An Interview With Zillow's Chief Revenue Officer, Greg Schwartz

On the road in Seattle, The Motley Fool pays a visit to online home and real estate marketplace Zillow. Today we chat with Chief Revenue Officer Greg Schwartz about Zillow's revenue streams, monetization strategies, and what lies ahead.

Greg joins the Fool to look at Zillow's current successes -- especially in mobile -- as well as future plans in areas such as rentals and home improvement, and the metrics investors should key in on when evaluating the company.

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Brendan Byrnes: Hey, Fools, I'm Brendan Byrnes, and I'm joined today by Greg Schwartz. Greg is the chief revenue officer at Zillow. So first of all, thanks for your time.

Greg Schwartz: Yeah, great to meet you. Thanks for coming.

Byrnes: I was wondering if you could just start off with giving an overview of Zillow's different revenue streams and how they contribute to the top line.

Schwartz: Sure. We've got a few different revenue streams. The first and largest revenue stream is our Marketplace revenue stream -- which includes local advertising from real estate agents, from mortgage brokers, banks, and brokerage firms -- which is our largest and dominant revenue stream.

Then we have what I'd call a more well-known display advertising revenue stream, primarily from advertisers who are adjacent to the transaction of moving, so wireless companies, telecommunications companies, and the like.

Byrnes: I wanted you to explain something. The new transition that you went through now, with doing a fixed number of impressions -- why did you decide to do that, and how is that going to impact your revenues?

Schwartz: Yeah, you bet. We converted our unit of sale, which is something we focus quite a bit on, to one that was directly correlated to the benefit that we provide to our real estate agent and brokerage customers.

Our traffic's been growing quite rapidly, as you know, over the last number of years. It is important that we adjust our charges commensurate with the benefit that we're providing. That was the driving purpose of it. We've converted all 30,000-plus of our customers to the new impression-based business model.

We'd been on share of voice prior to that, which was a relatively illiquid manner in which to charge for advertising services. We're pleased with the transaction.

Byrnes: A big part of that was based on big cities, correct, as far as where you get revenue from?

Schwartz: Yeah. You know, what's interesting about our business is we've always operated a national footprint, and we've got a scaled sales force that allows us to sell into virtually every corner of the country.

We set our advertising rates based on every individual ZIP code in the country, so it's quite varied, and it's commensurate to the opportunity and the profits that are available to a broker or to a real estate agent.

It's truly a national footprint.

Byrnes: I think one of the cool things about Zillow is the new Digs, where you have pictures of different rooms. You can go on and maybe get an approximate cost for some of them. Do you guys have any plans on monetizing that in the future?

Schwartz: Plans, yes, we absolutely have plans to do it. We're not going to offer it as a not-for-profit.

Byrnes: How would you do that in the future?

Schwartz: There are a number of different ideas. Right now we're quite focused, first and foremost, on expanding the content and engaging ever more home improvement-focused individuals and consumers on the site.

That tends to be the order with which we build a marketplace. We focus on the consumer experience first. We then focus on scaling the consumer experience, and then because our transactions -- buying a home, renting a home, renovating a home, borrowing a mortgage -- are such valuable transactions, we ought to be able to figure out how to monetize the audience.

I suspect it will, of course, be an advertising model. There will be a national and a local component, in time.

Byrnes: Do you guys at Zillow feel like you've established enough competitive advantage where you can raise prices if you have to?

Schwartz: That's something we get asked about a lot and we think about a lot. Certainly, we're in the strongest competitive position of any of the real estate websites and Web businesses out there, so we're pleased with our position.

With that said, our pricing leverage directly correlates to the benefit that we provide to real estate agents and brokers and mortgage brokers. The way we price our products is to ensure that they're wildly and significantly profitable to our customer base.

When I really think about what we're in the business of, it's sales promotion in many ways. While we have a very popular and important brand tool, so a real estate agent having the ability to promote themselves to these longer duration transactions -- you buy and sell a house every seven years, of course, on average in the country -- so a real estate agent wants to be known by those folks.

But at the end of the day, they want to see that their phone rings and that they have text messages coming in from potential buyers. We send about 15 leads per month to our average Premier Agent, and that's what the model all solves for.

If we're helping them convert those 15 leads that we send them, we'll do great. We've got pricing leverage, and that's where we're very focused, on expanding our pro tools.

Byrnes: Let me talk to you about your revenue trajectory. Obviously you're growing at a fast rate, but geographically when you look at -- you're in a lot of the high-demand markets right now -- what happens when you move into more tertiary markets? Do you think your revenue growth slows down then?

Schwartz: We've always operated across the country. We're in every state and at every major market, and we really look at -- and because of our pricing platform being impression-driven now -- we're able to deliver a great, high profit, high return opportunity to a real estate agent in Des Moines, or a small area of Des Moines, as well as in Manhattan.

We've got a national platform, today.

Byrnes: You also mentioned that you guys don't look nearly as much, if at all, at ARPU -- average revenue per user. Why not, and could you explain that, when others seem to use that in the industry?

Schwartz: Yeah. We think of ARPU as an output, not an input, primarily. We operate the sales force and the business to be revenue-driven, first and foremost. If we're generating the revenue ... this concept that we can talk a bit about, which is what we call the Zillow Code -- unlocking the code of success for our customers -- then ARPU rises in time.

We sell first to revenue and to sell through of our impressions, and then ARPU is an output.

Byrnes: Could you walk us through that code, that you said?

Schwartz: Yeah. It's really, really interesting. We've been at this a number of years, and we've got over 30,000 Premier Agents now on the platform, and thousands of brokers are participating with us. There are some very simple expectations which we think a successful online real estate operator needs to address to address our needs as consumers.

When consumers think about online real estate, they think about it in the same lens as getting a ticket online from Expedia, or buying a book from [Amazon.com]. They expect immediate response, they expect a very informed service provider, and they expect someone that rigorously follows up with them.

The code sort of plays off that. For agents who get back to leads or consumers that we connect them with, the requirement is about 10 minutes; that's the expectation that consumers have.

I fill out a form about a home that I'm falling in love with. I want a Realtor or a firm to call me back within about 10 minutes. Then those real estate agents had better know my market inside and out, and then they'd better rigorously follow up with me.

For those folks who want to operate in that systematic manner, we do amazing for. They buy more inventory, they stay with us forever, they're dear friends. For those that don't want to operate in that rapid a world, then Internet real estate probably isn't for them.

Byrnes: What do you think is the biggest untapped well for revenue for Zillow in the future?

Schwartz: We've got a few very, very robust businesses. All of our mainline businesses, whether it be selling advertising to real estate agents, mortgage brokers, and then this emerging home-improvement opportunity, the rentals business, are all triple-digit growers.

All in front of us are opportunities for significant growth. The one I'm spending quite a bit of my time on is this rentals opportunity. We really like that business for a number of reasons. Most importantly, the time between searching for a rental home and actually signing up for it or transacting is a very narrow time.

The opportunity to generate a lead or a connection between a property manager or a rental broker and a consumer allows for information transparency. They can directly correlate a generated lead or "I advertised in Zillow and it led to a lease almost immediately." Those tend to be very rich monetization opportunities.

Byrnes: What's the time frame on the rental part? How long do you think it takes before you start getting a meaningful percentage of your revenue from that?

Schwartz: I think 2014 will be a significant year for rental monetization. We're certainly working pretty hard at it right now.

Byrnes: How about this new Google partnership with Android phones? How does that fit in with your revenues, going forward?

Schwartz: Where it fits in very significantly is we're pretty comfortable making a bet on Android. I think anyone that's operating an Internet company ought to be comfortable making a bet on Android.

Our premier advertising model, the Premier Agent business, translates unbelievably well to mobile. We monetize actually better on mobile than we do on desktop. As I'm sure you know, 55% of visitors during the week and 65% of visitors on the weekend are actually on our suite of mobile applications, 25 native applications today.

Android is a very, very important part of that strategy. That they chose Zillow to be their real estate partner to start to intuitively push interesting real estate content and listings and information to consumers as they're walking around their neighborhoods on a weekend, is really, really exciting.

Byrnes: How levered is Zillow -- specifically the revenues, talking with you -- to the housing recovery?

Schwartz: We think the housing recovery certainly helps amplify our business. Of course, during difficult times, agents need to market themselves, and brokers need to market themselves. We grew a pretty valuable company during that period, and we see this richer housing market amplifying our revenues.

Byrnes: Will you talk about maybe the doubters that Zillow can't maintain this huge growth? What do you have to say to that?

Schwartz: There are doubters? Really?

Byrnes: Maybe not right now, the way your stock's been performing, but people that are saying, "This is a really expensively priced stock. How can they maintain that growth?" What do you say?

Schwartz: Yeah. We're at a relatively young time in the development of the company and of our revenue streams. Given the leading position that we have in real estate consumers, in the for sale marketplace as well as in the rental marketplace, there's just a terrific amount of growth ahead of us.

We're very focused on exceptional execution. We've got the team to do it. We have the consumers coming to the platform, we've got robust industry relationships, so we're going to get this done.

Byrnes: Can you talk about monetization, desktop versus mobile, how that impacts your top line?

Schwartz: Yeah. We think of Zillow as a mobile company now. Again, the key stats were on the weekend at least 65% of our visitors are on the 25 apps, so the consumer's already moved there.

They tend to be lowest funnel opportunities, or individuals, so they're walking around in their neighborhood, standing in front of a home on a Saturday or a Sunday, and they're flipping through photos in the interior of the home, and then we provide a selection of wonderful and rated real estate agents for them to connect with right then and there.

What's interesting is, a lot of the dialogue is happening on text. The immediacy of text -- getting it out of the email box -- particularly on the weekends is really, really important so those connection points are happening at even greater velocity. We're really excited about the mobile conversion.

Byrnes: For Zillow investors out there, what kind of metrics do you think they should be looking at, as far as how to evaluate the business?

Schwartz: We spend a lot of time talking to investors about the TAM, the total addressable market. In our approach to understanding TAM, we're at a relatively low point right now -- or a youthful point -- in our impact on total transactions.

The thing we look at is, how many leads do we generate? We have upwards of 30,000 Premier Agents. We send them about 15 leads each month. We think about 3% of those, currently, convert to a transaction, so we're somewhere between 4 and 5% of the transaction side in the United States today.

There's a ton of leverage, a ton of leverage, if we can use our investment in software and tools and training for our agents to increase that conversion rate from 3% to 4% to 5%. We'll impact more transactions, our agents will be more profitable, they'll spend more on advertising with us, and there's this wonderful self-reinforcing cycle that occurs. 


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