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Spencer Rascoff
Spencer Rascoff

Why did Zillow buy its longtime rival Trulia?

Stock analysts, financial journalists and real estate professionals are chewing on that one today, pontificating on the blockbuster $3.5 billion all-stock deal. I’ve watched Zillow and Trulia aggressively compete since they were started nearly 10 years ago, engaging in messy patent fights and plenty of boastful talk.

With those battles now in the rearview mirror, here are a few reasons why the deal came together:

1. The whole is greater than the sum of its parts

In a conference call with analysts Monday morning, Zillow CEO Spencer Rascoff said that it made more sense to own two-thirds of Zillow, with Trulia as part of the company, than to own 100 percent of Zillow without Trulia. In other words, they are better off as a combined entity. “Why not now? Both companies come at this from a position of strength. We both have a lot of momentum behind our businesses in terms of revenue growth and traffic growth and audience growth,” said Rascoff. “We are very fortunate that the stars aligned.” Time will tell how the stars look in a few years.

2. 1+1 = 3

In an appearance on CNBC on Monday morning, Rascoff was asked whether the Trulia deal was inked in order to thwart an acquisition of Zillow by a larger entity. Rascoff said that was not the case. Instead, he said it was born from the “realization that it is very early days in the real estate space.” With $12 billion spent every year on real estate advertising, Zillow and Trulia “are just a tiny drop in the bucket,” Rascoff said. In fact, the two companies only account for four percent of total marketing spend in the category, a number he says they are looking to grow substantially. “Advertisers follow audience and by joining forces as one company we think we can end up with a larger audience, and eventually end up with more advertising share.”

3. Offense and Defense

While Zillow’s Rascoff downplayed the notion of the acquisition being a defensive mechanism to ward off larger suitors, there was a bit of defense going on here. The fragmented real estate industry is headed toward consolidation, evidenced by the report that Trulia had investigated a merger with No. 3 online portal last month. A combination of Trulia and — owned by Move Inc. — probably didn’t sit well with the Zillow team. So, six weeks ago, Rascoff went on offense and approached Trulia about a deal. As the top online real estate portal (both in terms of brand penetration and market value), Zillow was in an enviable position to gobble up a smaller fish. Better to do that on your terms, than let rivals combine. Even if Zillow achieves little value from Trulia in the coming years in terms of revenue, traffic or technology, the acquisition could prove successful for Zillow by preventing what may have been.

4. Cost savings

Zillow - Mobile platformsMarketing. Headcount. Office space. Product features. Almost every way you look at it, Zillow can ring efficiency out of the combined company. At this point, Rascoff is not speaking about layoffs, saying only that the new Zillow will obtain $100 million in “cost avoidances” in 2016. That means TV ads it no longer has to run (the company will continue to spend on marketing, it just won’t need as much with its top rival gone) and employees it won’t have to hire as many folks (a key to the deal is whether the engineering teams will be able to effectively work together). “As we think about how the category is evolving, both teams are increasingly spending on marketing,” said Trulia CEO Pete Flint in a conference call. “And we are very conscious of that…. While we will continue to spend on marketing, we think we can do it more efficiently than standalone.”Meanwhile, Rascoff gushed about some of the mobile features of Trulia, calling the native apps “fantastic” and noting that the company’s mobile experiences are “awesome.” Together, the two companies can share resources and best practices from 10 years of innovation, especially in mobile where the execs believe the future lies.

5. The big kahuna in online real estate

Perhaps the most important reason that the acquisition makes sense is a simple one. In one fell swoop, Zillow becomes the top dog — the big kahuna — in online real estate. It already was running in front of the pack, but with Trulia in its fold, no one is even close now. Think about this: Zillow and Trulia had a combined 137 million unique visitors to its Web site and mobile apps in June. No one comes close, even though new entrants like Urban Compass and Open Door are trying to get into the game. Real estate professionals will increasingly need to turn to Zillow to market their properties, creating a level of dominance not seen before.

Here’s Rascoff talking about the deal on Bloomberg TV, downplaying the significance of the Zillow-Trulia market position. “It’s very early,” he said. “We have a long way to go to achieve what we consider our ambition, which is to sell a lot more media and software tools to real estate professionals.”

Previously on GeekWire: Zillow buying Trulia: An industry perspectiveZillow pays $3.5 billion for longtime rival Trulia… Why a Zillow acquisition of Trulia makes a ton of sense, and a few reasons why it doesn’t

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