Monopsony vs. Monopoly - Estate agents try to gang up on Rightmove

(Please note that I have a long position in Rightmove (LON:RMV))

Have you ever heard of a monopsony? It’s one of those rare words which you might learn for an exam, and then never think about again.

It means a market where there is only one buyer of a product or service. This makes it the opposite of a monopoly, which is a market where there is only seller. Monopolies are in general considered to be undesirable, and monopsonies are their mirror image.

A monopsony sometimes arises in the labour market, where a person’s skills are specialised to such an extent that their labour is only very useful to one firm. That one firm is willing to keep “buying” those skills (i.e. hiring that individual), but the skills aren’t of much use to anybody else.

In reality, most skills are transferable. But for example, when someone spends their entire working life at a single company, their understanding of that organisation and its culture reaches an extraordinary level, and their skills have probably become specialised to that organisation.

The same phenomenon can arise in particular locations where there is only one large employer. This employer is the main “buyer” of labour in that area, i.e. the monopsonist. Workers who don’t want to be employed at that firm have limited options: their main alternative is to leave town, and move somewhere else.

For this example we assume that it’s not possible, or too difficult, to start a rival firm which could compete for labour in that town. If the monopsonist is the owner of a coal mine, and there are no other mining deposits in the area, then this might be a realistic assumption.

Porter’s 5 Forces – Wikipedia.

The concepts of “monopoly” and “monopsony” fit into the classic framework within which competition is analysed, known as Porter’s 5 Forces.

• Monopoly (meaning “single seller”) occurs when the bargaining power of suppliers is at an extreme level.

• Monopsony (meaning “single buyer”) occurs when the bargaining power of customers is at an extreme level.

Economists will tell you that in a state of perfect competition, where there are no barriers to entry, there can be no such thing as an “economic profit”. This means that all firms would earn their cost of capital, and no more. This theory leads to the belief that any short-run discrepancies in the profitability of a firm should be smoothed out by competition entering or leaving the market.

This does hold true in commoditised markets. In resources, for example, high prices lead to additional supply (see the boom in US shale, before the recent crash). Then when lower prices take hold, production ceases and supply starts to reduce. It is messy and unpredictable in the short-run, but investors and companies do respond to prices over the long-run.

In monopolistic markets, however, things work very differently. Due to a lack of competition from other suppliers, the prices that customers are willing to pay are substantially higher than the average cost of production. And this doesn’t revert over time, due to the existence of a sustainable competitive advantage.

Graphically, it looks like this:

Source - Lumen Learning.

Preventing or weakening monopolies is the focus of agencies such as the Competition and Markets Authority (CMA) in the UK. Preventing mergers has the consequence of frustrating investment and innovation (see the prevention of Amazon’s investment in Deliveroo), but is considered desirable for its other effects.

What has all of this got to do with the topic?

Rightmove (RMV) was mentioned in my column last week as an example of a company with a high operating margin. Indeed, its stable 74% operating margin is the highest of any company in the FTSE – a remarkable achievement.

Earning a huge operating margin, without deploying many assets, is the recipe for an astronomical retun on capital employed. This is what Rightmove has done, for years.

Figures to 2019 – Stockopedia.

These margins and returns would not be possible if there were dozens of alternatives to Rightmove. But there is only one, and the rest pale in comparison.

According to the most recent Annual Report for 2019, Rightmove’s market share (measured as time spent on the platform) is over 75%, down from 76% in 2018 but up from 73% in 2017.

This metric is given by a media analytics company called Comscore. They changed their methodology last year, and their new method puts the Rightmove market share at the even more staggering level of 87%.

As a portal where buyers and sellers interact, Rightmove benefits from so-called “network effects”. The more people who use Rightmove, the more attractive it is. It is the place to research properties for sale in your area.

It’s noteworthy that the CMA gets interested in mergers which result in a market share of more than 25%. If Rightmove’s position had been created through a buy-and-build strategy, instead of through organic growth, it would never have been allowed to happen.

The house-buying public, and some agents, don’t seem to have a problem with any of this. Rightmove is the 45th most popular website in the UK and has a “Great” rating on Trustpilot. For context, Zoopla ranks at #161, onthemarket is #857 and primelocation (owned by Zoopla) is #1,706.

Some estate agents, on the other hand, do have a big problem. After staff costs, Rightmove is their single biggest expense, and they resent the constant ratcheting up of fees over the years.

Rightmove’s revenue from each advertiser has certainly been growing faster than inflation:

Rightmove will argue that it provides good value for estate agents, and is merely a replacement for defunct local newspapers which were less efficient venues to advertise properties.

But discontent among some estate agents has been growing for years.

In 2013, a group of them created Agents’ Mutual, Ltd. which we now know as Onthemarket (LON:OTMP).

While Onthemarket has seen some good growth in its audience, it remains a very long way from challenging Rightmove. In my SCVR commentary, I’ve also been consistently bearish on its investment merits, since it is explicitly run for its customers (the agents), at the expense of its shareholders.

I also think that the launch of Onthemarket was ahistorical. While blaming Rightmove for being “unfair” to estate agents, the founders betrayed a lack of appreciation for the origins of the company they were trying to unseat.

Because Rightmove itself was founded by estate agents.

Why don’t they still own it? The answer is because they sold it.

If Halifax, Countrywide and Connells hadn’t sold out, they would now be sitting on a “ten-bagger” and the UK’s biggest property portal would still be in the hands of estate agents. Countrywide also cashed in on Zoopla, before it was later acquired by a private equity investor.

It was the voluntary decision of estate agents to cash in their chips which has resulted in non-estate agents controlling the biggest property portals.

If they regret their decision to sell Rightmove, the shares are available to buy back every day of the week on the London Stock Exchange. It’s a fragmented shareholder base – the largest shareholder owns just 8% of the company. This is a liquid stock in which it would be very easy to accumulate a position.

The relationship reaches boiling point

With the ongoing Covid-19 crisis, estate agents are feeling the brunt of government measures and are in a desperate state.

The property market has effectively been suspended. The government says that “active marketing” of most second-hand properties is no longer possible, since visits to occupied properties are no longer allowed.

This disaster has of course affected the banks, who are focusing on their existing, highly stressed mortgage customers rather than looking for new customers in an environment where property values and future incomes are uncertain.

As I said in the small-cap report on Monday, the current prohibitions on economic activity are a doomsday scenario for businesses, which few could have predicted.

Estate agents are at the sharp end of this pain, and unfortunately Rightmove has failed to maintain good relationships with all its estate agents during this crisis (this is a generous way of putting it).

In response to the turmoil, and very negative feedback from agents, Rightmove announced on March 20th a 75% fee cut for the next four months. This deal replaced the previous offer that agents could defer their payments.

But one agent with 36 branches had already decided that enough was enough, and started a grassroots campaign, “Say No to Rightmove”. He was interviewed a few days ago, in a video that has been uploaded to LinkedIn and viewed thousands of times.

Commenting on the 75% cut, he said “any portal is not going to be of a massive use to estate agency in a UK economy that is headed into lockdown”. If properties aren’t selling and rents aren’t being collected, then agency fees are dead and Rightmove’s tools can’t help.

Agents want more help from Rightmove, but their bargaining power has always been limited by the fact that there is only one Rightmove. Any estate agent who individually chooses to stay away faces the loss of business to competitors who remain on the UK’s biggest property portal.

What’s the solution? They won’t use this word, but the answer is that agents need to act as a monopsony. They must work together to collectively “say no to Rightmove”.

If they worked together, they could become the single buyer of Rightmove’s services, which would help to counter-act the fact that no other portal is as popular among the general public. The threat of a mass boycott would certainly get Rightmove’s attention.

What's the worst that could happen?

Jefferies published a research note last week, arguing that lasting damage had been done to the company’s relationship with agents. The bank’s analysts suggested that the frozen property market would create “involuntary churn” as agents went out of business, and “voluntary churn” as estate agents collectively sought alternatives.

Zoopla, for example, is offering agents up to five months for free (on an 18-month contract), or nine months for free to agents who quit Rightmove.

Jefferies therefore thinks that a permanent fee cut is the only way that Rightmove can survive as market leader. Its base case scenario is for a 15% cut in ARPA next year, and flat fees after that.

I note that even in the “bear case” scenario outlined in this report, Rightmove remains the market leader (by accepting a bigger cut of 25% to ARPA).

However, after reading this report (which can be accessed here), I am even more content to maintain my long position in Rightmove’s shares.

Why? Because even in the worst-case scenario outlined by analysts with a an “Underperform” rating on the stock, Rightmove is still the market leader and will still earn tremendous margins and returns, with no serious competitor able to upset it.

Long before the Covid-19 catastrophe, I accepted the possibility that a price cut might happen at Rightmove. The price-cutting strategy was at the heart of my expectations for the “worst-case” scenario, too.

And that’s the beauty of a company with an enormous operating margin – it can afford to adjust its pricing downwards, if necessary. It will still be very profitable, even if it does that.

But I do remain sceptical as to whether estate agents will succeed in acting together and becoming the “single buyer” which could negotiate Rightmove down by more than 15% on a permanent basis.

The simple fact of the matter is that no agents have significant market share. While some agents do have strong brand names, there are effectively no barriers to entry in this labour-intensive industry.

Some agents are happy with Rightmove – you can find their reviews on Trustpilot. When they don’t take part in the threatened boycott, they will enjoy enormous advantages from the fact that the UK population is addicted to this website.

Last year, the public spent 1 billion minutes per month on the site. 1 billion here, 1 billion there – pretty soon, we are talking big numbers!

RMV shares are more expensive than the market as a whole, relative to earnings, but I continue to believe that this company is expensive for all the right reasons.