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Information and the Firm – Real Estate Style

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I’m pretty certain this is going to be an obsession for me for the next few weeks. So as I’m wont to do, I’ll think out loud on these pages what these incredible insights might mean for real estate.

The “this” is both the video above and this blogpost on The Economist’s Schumpeter blog. The discussion is between Philip Evans of the Boston Consulting Group and Kenneth Cukier, the data editor of The Economist, from the Ideas Economy: Information 2012 conference held on June 6th.

There’s so much here to think about and digest, but the thing that got my interest initially is this quote, from the blogpost itself:

“Well, if information means big data, then a very, very challenging question becomes ‘are you big enough’ or ‘is somebody else big enough’ or ‘is there some horizontal cut of that data that is actually going to have more ability to create value than what’s accessible to you?’ And that fundamentally is as big a challenge to the traditional conceptions of competitive advantage, even the traditional concept of the corporation, as anything we’ve seen in recent decades.”

That is a big thought.

The Thesis

From what I can tell at first glance, the idea appears to be that changes in technology creates a new paradigm in which colossal scale swamps the value chain. So, for example, Evans suggests that there are activities where there Big is Beautiful; there are other activities where scale is negative — i.e., individuals can do it better. And there are some things that are in the middle. The corporation or the firm was the combination of all these things.

What Evans surmises is that the middle has no real advantage. Some companies (such as Google) will get so big, leverage colossal scale in those areas where Big is Beautiful, and tend to dominate the entire segment in which it is active. But those tasks where scale is a negative value — Evans cites things that require creativity, for example — will tend to be done by individuals or small teams, because they’re better at those tasks. The nightmare scenario for most companies, then, is an alliance between those Big Firms and the Individual. They’re not big enough to leverage colossal scale, and they’re not small enough to be creative and nimble.

Information and the Firm in Real Estate

I think that Evans has more or less described the strategic problem confronting real estate brokerage companies.

This is going to be a pretty rough comparison, because I don’t think we’re yet at the stage where Big Data has become a factor in real estate. But I can imagine such a future.

For example, let’s imagine that Zillow is able to track every single click and every movement of the mouse of every single one of the 35 million or so unique users that hits its website every month. Let’s imagine that the Zillow App transmits location data every few seconds back to Zillow’s servers. Let’s imagine that each person who registers with Zillow for any reason and gives his email address can be tracked through the rest of the Internet (e.g., Facebook’s Social Graph, Google search data, etc.). I can easily imagine a future in which Zillow can leverage colossal scale, Big Data, and sophisticated data mining to know everything that a particular real estate consumer has done, does today, and through predictive analytics, is likely to do in the future. [NB: I use Zillow because it is the biggest real estate site today; but it could be Realtor.com or Google or some new startup that does this.]

In such a future, there are tasks where scale is a negative. The best example is the personal relationship between the consumer and his real estate agent. Each person is so unique, each person’s situation is unique, and each agent’s style and personality are unique. I can easily imagine that actual service delivery is something where scale is a negative — one size most definitely does not fit all.

It seems patently obvious that the individual agent could not possibly do Big Data. She doesn’t have the technology, doesn’t have the enormous datasets, and doesn’t have the expertise.

The question is, can the Firm?

Mo Betta Questions, No Getta Answers

Is there a brokerage company in the world today that is big enough to really do Big Data at the colossal scale at which new value emerges? The answer is no. The largest brokerage  in the country is NRT, a division of Realogy, with about 41,500 agents (4% of REALTORS) who did 255K closed transaction sides (about 6% if we only look at Existing Homes Sales) in 2011. Not colossal scale then.

Okay then… is there some horizontal cut of the data that can create more value than is available to the brokerage? The answer appears to me to be yes. See above for what such a horizontal cut of consumer data could look like.

And is there someone else that is big enough? The answer is, “Maybe, in the not-so-distant-future”.

What about the MLS? After all, that is the organization to which brokerages have outsourced data operations and pooled all of the property data together. I’ll have to think more about this one and do a future post on it, but my initial impulse is to suggest that the MLS is a vertical dataset, not a horizontal one. Besides, the largest MLS in the country today can claim perhaps 6% of the REALTORS; again, not exactly colossal scale.

So if the future of information is in creating colossal datasets, manipulating Big Data, and getting actionable insights out of exabytes of data… and the value chain breaks down to concentrate at the two poles — either gargantuan and dominant or tiny and creative (i.e., the individual) — what then is the strategy for existing brokerages and firms in real estate?

The answer, according to Evans and Cukier, is… there isn’t one. They say, “Get Big, or Get Out.”

Is that really true?

We will attempt an answer in a future dispatch.

-rsh

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