Where Is Homestore's Future?
by Peter G. Miller
More than two years have passed since Mike Long and others replaced the original leadership at Homestore, the company that operates Realtor.com under a license from the National Association of Realtors. Since "new management" joined the company, it's fair to say that Homestore has earned a number of victories: The huge dispute with AOL was resolved with Homestore still having access to AOL subscribers, no accounting oddities have been reported by the SEC, a settlement with the California State Teachers' Retirement System has been completed, and the stock is once again listed on NASDAQ. Moreover the company exists, a suprise to some given the scope of its past problems. The achievements above are significant and should be recognized; in one sense they are: Homestore shares trade above $4 as this is written -- 13 times higher than in October 2002 when share values dipped to 29 cents. Alternatively, share values are far below the $20 IPO price and nowhere near the $122 seen in January, 2000. And yet, how do we rate successful companies? We surely look at profits and promise, and in terms of Homestore what can be seen is murky at best. In the last quarter, which ended March 31st, the company reported a net loss of $5.1 million -- far better than the three previous quarters when losses were roughly $12 million (December 31st), $30.5 million (September 30th) and $91.5 million (June 30th) -- but still a loss. The lack of profits cannot continue interminably for Homestore or for any other company, a fact which brings us to the magic question: What steps can Homestore take to solidify its operations, to make a profit? Business Week, in its issue of May 17th, quotes several positive remarks from securities analysts. One reason: a predicted shift of ad dollars from newspapers to the Internet. (See: "Homestore: The Hottest Thing In Real Estate") Alternatively, there is the view that Homestore might find greater success by evolving into a smaller company with fewer products and services, and also fewer employees and costs. This is an awful choice for the people who have stayed with the company, but is it unrealistic? Another idea is that Homestore could develop new products and services that would attract more brokers and agents and thus produce new and additional revenues. The buzz at the just-concluded NAR mid-year meeting in Washington was that perhaps Homestore should be allowed to develop referral income from its listings, as other online firms are trying to do but something now prohibited under Homestore's operating agreement with NAR. As Homestore explained in a 2000 Securities and Exchange Commission filing, "we may be restricted in our ability to create additional web sites or pursue other lines of business that engage in displaying real property advertisements in electronic form by the terms of our agreements with the NAR." The result is that Homestore is stuck with headaches and limitations which date back to its inception, limitations accepted in exchange for the right to operate Realtor.com. One result is that Homestore cannot now compete for the referral revenues going to other companies and at the same time it cannot perpetually sustain losses. What's missing here is something new and different, something that would both raise dollars for Homestore and yet position the company as the broker's advocate. It's difficult to see any circumstances under which referral fee restrictions will be abandoned -- unless Homestore trades something of significant value to the brokerage community. It turns out the Homestore may have something to put on the table: Lower referral fees. If price competition is good for brokers, why not for online referral companies? If one company can provide actionable leads at a substantially lower cost, would it not attract more business and revenue? Would not all online lead services lower prices to compete? If brokers are going to pay referral fees instead of investing in their own websites, their own local marketing and their own names, if brokers are going to pay referral fees at all, then like much else on the web referral costs should fall with enhanced competition. In effect, it may make sense for Homestore to seek an end to referral-fee restrictions in exchange for an agreement to provide discounted referral services. Discounting works for Wal-Mart and it could also work for Homestore. NAR, for its part, could extend referral-fee restrictions on a quarterly basis to assure that prices do not rise over time. | 
