With Xceligent Gone, Brokers Fear A Dominant CoStar Could Raise Prices
Want to get a jump-start on upcoming deals? Meet the major players at one of our upcoming national events!
The abrupt shutdown of property data company Xceligent Dec. 14 sent shockwaves through the U.S. commercial real estate industry, with thousands of brokers unable to access property information for deals they were working on and many in the industry growing concerned over CoStar's potential monopoly status.
"The loss of competition at a level that prominent is certainly challenging to the industry," said CCIM President Robin Webb, an Orlando-based broker with NAI Realvest. "It eradicates the choice, and that's not usually good for the buyer in any instance ... It certainly opens up the opportunity for abuse any time there's a single player."
Xceligent filed for Chapter 7 bankruptcy one year after the high-stakes legal battle between the two companies began with CoStar suing the Kansas City, Missouri-based firm for intellectual property theft.
After a setback in the case in October, Xceligent parted ways with its founder and CEO Doug Curry. Its parent company, Daily Mail & General Trust, then wrote Xceligent's value down to zero on Nov. 30 and said it was exploring all business options before deciding to shut the company down two weeks later.
Brokers across the country immediately felt the impact of Xceligent's closure Friday when they lost access to the information platform they used to make deals. In Minnesota, brokers had come together to form an association that received a group rate on Xceligent, Minneapolis-based broker Royce Durham said, so more than 95% of its brokers used the service while less than half used CoStar.
"A lot of us showed up to the office and had buyers or sellers we were representing, and more than half us aren't subscribed to CoStar, so we have no way to look at properties and no way to help out our clients without Xceligent," said Durham, who works for KW Commercial. "It's going to hurt commerce here in Minnesota."
It remains to be seen if CoStar will absorb Xceligent's customer base or if another competitor will emerge from the ashes. DMGT had invested $150M to create a national platform of property data that now sits unusable.
"You have $150M worth of research on a computer somewhere that it would be a shame to see go to waste," Webb said. "Perhaps someone will tap into the bankruptcy case and buy it out and try to take a run up that hill again. It wouldn't surprise me at all to see someone buy the bones out of bankruptcy."
But the number of lawsuits CoStar has filed against similar companies could present a challenge for anyone trying to compete on a national scale.
"Everyone is seeing what CoStar has done," Durham said. "They are very lawsuit-happy and not afraid to go after other people. I'd imagine that's what's going to happen to the next guy."
CoStar CEO Andy Florance, in an exclusive interview with Bisnow Sunday, warned against anyone trying to buy Xceligent's assets to rebuild another company with its information, implying that CoStar would take similar legal action if that were to happen.
"That content was illegally taken and cannot be resold," Florance said. "So if someone takes that content and tries to now resell it, it still belongs to us. Just because somebody stole it and then goes bankrupt, doesn't mean that someone else can then use that stolen content."
Even if someone did try to put Xceligent's data to use and managed to traverse the legal battlefield, reaching the scale CoStar has achieved could prove immensely challenging. Scott Napier, who ran a similar property data platform in Portland that CoStar acquired in 2000, doubts any company will be able to compete with it nationally.
"I don't know how it's humanly possible," said Napier, who now runs Verticalemail.com. "CoStar was so far ahead of Xceligent when they began, it seemed like an impossibility to me, knowing what it takes to run one of those databases. For someone to come close — even if they could buy the data out of bankruptcy, which may be available — seems to me like it would be extremely difficult."
The lack of a national competitor existing as a second option to CoStar has some brokers worried about what could happen with the company enjoying a potential monopoly over the industry.
Especially for smaller brokerage shops, CoStar's prices can prove prohibitive. Longtime Atlanta broker Daniel Levison, who founded Commercial Property Professionals and now runs his own brokerage while pursuing other ventures, said CoStar costs him $395 per month. He said it is one of the largest expenses small brokerage shops have.
"After our rent, it's CoStar," Levison said. "This is probably true for most companies."
Levison said he is finalizing his operating budget for next year and is already increasing the line item for CoStar expenses in anticipation its rate will increase with its competitor out of business. But he does not expect CoStar's prices will skyrocket immediately.
"CoStar knows how a lot of people feel about them," Levison said. "This will be a slow creep. I’d be pretty shocked if they try to increase people 25% on their next renewal. They’ve been through that and they’ve soured a lot of people. They’re going to do it slow. If you look at their price now and we come back three years from now, I bet my $395 is $600, somewhere in there."
When she founded Winter Park, Florida-based Beyond Commercial four years ago, Amy Calandrino said she could not afford CoStar. When Xceligent entered her market she began using the service and she said she now does enough deals to afford both. But she said she worries some of her colleagues at other small firms will not be able to pay CoStar's rates and will be unable to access information necessary for their business.
"It would be very challenging if you're a small brokerage, especially if you're starting out, to commit yourself to thousands of dollars a year," Calandrino said.
Florance said CoStar is putting its product on sale and offering special packages to new customers. To try to win over Xceligent's customer base, he said CoStar is offering free analytic reports to former Xceligent users who need information on lease comparisons or space availability for deals they are working on.
But Durham questions how long that goodwill will last. He said the Minnesota Association of Commercial Realtors expressed to its members that it was not interested in working with CoStar because of its pricing.
"A lot of folks here fear CoStar prices will continue to go up and they'll essentially have a monopoly on the market," Durham said. "It's not a good situation."
The Federal Trade Commission in 2012 took action to prevent CoStar from becoming a monopoly. During the company's acquisition of LoopNet, which owned Xceligent, the FTC forced CoStar to sell Xceligent to another investor so a competitor could exist in the marketplace.
Now that competitor has vanished, but antitrust expert Tad Lipsky, who served as acting director of the FTC's Bureau of Competition this year before retiring in July, said that is not necessarily a precursor for the FTC to step in again.
"Even in a growing industry, if you do something so well and so efficiently, and consumers are so enthralled with it, if you take over the market, good for you," said Lipsky, a professor at George Mason University's Antonin Scalia Law School. "That doesn’t mean you can defend or get to that position by illegal means like predatory pricing, trying to deprive your competitors of access to inputs that they need, exclusionary conduct. So long as you avoid that, there’s nothing wrong with your getting a monopoly."
And while customers may complain about CoStar raising prices given its lack of competition, he said that is the firm's right as a valuable service in the marketplace and would not constitute illegal monopolistic behavior.
"It is not at all unusual for a highly innovative company that has a lot of technology and a lot of intellectual property to behave in ways that, even though they are perfectly legitimate, cause customers to have that complaint," Lipsky said. "But that doesn’t mean the complainants have proven an antitrust violation."
Ethan Rothstein contributed reporting to this article.