Zillow CEO Spencer Rascoff Goes To War For $300b Home Improvement Market

When Zillow launched their home improvement planning site Digs earlier this month, the biggest player in the space—a company called Houzz—called it a “complete knock off.”

Months before the Zillow Digs launch, I became interested in Houzz’s concept of a place where homeowners can go to visually brainstorm, plan out, and find local pros to make improvements to their homes. Last summer I asked Houzz’s head of business development Katherine Nannizzi about their traffic, database size, company size, and funding. At the time (July 2), the stat rundown was:

- 5 million unique visitors per month

- 500,000 “magazine-quality” images

- 80,000 building, remodeling and decorating professionals using the site

- Raised $13.6m from Sequoia Capital and other prominent investors

- 27 employees

Since then, co-founders Adi Tatarko and Alon Cohen have watched growth explode. Now the stat rundown for the four year old company is:

- 12 million unique visitors per month

- 1 million “magazine-quality” images

- 160,000 building, remodeling and decorating professionals using the site

- Raised $35m more (for total of $48.6m) from New Enterprise Associates and GGV Capital, Sequoia Capital, Comcast Ventures, Kleiner Perkins, and Yammer founder David Sacks.

- 60 employees

All of those stats, including the $48.6m in funding, definitely make Houzz the real deal. And necessarily so … the stakes are enormous: spending on home improvements and repairs totaled $275 billion in 2011 according to a January 2013 report by the Harvard Joint Center For Housing Studies. That number exceeded the amount spent on single family and multifamily home construction in 2011. It also exceeded consumer purchases of clothing, furniture, home furnishings, electronics, and appliances.

On that note, Houzz has monetized to date with furniture and home furnishings by partnering with major home design brands to put contextual ads on items in seen in room photos so site users can buy those items.

That’s their first revenue source. The second revenue source was announced with their $35m funding announcement January 29, which is charging the home improvement pros on the site for better and more direct exposure to the consumers looking to hire them. It’s up and running in select U.S. cities, and their funding obviously allows them to expand rapidly.

THE WAR FOR $300b HOME IMPROVEMENT MARKET BEGINS
But now Houzz has to contend with online and mobile real estate giant Zillow, who’s got some impressive stats of their own:

- 34.5 million unique average monthly visitors in 4Q

- That increased to 46 million unique visitors in January

- 23 distinct mobile apps for consumers and pros, across all platforms

- Database of more than 110 million U.S. homes for sale, rent, and currently off-market

- 100 million high-quality images

- Ended 2012 with 550 employees, up from 330 at end of 2011

- 2012 revenue $116.9 million, up from $66.1 million in 2011

- 2012 net income $5.9 million, up from $1.1 million in 2011

Zillow has already acquired six other companies to augment other business areas. Given this track record, I asked CEO Spencer Rascoff this week why they didn’t just acquire Houzz for traffic and/or technology. His answer centered around three main points:

First, about 75% of homebuyers go online to look for remodels, and Zillow already has the biggest homebuying audience on their site.

Second, they already have a database of 100 million photos, from which they curated to form the basis of Digs at launch.

Third, Digs has a product feature that Houzz doesn’t: price estimates for improvements (demo). Rascoff noted how a lot of Houzz photos electronically dangle little green price tags giving consumers the option to price individual objects in the room (sample), but they can’t price the room itself.

That last point is critical to Zillow’s core mission from day one on February 8, 2006: Transparency. Their goal was first to bring transparency to home pricing with Zillow Zestimates, then to mortgage rates in 2008 with Zillow Mortgage Marketplace, then to home rentals with Zillow Rentals in 2010, and now for home improvement with Zillow Digs.

It’s also why it’s not so simple as casting off Digs as a knock off. There’s some serious technology behind it.

But that said, the war is on. And while I stand by my position that competitors ignore Zillow at their own risk, it’s quite plain that Houzz has a great product and formidable backing.

WILL TRULIA BUY HOUZZ?
One of Houzz’s biggest funders, Sequoia Capital, is the company that backed Trulia—Zillow’s main rival—and eventually took them public last September. And the fact that Houzz is so hot among investors means those investors are expecting a healthy exit at some point.

What if the exit came in the form of a sale to Trulia? The war for online housing eyeballs and dollars would get even more interesting because Zillow (NASDAQ: $Z) and Trulia (NYSE: $TRLA) are resoundingly similar companies that make money in two ways:

(1) charging pros to directly access their consumer users—called Marketplace Revenue in both companies’ financials

(2) charging pros and whole companies to advertise in targeted areas of their sites/apps—called Display Revenue by Zillow and Media Revenue by Trulia

The pros they charge run across different business lines.

Zillow has four business lines: real estate marketplace, mortgage marketplace, rental marketplace, home improvement marketlpace (aka Digs).

Trulia has those first three, but lacks a home improvement business.

Plus Zillow is monetizing better than Trulia so far. Currently, the bulk of both companies’ revenue is charging real estate agents to connect with home buyers and sellers (the ‘real estate marketplace’ business noted above). Average monthly revenue per real estate agent subscriber for Zillow in 4Q2012 was $267 and they had 29,473 paying subscribers. Average monthly revenue per subscriber for Trulia in 4Q2012 was $172 and they had 24,433 paying subscribers.

And perhaps worst on the rivalry scale, Trulia’s mortgage marketplace was rolled out last October with an announcement that a formidable mortgage software company called Mortech would be their key partner running the back end of that service. Then Zillow bought Mortech in November. Trulia was graceful about it on their 4Q earnings conference call last week, saying:

In Q3 of 2012, we launched our mortgage center with an initial partner. In Q4 we began evaluating multiple partners as part of the process of optimizing our user experience. We will be moving on from our first partner and commencing new relationships in the coming months. We don’t anticipate that we’ll generate meaningful revenue this year from our mortgage business, as we continue to focus on building the best product for our users.

But still, that move by Zillow is unlikely to go unanswered by Trulia.

Is the answer to add a home improvement business imminently?

Follow @thebasispoint to stay tuned…
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Reference:
- Zillow Launches Digs, A Home Improvement Marketplace (features/demo video)

- Houzz CEO Adi Tatarko Tells CNBC How Technology Is Reinventing Home Improvement

- Follow Houzz on Facebook

- Follow @SpencerRascoff and @Zillow on Twitter.

- Follow on $Z and $TRLA on Stocktwits for realtime stock news

- $HD, $LOW, $SHW, $DD, $APOG, $XHB, $IYR, $ICF

Disclosure: I don’t own Zillow shares, and don’t quote rates on Zillow. Full disclaimer.