Over at 1000watt, there is a rather interesting debate going on with some heavy hitters contributing, on whether big brokers should or should not support innovations and tools by the MLS or Association. Go check it out if you haven’t already.
The general thrust is that Brian Boero and Marc Davison both believe that innovations are an unqualified good, and that big brokerages have no reason to oppose innovation wherever it occurs — even if that is at the MLS, at the local Association, or at NAR. As Marc writes:
If you share this belief, then I submit it would be impossible for you to ever stand in the way of any innovation or impede anyone from offering that innovation. Even an MLS.
If you share this belief, never fear a tool. And always proceed by having supreme confidence in what you could do with any tool versus others.
The basic idea is that the big brokerage, with its superior execution ability will benefit more from any tool or feature offered by the MLS/Association.
The counterpoint, articulated well by a few folks who are in a position to know, is that brokerages invest heavily in technology, in tools, and in innovation. And that the MLS or Association offering those same capabilities out results in an unfair leveling of the playing field. For example, here’s Pam O’Connor, CEO of Leading Real Estate Companies of the World:
Many brokers (and not just the largest ones) invest heavily in tools for their agents for the purpose of differentiation with consumers and attracting the best and brightest. It’s called competition. To have their local association or MLS then offer the same thing dilutes that investment and competitive edge.
It’s an interesting discussion.
Well, I have a concrete suggestion to every MLS that I think would go a long way towards solving this particular conundrum. I happen to think it’ll help some other conundrums as well.
The MLS should cease collecting payment from the agent/member; it should, instead, collect payment directly from the broker, and only from the broker. Change the customer of the MLS to be the brokerages, and some of these problems become easier to think through.
The Customer Conundrum
Art Carter, CEO of CRMLS, said something at the Data Summit that stuck with me. And it turns out, many of our issues revolve around this issue. He said that the MLS uses data belonging to the broker to run its business, but gets paid by the agents. This division of property and customer relationship is the root cause of the “level playing field” issue — and a few others.
The customer is the guy whose name is on the check. The MLS’s customer, therefore, is the individual agent.
Since no business survives for long without meeting its customer’s needs, it seems obvious that the MLS would release products, features, and engage in projects that would deliver value to its customer: the agent. But as Pam pointed out, the broker does the same thing — release products, features, tools, and other stuff to deliver value to its customer: the agent.
Yet, the copyright to listings data, as well as the legal liability for the buyer-seller relationship, the legal responsibility for the transaction itself, all belong to the broker. In theory, the agent is under the supervision of the broker, who holds the actual relationship with the consumer.
The simple fix, then, should be to have the financial relationship with the MLS at the broker level. The brokerage can pass on its costs, if it wants to do that, but the MLS’s own customer should be the broker.
With this simple change, the MLS realizes that it has to deliver value to its customer: the broker. Whether a project or an innovation helps the agent or not becomes less relevant; the real issue will become whether the MLS’s own innovations deliver value to the broker, who pays the bills.
Who Pays and Innovation
One consequence of shifting the payment responsibility from the individual agent to the broker is that these “innovative tools” get evaluated a bit differently.
Today, there are two broad ways that a MLS releases a tool: as a “member benefit” or as an add-on service. Keep in mind that vanishingly few (if any) MLS’s have actual developers working there; third party vendors develop the tool, maintain it, and offer it to the MLS and its members.
Member benefit tools are those offered to the entire subscriber base at no additional charge. In these arrangements, the MLS would typically pay some fee to the vendor, usually based on number of seats. A MLS with 5,000 members would pay some fee calculated on the basis of 5,000 users, while a MLS with 200 members would pay for 200 users. Typically, volume discounts kick in, lowering the per-seat cost, while raising the absolute dollar amount.
For add-on services, the typical arrangement is for the vendor and the MLS to market the product to the members/subscribers, and split the revenues in some fashion. There may or may not be out-of-pocket expenses to the MLS (setup fees, etc.) but overall, the MLS takes on no major financial burden for releasing one of these add-on tools.
In the former case of member-benefit tools, the MLS is the purchaser, and the executives and the Board of the MLS would investigate the tool and make a determination that the MLS would benefit by offering it to the entire membership base. Tax and sold data are good examples of this. Note, however, that the analysis would start and end with the principle that the customer of the MLS is the individual agent, irrespective of which brokerage, which franchise, or any other network said agent may be part of.
A major issue with these member-benefit tools is the usage rate. Given that on average, roughly half of the membership of any given MLS does not a single transaction, it may be surmised that in fact, only a minority of the membership actually uses the tool/innovation. The fee, however, is normally based on simple headcount, rather than on usage. The net effect is that the low-usage subscribers are subsidizing the high-usage subscribers, and if the numbers are skewed enough, there is significant economic inefficiency. (E.g., 1,000 members at $10 a month, but only 100 users = $100/mo real price per user.)
In the latter case of add-on benefits, the calculation is usually made on the basis of “how many of the membership base would actually purchase”. If there are 5,000 members of the MLS, both the vendor and the MLS make some guesstimates on how many of the 5,000 would pay the extra $9.99 or whatever per month to have Shiny Tool ABC. Once again, these calculations are made without regard for the brokerage, franchise, or other affiliations of the individual agent.
Add-on models avoid the economic inefficiency of the seat-based pricing, but the downside is financial risk undertaken by the vendor or the MLS or both, depending on how the deal is structured. Furthermore, because many brokerages, franchises, and other networks offer similar tools/benefits to its agents, you get significant overlap at times, and the MLS tools either knock out the offerings of the brokerage/franchise (thereby setting up all of the complaints) or are useless since what the broker/franchise offers is better/cheaper/faster.
Normally, competition in the marketplace is a good thing for the consumer (the agent in this case). Except that as it comes to the MLS, the main “product” that creates value belongs to the broker. The broker holds the copyright to all of the data; the MLS holds the copyright to the compilation, but the base property-level data copyright belongs to the broker, not the agent.
And so we come to the core of the conflicts.
Make The Broker Pay
My modest proposal, therefore, is to make the broker pay for everything, on a per-seat basis.
The MLS may offer “member benefit” products, but it will consider the value to its customers: the broker. There may be certain products, certain types of innovation, that are simply too expensive for any individual brokerage to undertake: those are precisely the kinds of innovations that the MLS can provide for its customers, achieving economic efficiency. Add-on products would also be analyzed on the basis of how many of the brokerages in the MLS’s market would adopt them, rather than how many agents would.
Payment for these products would be made by the brokerages, which creates enormous incentives for the brokers who want those products to drive usage rates among its agents. After all, the brokerages would pay on a per-head basis, and would recognize the real benefit of getting their agents to use the products that they’ve just spent a bunch of money acquiring via the MLS.
And of course, the whole conflict of intellectual property fades significantly when the broker is the one making the decision as to whether to buy a particular product or not for all of his agents.
Smaller brokerages may opt to pay for a bunch of products from the MLS, because they don’t have the capability to develop (or have a vendor develop) unique products. Big brokers may elect to “opt-out” of such products, and spend money themselves on developing innovations for their agents. We still have competition in the marketplace, but with far less conflict. Member-benefit tools offered out to everyone at no additional charge would be those that the majority of the brokers in a MLS find valuable.
And of critical importance, brokerages could make the determination of whether they would benefit more from such universal member-benefit products because they can train, implement, customize, etc. better than others before the fact. They can be proactive in those decisions, rather than reactive, and make their own investment decisions accordingly. Marc’s view that big brokers have nothing to fear from innovation because they can out-execute may be correct, but the missing piece is timing: out-execute, yes, but be able to prepare and plan for it, rather than having to react and respond to events.
I think this relatively simple change would go a long way towards restoring order while lowering conflicts in the real estate industry. Frankly, I don’t see a huge amount of downside. And it would be relatively easy to implement: some changes to billing practices are what’s required.
Furthermore, it isn’t as if change isn’t coming anyhow. There are changes coming, like it or not. The current system is not likely to be sustainable, and that which cannot last won’t.
But I’d like to hear if I’ve missed something. Is there a downside to the broker-pays model that I haven’t considered? Is all this too late? What do my readers of wit and wisdom think?