Is Zillow overstating the size of its user base?

August 12, 2014 12:27 PM

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Is Zillow overstating the size of its user base?

When Zillow reported second quarter results last week, the company highlighted in its press release that it achieved record all time traffic during the quarter of 89 million unique users in July, a 45% y/y increase.  That sounds great, except that when you step back for a moment and really think about that number, it doesn’t make a whole lot of sense.

Zillow only covers the US real estate market, and there are only 121 million households in the US, which means that if Zillow really had 89 million monthly unique users, 74% of all US households would be visiting Zillow every single month.  Moreover, existing home sales are currently only running at about a 5m unit annual pace.  Are 18x that many people really using Zillow each month?  Even Twitter claims fewer monthly unique users in the US than Zillow, and Facebook claims just 2.3x more.

Sure enough if you look at Zillow’s 10-K or Q, they imply that the monthly unique data probably overstates its user count:

“If an individual accesses our mobile applications using different mobile devices within a given month, the first instance of access by each such mobile device is counted as a separate unique user. If an individual accesses our websites using different web browsers within a given month, the first access by each such web browser is counted as a separate unique user.”

In other words, if you were to visit Zillow on your phone, your PC and your tablet, you count as three users. If you visited once on Chrome and once on Safari, you count as four.

This method of counting monthly active users is not unique to Zillow.  The company pulls the user count from Google Analytics.  Still, this is an important thing to keep in mind as an investor because monthly user counts could overstate users by a factor of 2-4x.  Zillow definitely does not have 89 million engaged users.

Also, different companies measure their user counts in different ways.  Twitter explicitly says that it counts logins, Facebook only cites “internal company data.”  Both companies are explicit in their SEC filings that these are very difficult metrics to accurately count though due to duplicate users, spam, bots, etc.  They try to adjust for these factors, and estimate that these variables impact user counts by a mid to high single digit percentage.  Funnily enough though, when an analyst asked Twitter about the duplicate user issue on its most recent conference call the call abruptly ended:

“On duplicative accounts, there is some usage of multiple accounts by single users but again that’s not a number of that we just…[call ends]“

Accurately counting users should be an extremely important issue for investors because these companies all trade at high multiples of revenue on the assumption that they will be able to monetize their large user bases.  If it turns out that those user bases have been overstated by a potentially large amount, it could have a material effect on these companies’ valuations. Further, it’s not clear that any of these counts are currently independently verified.  That  probably could be an issue that requires SEC attention.

This is also an extremely important issue for advertisers on these platforms.  Currently advertisers are being drawn to these platforms with the promise of high user counts and engagement.  It’s clear that advertisers, long skeptical for reasons like the ones mentioned here, are starting to test these platforms.  However, the ROI on advertisers’ investments (on a platform saturated with other ads) still remains to be seen.

For Zillow, this actually may be an advantage because its advertisers are real estate agents who can have a more measurable sense of lead generation from the platform.  On Zillow’s most recent call they said that existing agents are spending more, which implies that agents are happy with the value that they are currently receiving.

Brand advertisers (e.g. Coca Cola, Procter and Gamble) are never able to measure the ROI of their advertising directly though because their ads don’t generate direct leads.  Therefore the ad spend on any form of media, including one like Facebook’s, requires a significant amount of trust that the ads are reaching their intended targets.  If customers start to believe that ads aren’t reaching their targets, then revenue could evaporate.  The customers of these businesses are the advertisers, not the users.  The advertisers had better be able to trust that the users are there.

Photo thanks to Wally Gobetz

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