Congressional Quarterly Transcripts Interview with Spencer

Wire: Congressional Quarterly Transcripts (CQT) Date: Nov 11 2013  12:25:10
Interview with Spencer Rascoff, CEO, Zillow

     SPENCER RASCOFF, CHIEF EXECUTIVE OFFICER, ZILLOW, IS INTERVIEWED ON
BLOOMBERG SURVEILLANCE

     NOVEMBER 11, 2013

     SPEAKERS: SPENCER RASCOFF, CHIEF EXECUTIVE OFFICER, ZILLOW

     SARA EISEN, BLOOMBERG NEWS

     TOM KEENE, HOST, BLOOMBERG NEWS

     SCARLET FU, HOST, BLOOMBERG NEWS

     (This is not a legal transcript. Bloomberg LP cannot guarantee its
accuracy.)

      TOM KEENE, HOST, BLOOMBERG NEWS: Our guest host this
hour, he's trade talk free, is Spencer Rascoff. He's Chief
Executive Officer of Zillow. Let's we'll do housing here in a
minute. Let's talk about the effervescence out there. Is it
like 1999? I mean forget about Twitter, there's everything
else as well. It's frothy.

     SPENCER RASCOFF, CHIEF EXECUTIVE OFFICER, ZILLOW: Well
the late stage venture capital market and the early stage
venture capital market is frothy on the West Coast. But
there's a big difference between now and 1999 which is the
size of the internet.

     KEENE: It's bigger.

     RASCOFF: I mean back in 1999, it just much bigger, there
were 100, 200 million people on the internet back then and
today it's 2 billion. And so a lot of these business models
that seem kind of crazy 10 or 13 years ago, now with the
audience size 10x can actually work. So I don't think it's
quite the same.

     SARA EISEN, HOST, BLOOMBERG NEWS: Your stock has been
doing very well. I know you recently came out with earnings.
Interesting parallels right Scarlet. Because no profit for
Zillow, you're in, what you call investment mode. Yet
investors are in love with it. It sort of reminds me of a
recently announced IPO.

     KEENE: We'll have a moment of silence for Spencer
Rascoff in honor, you made, you actually brought money down
to the net income line. How charming.

     RASCOFF: It's quaint isn't it?

     KEENE: It's like you're a blue chip. Yeah.

     RASCOFF: Look, we and other companies like Twitter, see
a very, very large market size in front of us. And therefore,
chose to invest. So in the case of Zillow, what's depressing
profitability, is investing in advertising. We're spending
$30, $40, $50 million a year right now on advertising. And
it's working. It's growing our audience dramatically. We're
separating from competitors. We're by far the largest real
estate site in the US and part of that is due to advertising.
So we're happy to make that trade off with profitability.

     KEENE: But you're free cash flow positive right?

     RASCOFF: We are.

     KEENE: How irresponsible of you to actually show--

     EISEN: Wait, so where does the revenue come from? Does
it come from advertising or from the agent business?

     RASCOFF: It's one and the same for us. So we have almost
50,000 real estate agents that spend a couple thousand
dollars a year advertising with us in local markets. And so
for Zillow it's the story of local network effects. We're the
largest real estate site in every major city in the country.
And local real estate agents flock to advertisers where the
largest audience is in their city.

     SCARLET FU, HOST, BLOOMBERG NEWS: But the track record
for companies, tech- related companies that IPO when they're
not profitable, is not so great. It's good on the first day
of trading, they tend to outperform those that make money.
But one year down the line, three years down the line,
according to research by the University of Florida's Jay
Ritter, it's not looking so good.

     So critically, if it's things happening in the next two
years is what makes the difference. What's on your agenda for
the next two years?

     RASCOFF: Well for us what's driving our business now is
mobile. So between 60 and 70% of our usage is on a mobile
device. That's really where Zillow is dominating, that's
where the growth is coming from. And we monetize incredibly
well on mobile because when agents buy advertising from us,
they appear on Zillow on the desktop, Zillow on the table,
and Zillow on the mobile device.

     KEENE: But quickly to be clear here very quickly, you're
not extrapolating out to 2018?

     RASCOFF: No I don't think we'd trade off 2018.

     KEENE: OK you can stay. Spencer Rascoff with Zillow,
through the hour.

     (BREAK)

     KEENE: Good morning everyone, Bloomberg Surveillance
worldwide, I'm Tom Keene. "This Matters Now" to our guest
host, Spencer Rascoff. He is Chief Executive Officer of
Zillow. There were doubters when the realestate.com company
went public. It's up 280% large not bad. Well that is
Twitter-like.

     We need a clinic in Going Public 101 with Professor
Rascoff. What's the biggest trigger to say I want to go
public?

     RASCOFF: Well companies want to have liquidity for their
early investors and their employees.

     KEENE: And their employees.

     RASCOFF: And so that's clearly a reason companies go
public. But what I think Twitter and Zillow and others have
done a good job realizing is, it's not an in and of itself,
it's a means to an end. It's a way to establish permanent
capital and companies that are successful over the long-term
view it as just a milestone but not an event in and of
itself.

     KEENE: Does your auditing change when you go public?
Does your relationship with the accountants radically adjust?

     RASCOFF: A little bit. It does start to adjust about a
year or two before you go public, absolutely. And there are
certain regulations that you have to abide by a year or two
ahead of time. But most companies that are well run frankly
are 80 or 90% of the way towards being IPO ready from an
accounting standpoint. That's not what keeps companies from
going public.

     KEENE: Then what is the issue?

     RASCOFF: The issue is understanding the levers of your
business. So knowing the cause and effect of, for Zillow for
example, if we hire 10 more salespeople, what will happen to
revenue? If we buy advertising, what will happen to our
audience? Companies like Groupon for example, that weren't
sure what was going to happen internationally, and then
really struggled post-IPO because of international--

     KEENE: Right.

     RASCOFF: Or Facebook wasn't sure how to monetize mobile
and they struggled in the early days post-IPO because of
mobile. Those are, that's the biggest hang-up really, is
understanding, you know, the effects and why.

     KEENE: Right there are three guys in Brooklyn this
morning, they're wearing black tee-shirts, they hate Mumford
& Sons, they're like wicked cool and they want to be like
Spencer and go public. What's your advice to those guys about
what not to do as a start up?

     RASCOFF: Well they're already on the wrong track if they
want to go public, if that's what they're focused on. They
should try to build an enduring company that's going to last
20 years, and an IPO is just--

     KEENE: Do you build an enduring company at the revenue
line or down the income statement?

     RASCOFF: At the revenue line.

     KEENE: It's all about revenue.

     RASCOFF: So, in the early days yeah, investors are
willing to pay up for growth. And that's because they feel
that profits will follow later. Amazon has blazed the trail
here of course. And if you're in a large enough market like
real estate or like other local services or other parts of
the internet which are very hot--

     KEENE: Right.

     RASCOFF: If you can grow revenue fast enough then
there's an expectation that profitability can follow.

     KEENE: IPO 101 with Spencer Rascoff. Coming up we're
going to talk about, well the equity markets record high,
where are you in your investments for 2014 and far, far more
important, is housing and housing policy going to be part of
this? We will speak to Spencer Rascoff about the big surprise
for this year at the double digit return in cities like San
Francisco and New York, will it continue into 2014?

     From New York City this morning, Silicon Alley, it's
Bloomberg Surveillance.

     (BREAK)

     EISEN: Well it's a good time to take stock of the
housing market and where it fits in to this recovery. Because
we've been getting sort of mixed signals. On one hand home
prices continue to climb, but as mortgage rates have notched
higher, new mortgages and pending home sales have sort of
slipped in recent months. And we're starting to see that
impact the banks.

     FU: Yeah we definitely heard it from the big banks in
the third quarter, their mortgage originations declined. One
facet or real estate though seems to thriving, Zillow. It
tracks the real time database on custom mortgage quotes
submitted daily. And this quarter the online real estate
company reported 5.9 million loan requests. That exceeded of
loan requests in the entire year of 2011.

     Our guest host is Spencer Rascoff; he joins us today to
discuss how Zillow is changing the game for homebuyers. Your
company, you've said is in hyper growth mode. You're buying
up other companies, you're expanding rapidly. Yet we do hear
about the mortgage market and the real estate market slowing
down. Are you immune to that? Or where do you see signs of
it?

     RASCOFF: Well overall the housing market is in a really,
really great shape right now. So home values are up 7% year
over year. And we forecast another 4% increase over the next
12 months. We're back to around 2007 values. So not quite
peak of '05, '06 but getting close.

     FU: But a slowdown nonetheless.

     RASCOFF: Yeah so what's happened over the last couple of
months is the brakes have been tapped on this recovery. So in
July for example, all 30 of the 30 largest cities were
appreciating, today 15 of the 30 largest cities are
appreciating and half are depreciating.

     EISEN: Are you trying to disrupt the government data and
the S&P Case Shiller data as well? Are you trying to do what
you're doing to online real estate to the actual housing data
that we get?

     RASCOFF: Well yes, that's already happened. So Zillow
data now is widely cited by folks like Bloomberg and others
in the media and has a lot of benefits that differentiate
Zillow data from others. So yes, our data has become widely
used.

     FU: Well speaking of data though, when I look up my
house on your website, the valuation that you give it is a
lot lower than what I'm being charged in terms of tax rates.
When I look at other houses that are available for rent, the
rent they're charging is higher than what you cite in your
data. Why is that?

     RASCOFF: Well it sounds like you should challenge your
tax assessment.

     FU: I tried, trust me.

     RASCOFF: So Zestimates as we call them.

     KEENE: Zestimates. That's a jargon alert. That's so cute
I can't, a Zestimate?

     RASCOFF: That's what we call it. We produce 100 million
Zestimates on every home in the country. So there are
obviously outliers when you're producing automated valuations
on every home in the country three times a week.

     So nationwide, they're quite accurate. But there are
always going to be exceptions.

     KEENE: But is it tougher in the big cities? I mean New
York and San Francisco it's got to be a lot tougher game for
you.

     RASCOFF: It's tougher at the high end. And of course,
New York is high end, absolutely. There are fewer data points
for our models to train upon. So we are less accurate at the
high end.

     FU: Real estate is so local though. I've also seen other
houses compared to my house that isn't even in the same
school district. And it's all about school district at the
end of the day. That's something a human can go in there and
correct. Where an algorithm can't.

     RASCOFF: Absolutely. So real estate is hyper local, home
owners, can actually change information about their home and
that makes the Zestimate more accurate. So if you want to
impact the Zestimate, you can do something about it. But you
know, I think if you want to get a more accurate opinion of
your home's value, frankly you should talk to a real estate
agent. The Zestimate is a great starting point, but it's not
the end all be all, it's a starting point.

     EISEN: And just a testament to all of this. I've seen
you on the front lines of some of the debates on housing
finance and housing in this country by President Obama's
side. How did you get such a good relationship with
Washington? How'd you get them to pay attention to what
you're doing to the housing market?

     RASCOFF: Well it comes from our audience. So it's not
really Zillow, it's the 65 million people that visit Zillow
every month that politicians want to access. So in August I
sat down with President Obama to talk about housing and
mortgage finance reform. Last month we had a housing forum in
Washington D.C.

     KEENE: Right.

     RASCOFF: Where Corker and Warner and other Senators and
Congress people who are in the center of the mortgage finance
reform discussion were presenting.

     KEENE: OK, how much do the realtors hate you? They want
their 6% on sale, are you their friend or enemy?

     RASCOFF: Friend.

     KEENE: Oh stop it. More information means lower
commission.

     RASCOFF: Not necessarily, in the same way that
investment bankers don't hate Bloomberg. So Bloomberg
provides all sorts of information about markets, investment
bankers still play a different role in the transaction. So we
have nearly 50,000 real estate agents that spend thousands of
dollars a year advertising with us. They certainly don't hate
us, they're building a business. Just like eBay, power
sellers, build a business off of eBay.

     EISEN: All right Spencer Rascoff, it's good to have you
here. We'll continue to talk to you about going public and
about the IPO market. Spencer Rascoff, CEO of Zillow.

     (BREAK)

     EISEN: Well we have two tech CEOs with us, Shutterstock
CEO Jon Oringer of New York City, Spencer Rascoff founded his
online real estate marketplace Zillow in Seattle. It raises
an interesting question not just important for tech companies
here, and that is why you found where? Why Silicon Alley Jon?

     ORINGER: So actually I grew up right around here and I
started the business here because that's where I went to
school. But it's turned out to be a great place because 70%
of our business is outside the US and we actually answer the
phone in 12 different languages here in New York. So hiring
really diverse talent. And besides that a lot of media
companies are here. So it was a great place to start.

     KEENE: You get Virgin America back and forth, San
Francisco, San Jose and back and forth. What's the critical
distinction between Silicon Alley and Silicon Valley?

     ORINGER: I mean it's just another place to start a
company. I think New York's a great place to start a company.
It worked for us.

     EISEN: Well not Silicon Valley or Alley--

     KEENE: That's the best you can do? It's not about
baseball?

     ORINGER: No.

     KEENE: It's not about baseball?

     RASCOFF: Like everything in Seattle, we're there because
of Microsoft. So it was the Expedia team, Expedia started
within Microsoft. And then we were all at Expedia together.
And the Expedia team left to start Zillow. So almost
everything in Seattle is there because of Microsoft.

     FU: There's the talent pool that migrated.

     RASCOFF: Yeah and I mean for us it was great because
Zillow is a big fish in a small pond. And so we have a much
easier time recruiting software developers in Seattle than I
think we ever would in Silicon Valley.

     EISEN: And I know Jon you're looking to expand
internationally and you've just opened an office in Germany.

     ORINGER: Yeah.

     EISEN: How do you decide where internationally to open
up shop?

     ORINGER: Yeah we look for places where we, where there
are large media companies that we can sell to locally. And
also where we can find engineers. Because right now that's
one of the hardest things for us to source. So we just opened
an office in Berlin to build out a tech team there.

     KEENE: When you look at the development in this and
compare and contrast it to 1999, I remember young companies
like yours where people would simply just take options almost
no salary and they cratered two years later. What's within
the negotiation of getting talent, do they want a bigger
salary mix now?

     ORINGER: It's more of a combination now. So it's a
combination of salary and stock. People do want that upside
risk though because they believe we're building something and
we want them to have that too.

     (BREAK)

     FU: And he's having a great time.

     KEENE: That's cool. You wonder where it's going to be.

     RASCOFF: It's really a real estate company now. They own
60% of REA Group, which is a $3 or $4 billion Zillow of
Australia. And that's one of the most valuable assets within
News Corp actually.

     FU: And it's kind of forgotten about.

     RASCOFF: Well it's less forgotten about now that News
Corp has broken out from the rest of Fox. It was completely
forgotten about under the (inaudible).

     KEENE: Do you realize if we went to a cocktail party
with Spencer Rascoff, every conversation would end with real
estate?

     (LAUGHTER)

     RASCOFF: I live and breathe it Tom.

     EISEN: Is Zillow a real estate company or media?

     RASCOFF: We're a media company. We sell ads, we don't
sell houses. So we attract audience and then we sell
advertising.

     EISEN: You're disrupting both I would say.

     FU: And a tech company too because of the algorithms and
the--

     RASCOFF: Absolutely.

     FU: And the software you use.

     RASCOFF: That's how we attract the audience with our
technology.

     EISEN: Well speaking of algorithms, on my agenda today--

     KEENE: Oh here we go.

     EISEN: Is Bitcoin. Seriously this is the right agenda
item because a digital currency has hit a record high,
depending on where you look a 330.81 just as everyone was
bashing it. Including Tom Keene, it's gaining in legitimacy
and it's gaining in value. Also on the agenda here on US
Senators are meeting over the coming weeks to discuss the
future of the virtual currency. It is going to be the subject
of a number of Congressional hearings, Senate hearings, for
instance, of the Homeland Security Committee. They're trying
to figure out whether the illegal activity is getting fueled
by Bitcoin and the rise of Bitcoin--

     FU: Because people are using it to buy drugs right?

     EISEN: Can it really be a legitimate tender. Spencer I
know you don't buy it.

     RASCOFF: I'm skeptical of Bitcoin. I just think it's,
there's too much shadiness associated with a currency that's
not maintained by some sort of government or Central Bank.
And I think it will blow up at some point with some big
scandal where someone losses, $50, $100 million and I don't
think it's going to last five years.

     EISEN: And Jon you don't accept it either.

     ORINGER: Actually I'm a little more optimistic about it.
I mean starting a currency like this backed by computing
cycles is going to cause a ton of volatility at the
beginning. But it would take, it would take years to work
that volatility out and actually create something that had
some stability.

     KEENE: I'll believe when Christine Lagarde folds into
IMF analysis.

     EISEN: The ECB has done paperwork on the rise of virtual
currency and whether it threatens--

     KEENE: I can't disagree with you more; I'm in the Joe
Weisenthal camp here, over at "Business Insider". I just--

     (BREAK)

     FU: That's right our Twitter question of the day was:
are we in a tech bubble? Whether you look at Twitter, whether
you look at Tesla, whether you look at Netflix. Well some of
the answers: Yes, stock prices are not matching with revenue.
Total disconnect. I want what these guys are smoking.

     I would actually argue stock prices are not matching
with profits given that a lot of these companies don't make
profits.

     No, a few outliers, do not define all of "tech". A lot
of companies are tech or aren't tech.

     No this is not a tech bubble. I asked Siri...she's on
the fence. Siri the all-knowing answer to all questions tech.

     EISEN: Is the bottom line here Spencer that you just
have to look at a different set of metrics?

     RASCOFF: It's about addressable market. So the question
for Twitter or Zillow or Shutterstock is, what is the total
addressable market that these companies are going after? And
it's not; will we have the huge audience? These services
already have huge audience, it's how much revenue could they
potentially have. And I think that's what people disagree on.

     FU: How much can you wring out?

     RASCOFF: Yeah and Zillow all of these are relatively
small companies. Even Twitter is a pretty small company, a
couple hundred million in revenue, and the question is, can
it become $10, $20 billion in revenue. And reasonable people
are going to disagree. Some people will look at it and say,
it's going to attract a massive amount of revenue because
advertisers are going to flock to it. Same with Shutterstock,
same with Zillow. And others will reach a different
conclusion. So I think that's what we're arguing about. It's
not a tech bubble.

     EISEN: All right Spencer Rascoff, always good to have
you here on Bloomberg Surveillance as our guest host, the CEO
of Zillow. Also Jon Oringer thanks for joining us, of
Shutterstock.