iBuying accounts for less than 1% of the US residential real estate market, which begs the question whether home sellers and buyers actually want to transact online. The argument is that because the home often represents the most significant part of a person’s net worth and carries an emotional attachment, having a human involved, i.e. a realtor, is preferable. Simply put, selling to an iBuyer is considered too risky. Our recent survey offers evidence that this skepticism will fade over time.
iBuying has two sides, starting with selling a home online, followed by another party doing an in-person tour of the home and then purchasing that home online. iBuyers are the companies doing the buying and selling and include Zillow, Opendoor, Redfin, and Offerpad among others.
Our survey polled 175 US homeowners around their willingness to sell to an iBuyer. We were left with two takeaways:
- First, willingness to sell to an iBuyer if fees and sale price are equivalent to selling through a realtor and broker is high, 83% in our survey. The reason is because iBuying offers a simpler and more convenient solution compared to the traditional process. If fees and sale price are equivalent, consumers will go with the experience that is faster and easier.
- Second, 71% of respondents said they would be willing to pay a premium for the conveniences iBuying offers, ranging from 1% to 4% of a typical home sale. The three core convenience factors include instant cash offers, the ability to pick the closing and move out date, and no home prep or showings. This willingness to pay a premium suggests that iBuying solves real pain points in the moving process. 29% of respondents said they would not be willing to pay anything for these conveniences.
As mentioned in our iBuying Survey Part 1: Brand Awareness note, this is the first iteration of a survey we plan to conduct annually. Thus, comparative data in the future will be helpful in measuring how this willingness changes over time. That said, taken as a snapshot, our survey suggests strong consumer interest to sell to iBuyers, along with an appetite to pay a premium for convenience.
After giving survey respondents a brief description of what an iBuyer is, we asked them the following question:
83% of respondents said yes, indicating strong overall interest to sell to iBuyers if their fees are equivalent (more on fees below). As expected, younger respondents are more likely to consider selling their home to an iBuyer than older ones. In fact, all of the 19-34 age group said they would consider selling their home online. We see this dynamic as a sign that iBuying adoption is a function of time.
Also encouraging to the theme, 77% of those aged 46-64 and 67% of those age 65+ said they would consider selling to an iBuyer. This is important because the majority of homeowners are in these two age categories and therefore play an important role in iBuyers acquiring inventory.
For the 83% of respondents that answered yes, the most common reasons were the convenience of a digital solution and the certainty of a cash offer.
Digital solutions reduce friction by speeding information flow, and there’s a lot of friction in a traditional home transaction. Cash offers increase liquidity because homeowners can use the cash to make an offer on their next home (two-thirds of sellers are also buyers). Given nearly 40% of home buyers use the proceeds from the sale of a primary residence to secure the downpayment on their next home, a cash offer increases their ability to compete in a fast-moving market.
For the respondents that answered no, their preference to work with a local realtor was the most common response, followed by a view that iBuyers don’t make fair offers.
While realtors will face increasing competition from iBuyers, we believe realtors with strong individual brands will continue to do well. That’s because they bring an element of familiarity and trust that some home sellers prefer. Additionally, there is often some social pressure to work with a realtor that you know when it comes time to sell your home.
As to whether iBuyers make fair offers, historical data suggest that cash offers from Zillow and Opendoor are typically within about 1% of a home’s value. It should also be noted that homes sold through the traditional process can sell below market price as well. The National Association of Realtors reports that for recently sold homes in 2020, “the final sales price was a median of 99% of the final listing price.” In plain English, this means that if all homes had final listing prices of $300,000, half sold for less than $297,000 and half sold for more than $297,000. In other words, whether you’re selling to an iBuyer or through a realtor, the final sales price will likely differ by a percent or two or more from your asking price. Putting it together, we believe iBuyer cash offers are in line with what sellers receive on the open market.
While consumer skepticism will likely linger on this topic of fair offers, we believe it will diminish in time. It’s important to remember that Zillow and Opendoor are not trying to maximize the margin on each home they sell, but rather to maximize the number of customers they can incrementally monetize through adjacent services such as mortgages and closing services. This means volume is the most important metric. In order to increase the volume of sellers, they need to make market offers.
We asked homeowners what fee premium they would be willing to pay for three convenience factors:
71% said they would be willing to pay a premium, ranging from $3k-$12k, or 1%-4% on a $300k home sale. Depending on the iBuying platform, sellers typically pay a 1%-4% convenience premium on the sale compared to a traditional realtor-broker sale. We view this survey data point as evidence that iBuyers are solving real pain points in the moving process, and that consumers have some price insensitivity when it comes to convenience. Said another way, sellers are willing to pay up for certainty, simplicity, and time savings.
While this 71% figure was higher than our 50%-60% expectations, it is in line with Opendoor’s recent 2021 Real Estate Trend Report that found 71% of survey respondents said they were likely to consider selling their home to an iBuyer.
29% of respondents said they would not be willing to pay anything for the above three conveniences. As Buyers achieve economies of scale and bring down their fees to equivalency or below the traditional home sale process, a portion of these could become potential customers.
This survey was conducted through Qualtrix in late March 2021 and included 175 US homeowners with the following age composition:
- 19-34: 10%
- 35-45: 40%
- 46-64: 40%
- 65+: 10%
Tesla’s March deliveries are representative of a true growth story. The company appears to be entering into the slope of its growth S-curve. We believe the reason this is happening is a combination of consumer willingness to purchase EVs, along with Tesla’s winning formula of vehicle performance and value. For the March quarter Tesla delivered 185k vehicles, above consensus estimates of 168k and further above investor expectations of around 160k.
Entering the slope of the S-curve
A signature signal of a growth company is an acceleration in growth. This is rare, given this step up in velocity is increasingly difficult off a growing base. Of course, a company can still be in growth mode without this acceleration; however, when this dynamic appears, it’s noteworthy because it’s rare.
The chart below illustrates Tesla’s accelerating delivery growth over the past six quarters, with 23% delivery growth in Dec-19 climbing to 109% in the most recent quarter. Due to pandemic shutdowns, results in the Jun-20 quarter should be taken in context.
In plain English, something bigger is going on, which we believe is the combination of consumer readiness for EVs, along with Tesla’s value proposition.
Putting March deliveries into context
The 109% growth is impressive given there were more headwinds than tailwinds in the quarter. The one tailwind was that the Fremont factory was shut down for a week in the March 2020 quarter due to the pandemic, thereby benefitting year-over-year growth. In contrast, Tesla deliveries were negatively impacted by two headwinds:
- Model S and X deliveries dropped to 2k because of the model refresh. Normally S and X deliveries are around 15k per quarter.
- Some US buyers, which accounted for about 50% of the company’s revenue in the December quarter, likely delayed purchasing in anticipation of a potential $7,000 Tesla EV tax credit as part of President Biden’s infrastructure plan. A $7,000 credit is a measurable factor to take into account, as it would represent an 18% discount on a typical Model 3 purchase.
Model Y’s success in China
Aside from the macro factors, a driver of the accelerating March deliveries was Model Y in China. Skeptics will attribute Model Y’s March success as one time in nature given the pent-up demand for the new vehicle in China. While Model Y benefitted from this pent-up demand, the SUV category still remains largely untouched for Tesla, representing some 40% of passenger cars globally.
Some context relative to other automakers
As a point of comparison to Tesla’s 109% delivery growth, other automakers have reported March delivery growth between 1% and 28%, or on average, 15%. Tesla’s delivery growth outpaced traditional auto by 30%-60% over the June, September, and December quarters, which means the gap between Tesla and its competitors appears to have widened in the March quarter. It’s important to note that this comparison has a flaw, in that it compares Tesla’s global numbers to other automakers’ US deliveries. While this inconsistency muddies the comparison, we think the trend is still representative.
This piece is from Steve’s Substack, Markets + Metaverse.
Microsoft’s rumored $10 billion bid for Discord would be a major win for both companies. Discord, the communication platform of choice for gamers, would find a long-term, strategic partner in Microsoft. This would alleviate some pressure around monetization and allow Discord to continue to build out its platform to best serve its users.
Over the last year, Discord has seen a significant jump in its valuation. The company raised $100 million at a $3.5 billion valuation in June 2020, only to see that valuation double in a similar raise in December. The primary driver of this rise in valuation is the activity the company has seen outside of gaming, as Discord is increasingly being used in the workplace. Despite this recent uptick, Discord’s monetization woes are likely to continue. As a result, Discord makes more sense as a strategic acquisition than it does as a standalone public company.
It’s no secret as to why Discord is an attractive acquisition target for large tech companies with ambitions in gaming. Communications tools are where gamers hang out, make decisions about which games they’re going to play, and talk during play. Communication is a critical component to the Metaverse. As it exists today, the Metaverse is a fragmented space. People spend their time in different worlds, whether playing Fortnite or Call of Duty, talking to friends about the latest NFTs, or conversing in Twitch chat. A platform like Discord spans all of those areas and allows for persistent communication. Having access to that platform and ensuring high-quality integration is a powerful advantage for any company with Metaverse ambitions.
The argument against going public
For investors, monetization has been a key question for Discord. If Discord sets itself on the path to become a public company, monetization of its userbase would be the central talking point. Despite the platform’s immense popularity, having 140 million monthly active users, its revenue per user lags its counter parts significantly. Discord reportedly generated $130 million in revenue in 2020. To try to make an apples-to-apples comparison with Slack and Microsoft Teams, who report daily active users, I’ll assume Discord has a 20% stickiness rate, which results in about 28 million daily active users. It’s worth noting that WhatsApp, at the time of its acquisition by Facebook, saw 70% of its monthly users engage on a daily basis. Bumping the stickiness number up would only make Discord’s comparison to Slack and Teams look more discouraging.
For Microsoft Teams revenue, I’ll again be conservative. Microsoft’s Productivity and Business Processes business segment generated $49.2 billion in 2020. This segment includes Teams, Office 365, and LinkedIn among others. Assuming Teams represents about 20% of this segment (the majority is Office 365, although 40% of commercial users are now on Teams) it’s reasonable to estimate that Teams generated $10 billion in revenue in 2020.
First, they could add more features to Nitro to incentivize more people to subscribe. Discord could partner with creators and share revenue for any users they turn into subscribers, similar to how Twitch shares subscription revenue with creators on its own platform. Creators could then set specific features, like invite-only channels and server recognition, to drive more users to Nitro. While it seems like every social media platform is trying to add audio rooms after the rise of Clubhouse, Discord has a unique advantage. Audio is already a core component of the platform and creators in many cases have already built an audience on the platform. Discord’s announcement of its new feature, Stage Channels, shows that the company understands the opportunity it has in live audio.
If Discord can’t find new features to build out to drive Nitro subscriptions, they could cut down on features of the free platform to entice current users to subscribe. Discord could set something similar to what dating apps have in a limited number of messages and interactions over a given time period, then provide unlimited access for Nitro subscribers. This option would be bad news for users and may cause many to leave the platform.
If turning the dial on monetization isn’t a viable option, Discord must find a way to add a large number of users. While Discord has been able to branch out during the pandemic, it’s unlikely to be a major competitor to Slack and Microsoft Teams without changing what makes Discord great. While Discord will certainly continue to grow and add users over time, adding enough to meaningfully move down the path towards profitability will prove difficult the way the platform stands today.
If Discord can’t ramp up monetization or tell a compelling story of future user growth, it’s best off acquired by a large company with the resources to support the platform.
The argument for Microsoft acquiring Discord
Microsoft’s acquisition of Discord would remove any near-term monetization issues. Microsoft also has the resources to fund further development of the platform. On the user growth front, adding Discord to the Xbox platform would open up both new users and higher engagement from existing users. Whereas Discord has primarily been used for PC games in the past, with the recent shift towards cross-platform play, gamers are seeking a standalone communication platform across console and PC.
An early hint that this may be a reality – Xbox announced that its Xbox Party Chat service is now free for all users, not just those that subscribe to Xbox network (formerly known as Xbox Live Gold). Microsoft is leaning heavy into making more of its games and services free-to-play. It’s upcoming premier first-party title, Halo Infinite, will have free-to-play multiplayer, a first for the franchise. The company is also allowing players to play other free-to-play titles, like Fortnite, without a subscription to Xbox network. Discord will likely be available to all Xbox owners. While a subscription to Discord Nitro may still be an option in the future, it could also be bundled with Xbox Live Game Pass Ultimate, Microsoft’s game subscription service. Full-feature Discord access could be appealing to many users, and Microsoft has shown it intends to invest heavily in its gaming platform, acquiring ZeniMax for $7.5 billion in 2020. Discord would fit nicely into Microsoft’s gaming ambitions.
At $10 billion, Discord would be Microsoft’s largest gaming acquisition to-date, surpassing ZeniMax and Minecraft, which was acquired for $2.5 billion in 2014. Discord would actually be Microsoft’s second largest acquisition next to LinkedIn. It’s worth asking, is Discord worth $10 billion? When it comes to users, Microsoft would be paying double what Facebook paid per WhatsApp user in 2014, but about 1/10th what Salesforce is paying per Slack user. It’s important to note, Slack is a positive cash flow enterprise business and is able to generate much higher revenue per user. It’s unrealistic to assume Discord is worth the same price per user.