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While the New York Stock Exchange and the NASDAQ have both surpassed September 10th levels, the same cannot be said for Homestore.com, Inc., a firm which owns or operates many large online realty sites, including Realtor.com and Homebuilder.com.

Homestore shares, which were valued at $15.99 on September 10th, closed at $2.36 yesterday -- an 85 percent loss. During the past 52 weeks, Homestore shares have traded between $2.20 and $37.25, according to Standard & Poors, Comstock. The high point for the stock was January 25, 2000, when it closed at $122.25.

What happened? How is it possible for a major industry and online presence to plummet on Wall Street -- especially during a period when market indexes have risen?

The answer, essentially, is not a single development but rather a cascade of events.

Earnings

On November 1st, after the stock markets closed, Homestore announced that third-quarter revenue amounted to $116.1 million but also that the firm had sustained a net loss of $106.6 million. The reaction on Wall Street was immediate: Shares which closed at $4.99 on November 1st finished at $2.28 the next day, off more than half.

What will happen in the future is unclear. The company has announced that it will lay-off as many as 700 employees. At the same time it's projecting a fourth-quarter pro forma loss -- excluding certain charges -- of $0.30 to $0.38 per share.

Industry Support

Homestore said in its third quarter report that it had 369,000 real estate subscribers, up 6 percent over the previous quarter, and expected that 70 percent would renew with the firm. Seen the other way, 30 percent of all current real estate subscribers -- 110,000 -- are not expected to re-sign.

Meanwhile, major industry players are developing sites outside Homestore's orbit.

For instance, 54 major builders -- firms which produce more 200,000 new homes yearly -- now offer properties on a new site, NewHomeSource.com. And NAR news releases now direct reporters and the public to the site it operates directly at www.realtor.org and not nar.realtor.com.

On December 5th, however, NAR issued a news release entitled, "NAR Supports Steps To Maintain Realtor.Com's Dominance."

NAR Chief Executive Officer Terrence M. McDermott issued the following statement today.

"NAR supports efforts by Homestore to maintain Realtor.com's dominance in the marketplace during these difficult economic times. Ranked as the number one homes-for-sale site again in October, Realtor.com® currently offers potential homebuyers more than 1.7 million new and existing homes listed for sale.

Realtor.com has continued to expand its leadership position and increase its value for our members. It is critically important to the entire Realtor community that Realtor.com maintain its leadership position."

That's the entire text of the release. While NAR posted this release on its site, the release was not sent to the media via the Business Wire, a leading press release distribution service frequently used by NAR.

CFO Resigns

On December 6th, Homestore's chief financial officer, Joseph Shew, left the company for "personal reasons" and the firm announced that it would seek a new CFO. Shew had been named CFO in February.

Wall Street was decidedly unhappy with this announcement -- the stock closed at $3.10 on December 5th and $2.47 on December 6th, a 20 percent drop.

The AOL Dispute

Homestore has issued an ongoing stream of news releases which focus on traffic to company sites. The latest traffic announcement, issued November 13th, said company properties attracted 12.86 million unique visitors during October, "the 26th consecutive month the Homestore Network led all home and real estate destinations in attracting visitors to its sites."

You have to conclude from such releases that traffic is seen as a major measure of company success. You also have to conclude something else: If traffic is important, then Homestore's relationship with AOL is crucial.

In May, 2000, Homestore said that it was spending in excess of $200 million in cash and stock for a five-year deal to access AOL's 22 million members.

The AOL agreement cemented Homestore's position as a leader in the online real estate field. As Homestore explained to the Securities and Exchange Commission, "to draw traffic to our web sites" the company would become "the exclusive national provider of professional home and moving services across AOL, AOL.COM, CompuServe, Netscape Netcenter and Digital City."

In other words, if Homestore is the "exclusive national provider" then there isn't room for would-be competitors on the nation's largest ISP. In exchange for $200 million, Homestore got a lock on AOL's audience and automatic standing as a leading industry player.

But now the partners are squabbling. According to a September 30th report filed with the SEC, Homestore says it now wants binding arbitration to resolve a dispute with AOL. The problem? Homestore contends that "AOL is in breach of certain of its obligations under the agreement relating primarily to Internet traffic commitments."

"The notice of arbitration," says Homestore, "seeks a variety of remedies, including damages and equitable relief."

For the real estate community the question is plain: One of the major attractions Homestore offers is the ability to draw visitors from leading sites and systems. If Homestore is at odds with AOL, what happens to traffic?

Fortune Magazine's e-50 List

If you have an Internet firm it's great to be named to Fortune magazine's e-50 list. "Each of the companies in our index," says the magazine, "is, or has the potential to be, a major player; taken together, the companies cover the spectrum of the Internet economy. From e-tailing innovators like Amazon.com to enablers of faster, better networks like Broadcom, they're all here."

And sure enough, Homestore was there among the fabulous fifty -- until last week when it was dropped for USA Networks, "a media and electronic commerce company focusing on entertainment, information, and direct selling convergence."

What's Next

A looming issue for Homestore and for other national sites is the introduction of "Internet Data Exchange" or IDX systems. Scheduled to begin January 1st, IDX allows MLS members to publish listings online -- not just the listings placed on the system by an individual member, but all available MLS listings.

Not all brokerage firms support IDX, but most do and the marketplace impact is likely to be significant: In effect, every MLS member site can become a local or regional portal. If you want to know about listings in a given community, just go directly to a local MLS member.

Will local brokers support national sites once IDX becomes common? Will salespeople with personal web pages make use of IDX technology? Will the public go to Realtor.com or will they increasingly use search engines to find local sites?

To this point no one knows -- but within six months to a year we'll find out if local broker sites with IDX can compete with national sites -- and vice versa.

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