Since late August Homestore shares have been below their $20 IPO price, a reduction in value which follows widespread market losses on Wall Street. But while some Homestore woes are plainly the result of overall Wall Street trends, questions about subscriber retention and the creation of a new site for homebuilders are hitting Homestore stockholders: Share prices have dropped more than 50 percent since late August.

Changing Prices

After a survey of real estate licensees, the Wall Street brokerage firm of Salomon Smith Barney said on August 24th that Homestore might lose 30 percent of its subscribers -- that's more than 100,000 brokers and salespeople.

Homestore (Nasdaq: HOMS) stock, which had closed at $21.58 on August 24th, reached $15.99 on Sept. 10th, a loss of $5.59 or 25.9 percent.

During the same period, the Dow dropped 7.84 percent (10,423.10 less 9,605.51 = 817.59) and the NASDAQ was off 11.55 percent (1,916.80 less 1,695.38 = 221.42).

Homestore closed at $10.03 yesterday, September 19th -- down $11.55 or 53 percent from the $21.58 close on August 24th. Given more than 100 million shares, shareholder value has declined by more than $1 billion in the past few weeks.

The Survey

Salomon surveyed 176 licensees affiliated with Cendant franchises. Cendant, a major Homestore shareholder, operates such real estate franchises as Century 21, Coldwell Banker, and ERA.

"We found broad enthusiasm," said Salomon, "regarding the importance and the role of the Internet in the real estate business. Given Homestore's category leadership, the encouraging overall sentiment about the Internet among real estate professionals is clearly positive, even if expected. Furthermore, among those surveyed who were familiar with Homestore's products, we found active use and involvement with the services."

Salomon, said, however, that "half of the surveyed i-LEAD subscribers were unaware of the service that Cendant has subsidized on their behalf."

Among i-LEAD users, Salomon found of those "who were introduced to the service via Cendant's bulk purchase and subsidy, nearly 50% told us they would not or probably would not renew on their own if asked to do so today. In summary, our survey leads us to the conclusion that 55,000-60,000 of Homestore's 180,000 Cendant-subsidized subscribers (about 32%) would sign up to pay for i-LEAD individually if the subsidy ended today. Against Homestore's current overall subscriber base of 368,000, the implied subscriber loss could be 30%, in our judgment."

Salomon's estimate means more than 100,000 brokers and agents could end their Homestore subscriptions -- 30 percent x 368,000 = 110,400.

Confirming Homestore Estimates

A review of Homestore statements back to February shows that the Salomon analysis is consistent with the company's own estimates: Homestore itself has been saying much the same thing for months.

• In a February conference call, Homestore told Wall Street analysts that the firm expected to retain 70 percent of its subscribers.

• In an April news release, the company said "renewals also contributed to the increase in professional subscriptions with the renewal rate consistent with prior quarters at approximately 70 percent."

• In July, the company announced that "renewals also contributed to the increase in professional subscription revenue with the renewal rate consistent with prior quarters at approximately 70 percent."

The bottom line: If you believe 70 percent of your subscribers will renew, you have to believe that 30 percent won't. The Salomon report simply affirms Homestore's own statements.

The Tougher Issues

What if Salomon and Homestore are both right?

Can the perception of Homestore as important and necessary within real estate continue if large numbers of subscribing brokers and salespeople leave the system?

The question here is not financial -- Salomon says the lost revenues in this case can easily be replaced. Nor is the matter managerial -- all subscription-based businesses lose some subscribers each year. It's conceivable that 30 percent of Homestore subscribers will not renew but that new real estate subscribers will take their place. It's even possible that the net number of real estate subscribers could increase over time.

Homestore is the leading real estate address online. It has the largest group of major sites, the most traffic, and key relationships with both the National Association of Realtors and the National Association of Home Builders.

But if 100,000, 50,000 or 25,000 real estate subscribers leave the system the word will spread. There will surely be cases where Broker Smith will tell Broker Jones that you can be on the Internet without Homestore. And if Homestore is seen as an option rather than as a necessity among brokers and salespeople, what will be the impact?

A Changing World

The initial reason many in real estate supported Homestore was the sense that without an industry-centered online presence real estate brokers would face the same fate as travel agents, booksellers, and stockbrokers -- three groups among many where traditional players have taken a beating from the Internet.

But such initial thinking is now dissipating. Many brokers, salespeople, companies, franchises, and associations have grown comfortable with the Internet, have their own sites, and generate traffic and business directly. The worry that the Internet would become a FSBO paradise is largely gone. Instead, the new test for real estate licensees is how to use the Internet at the lowest possible cost and with the best results.

NAR research shows that a typical buyer moved "just" 10 miles in 1999. Whether people move locally or long-distance, a growing number surely know how to use an online search engine to find brokers and properties in specific communities. Given such realities, there is an emerging debate regarding how best to market real estate on the Web: Centralized sites, local sites, or both? Should real estate licensees primarily promote national pages, pages for the company, or their own individual pages?

With NAR's Internet Data Exchange (IDX) coming online, many sites will soon be able to carry enormous volumes of listings. As IDX becomes more popular the online "landscape" will change, effectively creating new competition for Homestore.

New Homebuilder Site

Not only is Homestore the biggest player among real estate listing sites through its operation of Realtor.com for NAR, it also has a major site which lists 120,000 new homes.

Here too, fresh competition is emerging. Yesterday a new web service was announced, Newhomesource.com. The site is supported by 54 major homebuilders and includes "200,000-plus new homes in several thousand communities -- a dominant share of all the new homes being built in America."

The new homes site is owned by Austin-based Builder Homesite. The company says that the five largest home builders in the country sit on the board of directors, 32 homebuilders are investors, and another 22 will list their properties on Newhomesource.com.

Homestore has been in business for several years. It's no longer a start-up and early industry worries about the Web are gone. The result is that Homestore now has a new and different set of hurdles to overcome: Turnover among real estate subscribers, competition from local sites, and the development of a major new site for homebuilders must be seen as critical issues.

For more articles by Peter G. Miller, please press here.