King Kong (CoStar) with Flat Stanley (LoopNet)
We interrupt our regularly scheduled blog posts to give some commentary on CoStar's acquisition of LoopNet, which finally closed on Monday.
If you're familiar with the market for commercial real estate technology, you've undoubtedly heard of CoStar.  CoStar is our industry's 800 pound gorilla.  When a company as dominant as CoStar announces that it will acquire its largest competitor (LoopNet), it certainly turns a lot of heads.  When both of those companies are publicly traded, and the industry is as large as commercial real estate, the heads that turn are that of the regulators at the Federal Trade Commission.  The anti-trust investigation took a full year, but after CoStar agreed to make some concessions, the FTC has finally approved the sale.
Now that the acquisition is final, many are asking . . .
"What will the impact of the acquisition be on the industry?"
This is a question I first attempted to answer back in June 2011 on Quora, when the sale was announced.  I'm going to add some new thoughts to that answer, but let's start with my original thoughts as a basis:
This will be both good and bad for end users and the industry:
The Good

Technology Improvement: LoopNet is more forward thinking when it comes to technology than CoStar.  They invest twice as much of their revenues in technology and are trying to automate information gathering.  They have also made some attempt at a Web 2.0 strategy with Facebook, LinkedIn, the iPad app, etc.  This should hopefully result in a better user experience than CoStar users are accustomed to, and more efficient/lower cost research for the combined company.

Better Exposure to the General Public: CoStar has historically only been available to paying users.  CoStar recently started CoStar Showcase to provide listings to the general public, but it doesn't have nearly the exposure that LoopNet has. LoopNet has much broader exposure to the general public and also has a stronghold on tertiary markets where CoStar is not as strong.  A merger would likely make CoStar listings more visible to potential buyers/tenants directly and expand presence in tertiary markets.  This would in-turn increase transparency in the market.

Monopoly Backlash/Pricing: LoopNet's subscription fees are relatively low, while CoStar's fees are high.  If the combined company chooses to take on CoStar's fees, then entrepreneurs will be incentivized to build a lower cost competitor.  If the combined company chooses to lower its fees (seems unlikely), that would be good for the industry, increase the user base and therefore increase transparency and help level the playing field between large real estate firms and small firms.

On a side note, if CoStar/LoopNet is smart, they will create several price points to (for all you economics majors) maximize revenue on the price elasticity curve. This would be good for both the company and users.

The Bad

A Monopoly: It has yet to be seen whether the government deems this merger to cause antitrust issues, but there's good reason to think it would.  CoStar and LoopNet are the two largest players in the commercial real estate information world.  While most commercial real estate firms are dependent on CoStar subscriptions, LoopNet did provide some competition.  Additionally, LoopNet's presence required CoStar to continue to innovate.  The combined company will have a chokehold over commercial real estate firms, and will have little incentive to innovate.  The barriers to entry in commercial real estate listings/information is rather high.  CoStar has an incredible amount of research gathered over many years, and makes a point of suing any company that threatens it.  While it's UI/UX may be mediocre at best, it will be very hard for upstart companies to compete with its wealth of research, existing relationships, and most notably, the status quo in an antiquated industry.

Nearly a year after I wrote that answer, we have a somewhat clearer picture into the outcome of the merger.  First, we know that the FTC did find antitrust issues, and has made an attempt to overcome these issues.  As a condition of the sale, CoStar is selling LoopNet's share of Xceligent, a competing commercial real estate listing and information provider.  It will also put other provisions in place to help Xceligent continue to compete over the next five years.  The order does the following:
  • Prohibits CoStar and LoopNet from restricting customers' ability to support Xceligent
  • Requires CoStar and LoopNet to allow customers to terminate their existing contracts, without penalty, with one year's prior notice.
  • Bars the merged CoStar and LoopNet from requiring customers to buy any of its products as a condition for receiving other products, and from requiring customers to subscribe to multiple geographic coverage areas to gain access to a single area in which they are interested.
  • Requires CoStar and LoopNet to continue to offer their customers certain core products on a stand-alone basis for three years after the acquisition.
It appears, that the biggest winner in the sale of Loopnet may not be CoStar, but will actually be Xceligent.  Nonetheless, the provisions put in place by the FTC create a lower barrier to entry for other real estate technology startups.  In particular, these provisions help startups with products that directly compete with CoStar's products, and whose services are are not used in addition to CoStar's offerings, but rather INSTEAD of CoStar's offerings.
It's worth noting, that while CoStar and LoopNet both compete with CompStak for the pocketbooks of real estate technology consumers, we do not view either as "direct competitors" at this time.  You'll learn more about that when we return to the "Why We Started CompStak Series."
P.S.  We think there is a ton of opportunity to expand the "pie" of the commercial real estate technology industry, but that's the subject for yet another blog post.