Amid FTC Probe, CoStar Now Faces The Dreaded Word 'Monopoly'
With the Federal Trade Commission stepping in to block CoStar Group's $588M acquisition of RentPath, the Bethesda, Maryland-based real estate data giant is under scrutiny over whether its dominance makes it something it has long denied being: a monopoly.
The FTC said on Monday it has filed an administrative complaint against CoStar and authorized a lawsuit against the company, alleging that the acquisition of RentPath would concentrate too much of a specialty niche in CoStar's hands by consolidating internet listings for vacancies in large apartment complexes in one place. The FTC had signaled its interest last spring when it quickly asked CoStar for more information after the deal was announced in February.
This isn’t the first time the federal agency in charge of regulating fair competition has taken action against CoStar.
Eight years ago, the FTC blocked CoStar from acquiring all of LoopNet, forcing it to spin off its commercial real estate data arm Xceligent to act as a competitor before ultimately allowing the acquisition to go through. Five years later, Xceligent went out of business while it was facing a lawsuit from CoStar.
RentPath operates Rent.com and ApartmentGuide.com and had filed for Chapter 11 bankruptcy. The bankruptcy court approved the sale in the summer.
Now that CoStar has aggressively moved into the residential market, regulators are taking a closer look.
"CoStar is going for a monopoly in residential listings, to add to those it has in the commercial space," Morningstar analyst Yousuf Hafuda said. "The reason commercial brokers pay the high rates for CoStar Suite is that there isn't an alternative. The second example is LoopNet as a means to market properties online, and advertising rates are high there as well because CoStar is large and powerful, and there's no alternative to it.”
In the short term, Hafuda said he doesn't expect the move by the FTC to have a significant impact on CoStar, and the market thus far seems only slightly concerned, with CoStar stock dropping from $919.72/share at the beginning of the day Monday to $888.88/share by the end of the trading Tuesday. But in the longer run, the FTC's action could slow or even prevent CoStar from consolidating a grip on apartment listings, Hafuda said.
CoStar CEO Andrew Florance did not respond to requests for comment from Bisnow on the FTC’s move. CoStar declined to comment on the agency's action beyond a brief statement.
"We believe the FTC is wrong in its assessment of our transaction [and] are examining our options," a CoStar spokesperson said in an email.
As of Tuesday, the FTC has declined to comment on the CoStar-RentPath investigation beyond its initial statement, but agency spokeswoman Betsy Lordan told Bisnow by email that in any merger case, the FTC alleges competitive harm.
"The agency brings such a case because it believes the merger will harm competition," she said. "When the FTC sues parties to the merger and the parties have not agreed to a settlement to resolve the complaint, then either the companies decide to abandon the merger or the case goes to court."
Almost since its founding, CoStar has grown through acquisitions, buying more than 30 companies. Over the past 10 years, the company has spent about $3B on M&A, using equity and debt in roughly equal measure.
Even as most of the economy, including real estate, has faltered this year, CoStar has grown. The company brought in $426M in revenue last quarter, an increase of 21% over Q3 2019, and while its net income dropped year-over-year, the company beat analysts' statutory profit projections by 32%.
"I hope you can agree with me that these results indicate that our business is not only resilient, but is in fact countercyclical," Florance said on the company's most recent earnings call. The company recently raised $2.7B in equity and debt to pursue further growth, Florence has said.
"Those other transactions will happen," Florance told Bisnow when the company announced its plans to buy Ten-X this year. "They are good companies that their balance sheet just simply won't weather this storm. We're having conversations with those folks."
But University of New Haven associate professor Rob Sanders, who studies antitrust law, notes that a pattern of aggressive acquisitions can also catch the attention of regulators.
"A number of factors go into an antitrust regulator's calculations," Sanders said. "A rise in the level of complaints to Congress, or obvious turmoil in an industry, especially a major industry that affects the wider economy, are red flags that regulators might notice. The piece of an industry that is No. 2 will howl like a hurt dog that they are in an unfair competitive market. Complaining the loudest is part of the process."
A String Of Complaints
As CoStar has turned its business providing digital, property-level data into a $35B tech goliath, it has generated heaps of complaints from its faithful subscribers.
"CoStar is the only organization that I deal with that is widely hated by its customers," Meybohm Commercial Properties agent Jonathan Aceves told Bisnow last month. "You don’t talk to them. They will sell your data to you, and every time they acquire a competitor, they raise their prices.”
After CoStar bought CRE auction platform Ten-X earlier this year, Cushman & Wakefield CEO Brett White expressed concern that CoStar was infringing on brokerage territory, while also demonstrating just how much the industry relies on Florance’s firm.
"From the earliest days of CoStar, what I've always said to Andy is, 'So long as you are a noncompetitive utility for the industry, we are going to be fervent supporters,'" White said in June on Walker & Dunlop's Walker Webcast. "If you cross a line, either to go to nonutility pricing or to be competitive, you need to know that the industry at some point will respond in one form or another. And I think with the recent purchase CoStar has made, it feels like we may be getting closer to that inflection point."
Aceves said he believes CoStar ought to be broken up, and he has started a petition on Change.org to push for such action. Other brokers agreed with that, telling Bisnow the company makes competition nearly impossible.
"I think that CoStar is almost a monopoly ... and overpriced for the value," said Janice Sangster-Phalen, a broker at eXp Realty in California and Nevada. "What they did by limiting access to the public on searches on LoopNet isn't right. I can't publicize my listing fully without a subscription and the public can't access the information, unlike with Zillow, Redfin or Realtor.com."
CoStar uses its position to squeeze brokerages by requiring all of the individual brokers at a company to subscribe — or none will get access.
“For us, it would have been between $400 and $700 a month, times the number of brokers here, about a dozen,” Aceves said. “That would have been almost our largest monthly expense. I would spend that much myself to have access to the research platform, which is high quality. But some of our brokers practice in a different area and don’t need the research I need, so the company wouldn’t go along with the expense.”
CoStar has sued its users for sharing passwords. Florance called people who access its platforms without permission “freeloaders” in 2018 when he declared plans to start going after password-sharers in court. CoStar sued seven small brokerages in a blitz of lawsuits alleging theft later that year.
"If those efforts fail to correct the problem, we plan to seek monetary judgements," Florance said at the time. "We're pretty good at that. We never want to litigate, but it is the reality of our business."
Down This Road Before
It has been eight years since the FTC decided one of CoStar’s dozens of acquisitions could put the real estate industry at risk of falling prey to a monopoly.
In the last clash between the regulator and the company, CoStar was on the cusp of being a massive market changer after it and competitor LoopNet had agreed to a landmark, $860M acquisition deal in 2012, but the FTC stepped in. The FTC forced LoopNet to sell Xceligent, which it said needed to operate as a separate entity to ensure CoStar’s position didn’t become too dominant and approved the deal.
“The listings databases and information services provided by these companies are critical to their customers in the commercial real estate industry," Richard Feinstein, then the director of the agency's Bureau of Competition, said in a statement at the time. "By maintaining Xceligent as an independent competitor and ensuring Xceligent's ability to grow and expand, the FTC's settlement order will foster continued competition in these markets."
Four years later, CoStar took Xceligent to court for stealing thousands of images from CoStar's website. Xceligent filed an antitrust countersuit against CoStar, alleging anticompetitive behavior and accusing it of acting as a monopoly. Less than a year later, Xceligent was gone.
The FTC appointed a monitor to ensure CoStar complied with the terms of the approved transaction: Guy Dorey, who four years earlier had sold his Atlanta-based commercial real estate information service to CoStar. Dorey hasn’t commented publicly on the case since his appointment in 2012 and declined to comment for this story.
When Xceligent filed for Chapter 7 bankruptcy and closed suddenly in December 2017, the average monthly price CoStar charged new customers jumped about 80%, from $255 per broker to $466 per broker, The Real Deal reported in 2018.
In the end, CoStar had the last word. The data giant won an award of $500M in 2019 against the now-defunct platform, which was more of a point of pride for CoStar than a monetary windfall since Xceligent's insurers agreed to pay CoStar only $10.7M — every last penny of the entity that Doug Curry founded in 1999.
"We're very glad to have it, $10.7M is nothing to sneeze at, but it doesn't cover half our costs," Florance told Bisnow after the win. "I think it's a pretty big deterrent that basically shows the next folks who decide to systematically scrape our websites that, in fact, the law is clear, and it's not a way to make money."
A Growing Empire
More acquisitions would certainly be in character for the company, analysts said. Almost since its founding in 1987, CoStar has been busy absorbing companies and competitors.
While its biggest buy is still LoopNet for $860M, CoStar bought Ten-X for $190M earlier this year and hotel research company STR for $450M last year. Just last week, it agreed to buy residential listing app company HomeSnap for $250M, and in October it agreed to buy German CRE data company Emporis. Florance described the size of that deal with his signature bravado on his company’s most recent earnings call.
“It’s in line with the coffee budget, and lately we haven’t been using much coffee here at CoStar," he said on the Oct. 27 call.
CoStar has focused most of its acquisition energy on the apartment listing market in recent years. Before trying to buy RentPath this year, CoStar bought Apartments.com for $585M in 2014, acquired ApartmentFinder.com for $170M in 2015 and bought ForRent for $385M in 2017.
Over the years, litigation has been another arrow in CoStar's quiver when it comes to dealing with competitors. CoStar has filed more than 32 copyright-related lawsuits since 1999, many of which involve similar copyright infringement claims, and it has a habit of alerting favored media outlets when they file them, including Bisnow. In 2017, a judge ordered Apartment Hunters to pay CoStar for stealing listings, and in 2016 RealMassive agreed to settle a copyright infringement suit for $1M.
Most recently, the company accused CREXi, a small competitor, of having its employees access CoStar's database over a million times, and alleged that it found more than 10,000 CoStar images on CREXi's website. CREXi has emerged in Xceligent’s place as one of the only alternatives to CoStar’s CRE data products.
“Maybe CREXi or some other services will gain some traction,” Sangster-Phalen said. “I hope so.”
CoStar's litigious propensity has made other CRE data specialists, even if they don't compete directly with CoStar, careful about what they do.
CoStar sued four CompStak users in 2014, alleging they stole CoStar data and uploaded it to CompStak.
"We've put technical measures in place so that when we receive data from our members, if the word ‘CoStar’ is in anything, that data is flagged,” Mandel said. “We won't take any data that has anything tied to CoStar, because we don't have any interest in their data."
Next For CoStar
For now, the market is watching to see what could be next for the company. The FTC’s action is merely the beginning of a process with uncertain consequences for CoStar, not only for its attempt to acquire RentPath, but also its future in residential data.
“The move could prove troublesome for CoStar in pursuing future acquisitions,” Morningstar's Hafuda said. Keeping CoStar from upping its residential data game isn’t going to damage the company’s existing strong position in CRE data, he added.
“It’s one thing for the FTC to challenge an acquisition that has been announced,” Hafuda said. “It’s a completely different thing for the U.S. government to break up an existing company. That’s much more rare.”
In November, not long after the election, FTC Chairman Joseph Simons said in remarks to the Antitrust Section of the American Bar Association that a pattern of acquisitions could lead the FTC to take action against a company for monopolistic behavior.
"From a competition perspective, a monopolist can 'squash' a nascent competitor by buying it, not just by targeting it with anti-competitive actions,” Simons said. “In fact, from the monopolist’s perspective, it may be easier and more effective to buy the nascent threat, even if only to keep it out of the hands of others, than to target it with other types of anticompetitive conduct."
Congress has held hearings examining whether tech giants like Google, Facebook and Amazon are violating the country’s antitrust laws, events that highlighted the concentration of market power among tech giants and the additional scrutiny the industry is attracting.
"Perhaps the FTC is moving to prevent the kind of blunders it committed previously in allowing some of the tech firms to grow as large as they have," Hafuda said. "So they're looking to pay closer attention, and that includes CoStar."