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Challenging times for Rightmove

This didn’t go down at all well, and sensibly it is no longer part of company policy. The point here is that if one estate agent in a given area left Rightmove and was not joined by other estate agents in the area it would be committing commercial suicide, so the idea now is to create incentives to encourage estate agents to move en masse. And early indications suggest that this is working. Having been admitted to trading on the Alternative Investment Market (Aim) in February, the new offering hit the ground running, and has already signed up nearly half of the UK’s residential estate and lettings agency branches.

We have to take a step back to see how this level of success has been achieved. OTM was created from Agents’ Mutual, whose board membership included Savills, Knight Frank, Strutt & Parker and Chestertons. These heavyweight names were reacting in response to what was and is regarded as the level of control exerted notably by Rightmove, which currently has virtually total market penetration. It’s worth pointing out that Rightmove was created in a similar way by Countrywide, Connells, Halifax and Royal & Sun Alliance.

However, since their inception, estate agents have subsequently sold down their holdings in both Rightmove and Zoopla, while the latter’s owner, ZPG (ZPG,) is in the process of being bought by US investment firm Silver Lake. By contrast, OTM is 70 per cent owned by the thousands of estate agents that supply the listings. The point here is that OTM can offer a cheaper service, whereas previously agents had little choice but to stump up whenever Rightmove increased its prices.

And stump up they have. In 2001, Rightmove’s average rent per advertiser (ARPA) was £100 per office per month. By 2017, this was up to £922, giving a compound annual growth rate of 14 per cent. And these are averages. Nearly half of its subscribers pay over £1,000 a month, and some as much as £1,500. All this has come at a time when estate agents are experiencing a really rough patch as transactional volume flatlines. And whereas Rightmove reported operating margins of 75.8 per cent in its last annual results, OTM  is expected to operate on margins nearer 30 per cent and ARPA of £300 per month.

Suddenly, OTM starts to look attractive, but it needs to gain a greater market share to be able to fund further growth. And at the moment agents are being brought on board without having to pay a fee. The revenue stream will be turned on when the model achieves critical mass. At this point, the idea is that agents will start to pay and save money by leaving one of the other portals. Other attractions offered by OTM include an option for estate agents to list their new instructions on OTM in advance of listing on other portals, which gives OTM a certain advantage when it comes to attracting active property seekers.

The question is, how can Rightmove respond? It has already mentioned OTM as a possible threat, but it is going to be a few years yet before estate agents start to switch off from Rightmove because currently they don’t pay anything to use OTM. When they do, and it will probably be for a five-year contract, that will be the time to stop using Rightmove. There may be a case for reinvesting some of its profits into technology and marketing, given the fact that it’s running an operating margin of around 75 per cent. However, the bottom line is that OTM is vastly cheaper at a time when estate agents are under pressure to find cost savings. Rightmove can’t match pricing without demolishing its bottom line, and there is no way that it could buy OTM because 70 per cent of the shareholders are the estate agents themselves. So, having nearly doubled its profits in the past four years, and trading on nearly 30 times forecast earnings, Rightmove’s share price must at some point start to look vulnerable.