WSJ: “Struggling Real-Estate Giant Realogy Strikes Deal With Amazon”
[Editor’s Note: The views expressed here are solely those of Ross Kaplan, and do not represent Edina Realty, Berkshire Hathaway (“Berkshire”), or any other entity referenced. Edina Realty is a subsidiary of Berkshire, and competes with Realogy subsidiary Coldwell Banker Burnet.]
“We lose money on every deal, but make it up on volume.”
–old business joke.
When a fast-growing, trillion dollar retail juggernaut enters into a partnership with a struggling company worth less than one-thousandth its value — whose stock price has dived 80% in the last year (see chart above) — who do you suppose has more leverage?
That’s what I think, too.
Win-Win (for Amazon)
In essence, Realogy appears to be paying Amazon, big-time, for deal flow.
Specifically, it’s buying access to well-qualified, prospective home buyers and sellers (“leads”), which Amazon identifies on its ever-expanding platform, and will now refer (presumably exclusively) to Realogy.
In return, at the end of the transaction, Realogy will stock each newly-purchased home with up to $5,000 in Amazon products (Alexa and other “smart home devices”), depending on the sales price.
Crunching the Numbers
Where does that potential $5,000 come from?
Realogy’s cut of the commission.
Ouch!
Call it, a giant “in-kind” referral fee.
Assuming the arrangement generates another 500,000 annual home sales annually for Realogy (10% of about 5 million U.S. total), given the U.S. median sales price of $280k, Realogy’s referral fee to Amazon could exceed $500 million per year.
The Google/Facebook/Zillow Business Model
All of which begs the question, “exactly what does Realogy get out of of all this?”
Additional business, true, but at what price??
For Amazon, meanwhile, it’s just another way to monetize its vast (and growing) universe of eyeballs users at virtually zero cost.
In fact, less than zero, given Realogy’s commitment to buy Amazon products for their “shared” customers’ new homes.
P.S.: Why wouldn’t Amazon just buy Realogy outright?
After all, the cost (about $700 million) barely amounts to loose change for Jeff Bezos’ behemoth.
Answer: because it doesn’t need to, to extract maximum value from the relationship.
