, and decided to begin offering marketing solutions for real estate agents. More importantly, it launched a significant suite of tools and resources nearly identical to was planning, and made it available, for free. They now offer a CRM system, significant training materials, and a free WordPress-based website (which real estate agents love), complete with numerous content widgets and an IDX feed of houses the agent can display on their site. The IDX feed is particularly notable because the vendor fees each regional MLS charges to access their IDX feed is non-trivial, adding $20-25 to each agent account on average, depending on scale.
Looking closer at the Zillow program, it is not just $25 per month they’re absorbing, there are also hosting and development costs and a free domain name they are subsidizing for new Realtors who sign up. Its a great value for agents who sign up, but a clear loss-leader on a massive scale. From what I have read, Zillow’s goal is to become the dominant destination for Realtors seeking online marketing solution. Or put another way, they are establishing a Freemium platform, upon which they’ll offered paid services. The free part of the product effectively neutralizes competition and allows them to establish a dominant mindshare; a position well worth the $5-10 million dollars in cost to them, and something that will pay off in spades later, with higher conversion rates and lower advertising costs for their services. More importantly, the margin compression asserted by their impossible economic model will inevitably starve out a majority of the small companies currently services Realtors, creating a much less crowded table which is easier to dominate.
What I am describing is a classic case of market consolidation. Well, the part wherein a company can offer better service at a lower price is classic competition which leads to consolidation. Subsidizing a new offering from other business units and recently acquired IPO capital in a way that renders your competition downright impotent to compete is arguably anti-competitive and monopolistic, but I won’t digress any further in that direction.
The reason for sharing this story is because it presents a learning opportunity for observant marketers and entrepreneurs. Just because an opportunity exists today, doesn’t mean it will still exist tomorrow. In fact, there is a natural cycle in business wherein a new innovation generates new opportunity, entrepreneurs seize on the opportunity in a vacuum of competition and do well. Their success inspires new entrants, the market gets crowded and ROI is squeezed. Eventually a “winner” of the competition will assert itself, another “winner” will respond, and all the small competitors are washed away in the waves of competition that overwhelm them. By this time, the opportunity for innovation and entrepreneurship in the field is exhausted and those who competed inevitably go to work for the ‘winners’. This is a phenomena first described by the Rogers Innovation Adoption Curve and well applied here.
If I were to apply it to entrepreneurial opportunity, I would say there are are 5 distinct phases:
1. Innovation – Shortly after an innovative disruption occurs, there is significant opportunity for an entrepreneur to introduce new ideas and products. Because there is virtually no competition, an immature product is acceptable and very little marketing strategy is required ( brand strategy et al).
2. Proliferation – Soon after the world realizes the opportunities the early movers have discovered, more and more entrepreneurs will seize on the idea. The market will soon get crowded. Marketing sophistication is now required and products need to be more polished and mature to compete (more features, etc). For these reasons, the cost of entry is now a lot higher and may even require significant capital at the later stages. The market is still healthy but increasingly difficult to enter.
3. Consolidation – During the proliferation period, 2-3 large brands likely pulled ahead through better product or marketing efforts. These brands are now in a position to begin major advertising campaigns, major new product innovations, or reduced pricing as a result of scale. In some more aggressive cases, they may seek to undercut competitors by offering product at impossible price points and take the loss in order to starve out competition, in an effort to accelerate the consolidation phase. Typically one brand will initiate the war but a second and possible third will respond in an effort to prevent the one brand from dominating them.
4. Nichification – After consolidation occurs, the dominating brand(s) will have created a platform or “ecosystem” that they control. AT&T did so with the telephone networks, NBC and CBS for television networks, Microsoft with the desktop OS, Google with online search, Apple with the IOS/iTunes ecosystem, Magento with eCommerce, and WordPress with blogging, YouTube for online video and Facebook with the social graph. Once those dominant platforms are in place, there is very little hope of a small entrepreneur challenging the platform. Instead, many entrepreneurs find opportunity, albeit smaller and more contrived, by developing “glue” to augment the experience of those platforms in the form of extensions, ‘apps’, themes, or content. Consulting is also still a viable opportunity at this stage of market maturity.
5. Completion – Eventually even the the entire innovation wave will be exhausted an even the niche glue opportunities on top of the dominant platforms will have been exhausted. There is always some room for innovation but the field will again get crowded, margins squeezed, and the platform owner becomes increasingly aggressive in their efforts to control and monetize the platform, further undercutting the entrepreneur. When all of this happens, the entrepreneurial battle for the wave is over, and many of those who participated will go to work for the dominant brands.
As frustrating as it is to observe, it is also fascinating and predictable. In my particular experience with real estate, I observed a large opportunity that seemed to be taking a rest for the past 5 years. I took this as a sign that the above progression was perhaps paused in that industry, providing me an opportunity to go back in time so speak, compared to a more accelerated wave otherwise online. I believed we were in the early stages of Proliferation in only marketing solutions for real estate agents, making it a good entry point, particularly when working without significant investment capital. In fact, we were much closer to the end of the proliferation phase than I realized, and Zillow moved quickly to accelerate the consolidation phase. So essentially we went from stage 2.5 (midway through stage 2) to 3.5 (midway through stage 3) almost over night!
As for where opportunities still exist in the niche, I believe a couple of competing platforms will exist, providing opportunities to create “glue” solutions. The questing is of course how open those platforms will be for entrepreneurs to participate. In Zillow’s case it is curious, though I see a clear competing platform emerging called Spark Platform, which appears will mount a meaningful battle against Zillow and seems to offer ample opportunity for entrepreneurs to become involved. Consulting, training, and guidance also remains a clear opportunity, as there are a lot of Realtors out there who are now waking up to the reality that 90% of real estate searches begin online, but haven’t a clue how to put that fact to work for them.
In every market segment, there is likely to be a similar pattern at work. It is critical for entrepreneurs to realistically assess where things are at in their market and determine their odds of success, before beginning. Raising seed money is becoming increasingly important as we get deeper into the proliferation phase, and so is the risk of being undercut by a dominant player. If a consolidation event has already begun, be realistic abut that fact and adapt to the prevailing platforms, or don’t even bother competing. I realize it is en vogue to be David and take on Golliath among tech entrepreneurs these days, but for every Mark Zuckerberg story, there are probably thousands of shattered dreams that litter that one path to success. More people will not achieve the massive hit of a Facebook, but still stand a good chance of a mid-size success, but only by being realistic and adapting to their environment.