Here’s how CoStar can beat Zillow and win the real estate portal wars

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This is a story about the simmering conflict between real estate portals Zillow and CoStar. But first, allow us an analogy.

In the 1970s, with Coke firmly entrenched as the dominant American cola, Pepsi went to war. The Pepsi Challenge, as the company called its advertising campaign of the time, featured consumers on the street taking blind taste tests of the two drinks. The tests allegedly showed that people preferred Pepsi. 

The ads signified a striking new direction for Pepsi’s marketing: actively attacking its more popular competitor. And that would remain one of the cola company’s dominant marketing strategies for years to come.

The cola wars are a bit of American lore today, and by most measures Pepsi’s offensive ended like a land war in the Russian winter. Which is to say, not well. 

But this type of corporate clash is actually a story that has played out again and again — oftentimes with varying results. Nike, for example, famously eclipsed rival Adidas after Michael Jordan signed a sneaker deal with the then-struggling shoe maker. 

Apple trounced Microsoft in the 2010s after decades of playing second fiddle to the personal-computer giant following the world-changing launch of the iPhone. 

Facebook pummeled MySpace into obscurity.

The lesson from these now-legendary conflagrations is not just that corporate conflict is inevitable, but also that in the age-old struggle between incumbents and insurgents, all bets are off. Sometimes you’re Pepsi. Other times, Facebook. 

And that brings us back to CoStar and Zillow. The two companies aren’t just competing. Thanks to a series of aggressive comments from CoStar founder and CEO Andy Florance, it’s clear the firms are battling for supremacy — with insurgent CoStar and its Homes.com residential portal looking to topple the biggest name in the business. That battle will come into even greater focus in the coming days; CoStar is set to announce its latest earnings next week, with Zillow following two weeks later. Both companies’ reports will shed light on just where exactly they stand in the struggle to be the residential portal du jour. 

Whether CoStar can actually win remains to be seen. At least one analyst was skeptical, saying that the portal world’s pecking order basically never changes. But a number of historical examples and expert observers suggest its not necessarily a lost cause. The road may be tough, and CoStar will have to both be careful and spend big. But occasionally insurgents do win. So the question now is if CoStar will become another also-ran Pepsi, or if it’s ready to soar like Nike with Air Jordans.

The Pepsi and Coke of residential real estate portals 

CoStar’s own version of the cola wars, the portal wars if you will, has been a long time coming. 

Established in 1987 by Florance as a commercial real estate analytics firm, CoStar is already a bellwether in the commercial space, generating $2.18 billion in revenue in 2022. It has also been making significant inroads into the residential real estate arena, starting with its acquisition of the rentals portal Apartments.com in 2014 — a site that has seen its revenue increase more than tenfold since CoStar’s acquisition. 

“We rebuilt the whole site, we made it faster, we focused on what consumers wanted, which is real actionable data,” Florance, speaking of Apartments.com, told Intel. “It’s been a huge success.” 

But CoStar’s real blitzkrieg into residential real estate began in 2020, when it acquired portal maker Homesnap. The company followed that purchase up by buying listings portal Homes.com for $156 million in 2021. 

Homes.com and CoStar’s other residential portals have landed in a position similar to Pepsi’s the past two years or so — staring down a market dominated by one major player, and figuring out how to wrestle some of that dominance away however they can. 

Of course that major player — the portal world’s Coca Cola — is undeniably Zillow, which today has orders of magnitude more traffic than any other rival, including CoStar’s residential sites.  

An insurgent’s path

CoStar’s version of the Pepsi Challenge has so far included several strategies, including one taken straight out of the corporate warfare playbook. That strategy involved tapping actor Jeff Goldblum to appear in ads for Apartments.com.

The campaign has echoes of Pepsi’s 1980s partnership with Michael Jackson, which earned the singer millions but also famously resulted in his hair catching fire while filming a commercial.   

So does this kind of strategy work?

That depends. Ann Stone, a former chief marketing officer for Coca-Cola who now lectures on marketing at the University of British Columbia, described Pepsi’s marketing from that era as risky and lacking in a clear brand identity. 

“They’ve had two campaigns. One is: we taste better than you, and the second is ‘who is the best entertainer who is willing to be shilling for us, and we’ll ride on the coattails of their popularity,’” she told Intel. “Pepsi’s all over the map. Ask someone what Pepsi means, they don’t have anything.” 

On the other hand, a celebrity partnership worked wonders for Nike, which rode Michael Jordan’s coattails — or, shoelaces — all the way to the top.

CoStar’s other strategy in its quest for dominance is also similar to Pepsi’s attempts to focus on the quality of its product — and the shortcomings of its rivals.  

“The other players in the portal space are selling display advertising on their sites,” Florence argued. “That doesn’t make for a good consumer experience — it slows the site down and it junks it up.”

While CoStar has kept its competitors out of any of its official marketing, Florance also hasn’t shied away from taking jabs at Zillow and other listing portals. 

During a 2022 appearance in Inman Connect, Florance accused a rival listing portal — which sounded conspicuously like Zillow — of “hijacking” listings, likening some of their agent fee practices to mob extortion. And he argued that consumers who “make the mistake of hitting the ‘contact agent’ button” on Zillow’s site end up with agents “harassing the heck out of them.”

Attacks can be part of a strategy to snatch market share. Stone said that companies in an insurgent position like Homes.com are faced with the challenge of finding their competitors’ weak spots and going after them, while also ensuring that they have a strong selling point of their own. 

“What can they find that’s wrong in Zillow that the consumer is looking for, and emphasize that,” she said. “As long, of course, as they can deliver it.”  

Stone went on to argue that decades ago, Pepsi was right to go after Coca-Cola’s supposedly inferior taste. But she also said the company failed to capitalize on the initial success of that campaign by forming a unique brand identity of its own — a fact that future insurgent companies like CoStar should be wary of. 

Florence’s comments also recall the rivalry between Apple and Microsoft, which saw Steve Jobs and Bill Gates trade barbs. Jobs, for example, famously said during the television documentary Triumph of the Nerds that the “problem with Microsoft is they just have no taste.” It’s a comment that could just as easily have come from one of Florance’s takedowns of Zillow.  

Today, Apple’s market cap is higher than Microsoft’s. The iPhone revolutionized the world. Jobs’ company arguably won. 

But Stone wasn’t convinced the CoStar and Zillow rivalry will necessarily play out the same way. She said Zillow is in a far less vulnerable position than an incumbent such as Microsoft, thanks to the simplicity of its offerings. Zillow also benefits from enormous levels of brand recognition. And that leaves Homes.com with the difficult task of convincing consumers that its product is somehow better. 

“Zillow has a challenge and an opportunity to stay true to what people perceive to be true about their brand and their messaging,” Stone said. “People want to explore the world of real estate, and they’ve been using Zillow for the most part to do that.”

The long road to the top

Celebrity endorsements and public attacks notwithstanding, the consensus among those who spoke with Intel for this story was that the path to victory will be a difficult one for CoStar.

“It’s a really, really hard road,” real estate tech analyst Mike DelPrete told Intel.

DelPrete compared portal standings to “the world’s most boring horse race” due to their overwhelming complacency.

“Nobody changes position, ever,” he said.

Competing portals have an incredibly hard time making inroads against market leaders because at their core, all portals offer an identical service: real estate listings. Additional bells and whistles often do little to move the needle traffic-wise, Delprete said. 

“A consumer goes to Zillow because they want to search for properties, and Zillow has all the properties listed for sale,” he said. “Little things like ‘we have an easier interface or we have an AI chatbot, or machine learning image recognition.’ Blah blah blah, nobody cares.”

Still, CoStar’s efforts have have not been fruitless so far.

What the company calls its “Homes network” of various portals saw a 150 percent annual traffic increase in April to 34 million unique monthly visitors. The network’s returning visitors are up 317 percent, according to data from Google Analytics. And since CoStar acquired Homes.com in May 2021, its unique visitors have increased by 386 percent. Such numbers have prompted the company to frame itself as already occupying the number two position in the portal wars, and Florance has said he believes Homes.com alone will be the second largest site of its kind (behind Zillow) by 2024.

John Campbell, an analyst at Stephen’s who covers real estate companies, said CoStar’s growth must look “scary” to a company like Zillow — a comment that suggest’s the incumbent’s position is less than certain.

“The rate of their traffic growth has been unprecedented,” Campbell told Intel, adding that “they’ve got a massive treasure chest, they’re sitting on such a larger profit base that they can go and just throw out $53 million a quarter to drive traffic.”

While DelPrete made the case that consumers aren’t going to switch for more bells and whistles, Campbell’s point about CoStar’s treasure chest is a significant one and illustrates perhaps CoStar’s biggest strength — and strategic opportunity — in the portal wars.

Indeed, when looking at market caps CoStar is actually orders of magnitude larger than any other firm in the portal space.

At the end of the day, it’s this larger size that may prove key in CoStar’s quest for the portal crown. DelPrete, for instance, suggested that its conceivable for a company to pay for search engine optimization to such an extent that they manage to get in front of enough consumers eyeballs.

“You could do it, if you have an unlimited amount of money or an unlimited amount of time,” he said. “But that’s like the least sophisticated, most expensive strategy possible.”

Ron Berman, a professor of marketing at the University of Pennsylvania Wharton School of Business who has conducted research on online marketing and advertising effectiveness, made a similar point.

“The fact is that today, especially with mobile phones, people click the top sponsored results much more. So these results are very valuable to bring more consumers, and potentially that makes it a profitable strategy,” Berman told Intel.

Berman also argued that CoStar could additionally focus its efforts on the quality of the traffic, and leads, it generates.

“If Homes.com is able to really target their ads well on search engines, i.e., to bring buyers which are a better match or lead to the agents, then this is also very valuable for the agents.”

All of which is to say that CoStar has taken a page from the marketing playbooks of companies like Pepsi, Nike, and Apple. But ultimately, the company’s path to portal dominance will likely have to rely as much on its large size and vast trove of resources as anything else. In other words, if CoStar can win the portal wars, it’ll be because the company spends large sums of money to do so.

Significantly, Florance has suggested he too sees this path as the way to victory.

“If I attempt to take the last 15 years and I look at Realtor.com’s spend on marketing and SEO, and I take Zillow’s spend on marketing and SEO, there’s a direct correlation between the advertising budget and the number of people who land on the site,” he said during an interview in May. “So it’s not a mystery. You can actually show up with a wad of cash and buy your way up the line, but you have to do it thoughtfully and you have to do it efficiently.”

Earnings expectations

It’ll take time to understand how CoStar is ultimately faring in the portal wars. But the company is set to report its latest earnings, from the second quarter of this year, in less than a week. The report will reveal key metrics, such as revenue and profitability, that shed light on how the company’s strategy is working out and potentially what kind of a commitment it’s making to residential real estate.

Right now, analysts expect CoStar to report earnings per share of $0.26 in the second quarter. To put that into perspective, analysts expected CoStar to report earnings per share of $0.17 during the second quarter of last year. But the company outperformed those expectations and actually pulled in $0.24 per share.

That means analysts expect CoStar to outperform its own track record from a year ago, which was itself an outperformance of forecasts at the time. Put another way, analysts are bullish on the company heading into earnings.

That bullishness is well-justified by CoStar’s track record. Since at least 2020, the firm has outperformed analysts’ expectations every quarter on both earnings per share and revenue.

CoStar is also bullish. In its last earnings report, the company predicted its second quarter earnings per share would actually be between $0.29 and $0.30, and that revenue would land the range of $603 million to $608 million — a 13 percent year-over-year increase.

All of these numbers paint a picture of a somewhat unique company, at least in the real estate world. Unlike other tech-focused firms, including Zillow, that have seen their earnings numbers swing wildly thanks to a changing economy and experimental initiative such as iBuying, CoStar has tended to have a steadier track record — which in turn could further make it a formidable competitor in the struggle for portal supremacy.

The upcoming earnings report will also give CoStar a chance to announce any new products or initiatives. Though the company has been relatively quiet lately, it was during a February earnings report that Florance announced plans to ditch a potential Realtor.com acquisition and focus instead on Homes.com. The episode highlights the fact that lately, earnings season is often when CoStar makes its biggest portal war moves.

The cola wars verses the portal wars

It remains to be seen just how the portal wars will play out. But in addition to a tale of corporate conflict, the tale of the cola wars also shows how sometimes outcomes are more complicated than they seem.

In the 1990s, Pepsi — by then the loser in the struggle for first place — made a strategic decision to diversify its holdings beyond soft drinks. It acquired major snack brands such as Quaker Oats, Tropicana, and Frito-Lay and effectively became the second largest snack brand in the world. Buying Quaker Oats also gave Pepsi ownership of Gatorade, which in 2021 reportedly had 67.7 percent of the sports drink market. 

Meanwhile, Coke has mostly stayed in its lane as a soft drink company. Its own effort at a Gatorade competitor, Powerade, has only a tiny fraction of market share compared to Pepsi’s brands. So, Pepsi won after all — not by toppling Coke, but by pivoting and fighting on a different battlefield altogether. 

That’s an important lesson for any insurgent brands looking to take on powerful incumbents, CoStar and Zillow included. And indeed, the two real estate giants are already playing on multiple different fields. CoStar, of course, is primarily still a commercial real estate company.  And Zillow has thrown a number of darts at the wall, including its now-aborted iBuying efforts and more recently its goal to build a real estate “super app.”

Such moves show that both companies are grasping at their next big pivot, much in the way that Pepsi turned to snacks and sports drinks or Apple leaned into mobile computing. It’s still early days and the success of the real estate giants’ pivots are unproven, but what’s already clear is that the fight to win the portal wars will have many more chapters to come.

Email Ben Verde