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Zillow lost money because they weren't willing to lose money

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Re: Zillow lost money because they weren't willing to lose money

#321

Post by hhmc »

JumpCrisscross wrote: post #319
hhmc wrote: post #204

Earlier quoted context omitted.

You can't garauntee your (bid/ask) resting orders are executed against in the same epsilonic time window, nor would you want to. No market making practioners would think in these terms.

> You can't garauntee your (bid/ask) resting orders are executed against in the same epsilonic time window, nor would you want to Of course you can. This is the entire thesis with which HFT beat out old-school market makers in securities.

I think you maybe have some misunderstandings around the practicalities limit orders and market microstructure (not withstand some theoretical model of risk free market-making, which has broadly been superseded, if you care about the theory at all).

Re: Zillow lost money because they weren't willing to lose money

#322

Post by nostrademons »

civilized wrote: post #314
perl4ever wrote: post #312

Earlier quoted context omitted.

I think he was saying that while no doubt it occurs on a case by case basis, it appears to be relatively insignificant either way. When they were paying less than market price, they still made a lot per deal, and when they were paying more than market price, adverse selection hardly pushed them over the edge. If you make "a million high ball offers" then the fact that some of them are particularly bad deals isn't the…

I won't say he's definitely wrong but it seems odd to argue that Zillow has so much market knowledge and money as to render adverse selection irrelevant, and yet they just couldn't resist making tons of unprofitable offers out of sheer impatience to scale up. What happened to all that market knowledge? There's got to be more to it than this.

This is where we get into internal incentives and theory of a firm.

My first project at a FANG made something like $42M for the company its first year, about $100M in total. There were 3 engineers working on it, and it cost the company maybe $500K in total. Great return on investment, right?

Except my Director wasn't in charge of making money, his job was to increase user happiness, typically measured as the proportion of interactions that were "successful". And this project didn't do this - since it encouraged browsing behavior (poking around without a goal), it actually decreased "successful" interactions. So the project was canceled and threatened with unlaunching about 18 months in.

I was like "Well can I buy it off you? $42M might be rounding error for you, but I'd love to have a business with a $42M ARR." But ultimately this was a no-go as well, because it used company infrastructure, user data, sale relationships, etc and negotiating that contract (along with all the legal and reputational risks to the parent company) would've cost a bunch more than $42M. Ultimately he was like "Well, if it's making that much money, maybe it should be transferred over to department that's actually in charge of making money", and that's where it landed for the next few years, until $100M became rounding error in the company's annual revenue and it wasn't worth that executive's time to sponsor it.

Projects have to move the needle for the executive that sponsors them, otherwise it's not worth their attention. Zillow made about $2.7B in 2019, with 47% gross margins. If Zillow Offers was profitable but could only flip say 1000 houses/year at a profit of $50K/house, that's only $50M, basically 2% of their existing revenue. It just doesn't move the needle for the shareholders, which means it won't move the needle for the CEO, which means it's not worth his attention. They needed it to be a substantial fraction of sales in the U.S. - if it had made a profit of $100K on $3M homes/year, that's a $3B business, more than double Zillow's existing revenue, at potentially higher margins.

Re: Zillow lost money because they weren't willing to lose money

#323

Post by sgerenser »

kube-system wrote: post #191
SilasX wrote: post #133

Earlier quoted context omitted.

Okay even accepting that Zillow made big unforced errors, that doesn't sound believable. Like, they don't make the offer conditional on someone looking at it in person for red flags?

As I understand, they were buying sight unseen. This happens in hot real estate markets. If you don’t want to miss out or start a bidding war, you have to be the most frictionless buyer.

In my area, OpenDoor was buying sight unseen. All they required was a 10 minute zoom call where you walk them through the house. Zillow actually sent out someone to do a home inspection (although a bit more cursory than what a typical buyer would pay for). This may have varied by market though.

Re: Zillow lost money because they weren't willing to lose money

#324

Post by icelancer »

emodendroket wrote: post #300
opportune wrote: post #158

Earlier quoted context omitted.

I don’t think it’s just that they had a poor model, but the combination of that and adverse selection. If you pledge to purchase at the Zestimate then people who reasonably think they can get more than the Zestimate on the open market don’t have an incentive to sell their house to Zillow (besides convenience). But people who think the Zestimate is an over estimate will of course sell to Zillow. So instead of a normal…

Well, that makes sense, but wouldn't it sink Opendoor too then? They are doing fine, as far as I know.

Rabois talks a lot of noise about how well they're doing, but Opendoor is a miniscule fraction of the size of Zillow, and it's hard to know exactly how good Opendoor is doing anyway. We'll see as the years roll on with a lot of economic uncertainty coming up.

Re: Zillow lost money because they weren't willing to lose money

#325

Post by dmurray »

nostrademons wrote: post #322
civilized wrote: post #314

Earlier quoted context omitted.

I won't say he's definitely wrong but it seems odd to argue that Zillow has so much market knowledge and money as to render adverse selection irrelevant, and yet they just couldn't resist making tons of unprofitable offers out of sheer impatience to scale up. What happened to all that market knowledge? There's got to be more to it than this.

This is where we get into internal incentives and theory of a firm. My first project at a FANG made something like $42M for the company its first year, about $100M in total. There were 3 engineers working on it, and it cost the company maybe $500K in total. Great return on investment, right? Except my Director wasn't in charge of making money, his job was to increase user happiness, typically measured as the proporti…

This doesn't sound right. 2% of the firm's revenue in its first year, combined with a plausible growth trajectory to 5x or 50x that, is great!

I don't doubt that your €42m project got shut down, and that your employer might well have been right to do it. But this particular Zillow project wasn't shut down because it didn't move the needle - if anything, it was shut down because it did.

Re: Zillow lost money because they weren't willing to lose money

#326

Post by TomVDB »

intuitionist wrote: post #263
perl4ever wrote: post #223

Earlier quoted context omitted.

>adverse selection According to Matt Levine's recent column, while you might think that, it wasn't what sunk them in practice. Bidding low in fact worked; it just was inherently limited in scale, which is why they switched to bidding higher. Unfortunately, being wrong in the other direction is very bad. "I know, I know, the traders are saying: “No, this is stupid, your algorithms will not be 100% precise, some of you…

I think the question of fungibility comes into play here, too. If I’m a HFT and I accidentally post a too-high bid for Anacott Steel then there are well-capitalized players in a position to sell me a whole lot of Anacott until I lower the bid. (They may even be other HFTs who can naked short it to me.) But if I’m an iBuyer and post a too-high bid for 742 Evergreen Terrace, only the Simpson family can hit that bid, an…

But what if iBuyer calls the Wallstreet Chronicle and tells them that Blue Horseshoe is buying 742 Evergreen Terrace?

Re: Zillow lost money because they weren't willing to lose money

#327

Post by dmurray »

skohan wrote: post #28

> They thought they needed to build a machine learning model when they really needed to build an entirely new organization, one that possessed the technical and cultural mindset necessary to succeed in this space. I totally agree. It's not impossible to imagine their model working: why couldn't you serve as a market-maker for homes at a large scale, especially with the unique insights Zillow could have based on their…

Very much this! I can count on one hand the number of successful businesses I've seen that use machine learning to do some magic inferences humans could never do. I've seen hundreds where humans are pretty good at doing their job, but machines can do it faster, more consistently and cheaper.

Re: Zillow lost money because they weren't willing to lose money

#328

Post by xibalba »

robbedpeter wrote: post #74
mgraczyk wrote: post #43

I really liked this quote, which is also true of machine learning organizations at large tech companies: The most valuable data is not social data, ... but your own data because every dataset that you’re looking at internally describes your own process, including your bugs, ... building models from your own data is the only way to build a really successful system. This is one thing that a lot of outsiders do not unde…

Yeah, I'm gonna say that romanticizing mass surveillance is a bit much. Cambridge Analytica, the five eyes countries, Clearview - all these are using Facebook and Google's data to great effect. Facebook and Google's data are not their own. That data is comprised of private lives, stripped bare pixel by pixel, bit by bit, and it's offensive to frame it as if they're doing something alchemical and special with it. Goog…

> mass surveillance

> rent seeking

> first mover advantage

This reads like an HN buzzword bingo card.

But seriously, a lot of your claims are flimsy or misinformed, which goes to credibility. Cambridge Analytica was a huge nothingburger that had no actual effect on US elections or Brexit. Google did not have first mover advantage, they were so late to the search engine game that it caused them trouble in their early financing. Show us a real, known harm from Clearview. Google and Facebook are not breaking any laws, so how can they be "invading privacy"? The bottom line is, people love FAANG tech, and are happy to trade their data to use it. And one of the reasons is because they are not experiencing real harm, in spite of what HN's white knights would have us believe.

Re: Zillow lost money because they weren't willing to lose money

#329

Post by nostrademons »

dmurray wrote: post #325
nostrademons wrote: post #322

Earlier quoted context omitted.

This is where we get into internal incentives and theory of a firm. My first project at a FANG made something like $42M for the company its first year, about $100M in total. There were 3 engineers working on it, and it cost the company maybe $500K in total. Great return on investment, right? Except my Director wasn't in charge of making money, his job was to increase user happiness, typically measured as the proporti…

This doesn't sound right. 2% of the firm's revenue in its first year, combined with a plausible growth trajectory to 5x or 50x that, is great! I don't doubt that your €42m project got shut down, and that your employer might well have been right to do it. But this particular Zillow project wasn't shut down because it didn't move the needle - if anything, it was shut down because it did.

It sounds like the problem with Zillow Offers is that it didn't have the plausible growth trajectory to 5x or 50x that. It could be a profitable $50M business or an unprofitable $1B business, but not a profitable $1B business. The earnings call shutting it down mentioned that the company wasn't getting the economies of scale that they thought they would be getting.

Re: Zillow lost money because they weren't willing to lose money

#330

Post by rpvnwnkl »

marcinzm wrote: post #76
rpvnwnkl wrote: post #58

Earlier quoted context omitted.

They are out 200k. They bought for 100 too much and will have to sell for a 100 less than planned.

Not sure I follow. They buy for 1m so they're out 1m. Market value is irrelevant when bought. They sell for 900k, optimally, so they then get back 900k. In total they're out 100k (900k minus 1m). Not counting fees, market movement and assuming they sell optimally.

lol yes I’m not sure what I was thinking. Thank you.
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