I was meeting with someone I've known for a long time. We had our usual semi-tensioned vendor-client discussion about requirements, performance, and other such things, when I decided to go philosophical on them. I said, "you all are like hamburger." As you can imagine, I received an immediate rebuttal. It took a while to articulate my meaning, and I'm not sure they got my point. I've intended to write about this topic for a while, and that recent discussion spurred me to kick out this post.
The Oligopsony.
So Rob (me talking to myself), what the heck is that? You're from Tujunga; they don't use fancy words like that! (I should listen to that voice, but I'm often pusillanimous about perpetuating that perception of my rural mountain-dwelling kin.)
Oligopsony. A state of the market in which only a small number of buyers exist for a product. Better known in the meat industry, a few buyers like McDonald's, Burger King, and Wendy's, buy up a large percentage of the beef produced in the US. Their volume comes with the ability to control pricing. Other products are currently subject to an oligopsony or are on their way. These include cocoa, tobacco, and MLS technology, all subject to the economic conditions that could be considered the inverse of a monopoly. But unlike a monopoly, oligopsony in the prop-tech vertical can be self-destructive for a shrinking number of buyers. Fast food joints can get away with selling low-grade beef, but I don't think that works for us.
When I got involved some 20 years ago, the MLS community consisted of over 1,200 organizations. I've spent a decent amount of that time growing the largest MLS in the country by merging MLSs one after the other. Today, with my consulting business, I participate in mergers regularly, and the industry has dropped to less than half of the original number of buyers that MLS prop tech vendors can sell to. As MLSs grow larger, it's easy to expect a better price.
Going back to before MLS, I've always enjoyed "working a vendor" for a better deal. Yes, I love to shop and haggle. I fondly remember spending a Sunday afternoon driving a reseller to drop another 5k on the $500,000 deal we'd worked on for weeks. But it comes at a cost that can continuously hit your metaphorical wallet day in and day out. As the vendors who need your business struggle to balance their budget, efficiencies must be found, and as karma would have it, the cuts at software companies typically start with their R&D and Security budgets. Those are two things we customers with multi-year contracts don't want our vendors to let slide.
As MLSs become larger and have more negotiating power, we naturally will demand a lower price. There is an economy of scale by bringing many users under a single contract and system to a vendor. But is that excellent price we are getting commensurate with the scale-based savings realized by the vendor? I'm seeing evidence it isn't. Vendors will do what they need to do to land those enormous contracts. I've often heard that our industry's ROI isn't as great as other industries. Also, the number of participants and subscribers isn't exactly shrinking, so the net effect is shifting the same users from higher to lower price brackets. If so, this results in lower revenue for the vendor while not reducing their expenses at an equal rate, leaving them with less to invest in security and new development. What happens if the MLS industry merges into 7 super-regional organizations? The vendors won't exactly have a vibrant marketplace in which to compete. I can't imagine the pressure on sales execs to "land one of the seven." And I don't see how that environment attracts new top talent who want to pour their heart and soul into creating great products and services in an industry where the buyers are so few and have such control over the prices. How would a start-up even get going?
How do we solve this problem?
Business is business, and we always want to grow. While I'm still happy to debate the junk taught to first-year business students about maximizing profit and the idea that if you're not growing, you're dying, businesses must compete to thrive. Regulatory solutions limiting MLS size would not work either. Can we more directly solve the issue of giving the vendors a large market of buyers?
We already have one!
There are still millions of real estate professionals in the US. The problem is that a shrinking number of MLS organizations are collectively buying services for them. It's time to kill the outdated "MLS member benefit" and embrace a new model. One that I know we are ready for.
Notice how large MLS organizations offer larger suites of services with redundant products? That's to deliver choice to existing and prospective new members. However, providing multiple redundant products using our current methods is a hefty lift. Some MLSs do it quite well, but to deliver a member benefit, MLSs are negotiating contracts, managing the vendors, managing change, providing support and training, and when you repeat that across more and more products, it can stretch the MLS staff pretty thin. Even if you staff up, you're still putting a lot of topics and the need for expertise under one hood. Lowering the ability to specialize always lowers quality. Besides, many vendors already provide their own training and support. And if they had to do more of it, I bet we'd see more intuitive solutions being delivered, requiring less training and less support.
What is our fundamental value?
Now that we have the unilateral offer of compensation out of the way, the actual value of the MLS is easier to see. Sure, we're pretty good at negotiating service contracts, managing vendors, and ensuring the MLS system has that new popular function, but that's something we might not need to do. What if a competitive market took care of that and did a much better job than any of us MLSs could ever do?
I'm sure you knew this was coming, but data integrity is the actual value of the MLS. Ensuring quality is met while understanding and supporting business needs, laws, norms, regulations, etc., is a very dynamic and local job. One that larger national businesses have tried, and when they see how well the MLS can do it and how hard the job is, they would much rather be our customer than our competitors. If that's where our value is, maybe more focus on data quality would be good.
How does our core value drive a vibrant marketplace?
Concerning the products used directly by our members, if we were to step back from the member benefit model, become the engine that drives and regulates those products, get out of the way of the vendors, and focus our attention on driving a competitive marketplace, isn't that really what you'd call making the market work?
There is a seriously challenging path to get there, and I enjoy discussing how that can be done with my clients and friends. Considerations go from contracts to tools to who does what and how we transition. I intend to write more, but it's getting late, and I have to prepare for a morning meeting. I've enjoyed writing the post and intend to write more on this topic. I also look forward to many more engaging conversations. Maybe by a firepit with a cigar.
In closing, we can say goodbye to the oligopsony by saying goodbye to the member benefit. Then maybe my aformentioned business associate will see why it's better not to be a hamburger.
Stir the pot.
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