Homestore just announced diminishing quarterly losses last week after an extremely expensive year spent righting many of the wrongs of past management. The company, says management, is well positioned moving forward with stable revenues, and looks eagerly toward the spring launch of its new Website which the company promises to be more REALTOR-friendly with many more advertising opportunities for Realtors.

Homestore is trying to overcome a terrible past in which former management inflated revenues and struck questionable deals to make the company a dot-com Wunderkind. Now, as former managers plead guilty to securities fraud, and the company continues to face a huge class-action shareholders suit, any progress is tedious at best.

One of the major obstacles in revenue generation for Homestore is the investment by real estate giant Cendant into the company, which has alienated many other competing brokers and agents. Some see buying Websites from Realtor.com as putting gold in their competitor's war chest. Realtor.com, which Homestore operates for the National Association of Realtors, is supposed to be for all Realtors.

Yet, two recent controversies may make those competitive concerns less relevant.

• The NAR recommendations on virtual office Websites (VOWs) are about to go before membership for comments. Cendant Real Estate Division leaders have already publicly stated their preference that VOWs be regulated so that they can't be used in referral schemes to use MLS database listings to charge referral fees back to participating brokers, among other concerns. If the NAR leadership votes to allow VOWs to continue unregulated, listings from NRT and Cendant brands could be pulled from local MLSs, and a Cendant MLS put in its place. This could be a huge boon to Realtor.com if Cendant brand brokers choose Realtor.com advertising over companies who advertise listings in order to charge referral fees to brokers. Third-party advertisers such as Yahoo! and Realestate.com could find their real estate divisions hurt as the nation's real estate community divides itself.

• One of Realtor.com's largest competitors, Realestate.com, which pushes referral fees instead of front-end advertising fees, has been caught red-handed misusing listings in a scheme to benefit itself, Lending Tree and others. As brokers and agents worry about how their listings are being used and by whom, an advertising company like Realtor.com, which operates under the supervision and restrictions of the NAR, which does not allow Realtor.com to charge referral fees, could look even more attractive.

Richard Smith, CEO of Cendant's Real Estate Services Division which boasts over 12,000 residential and commercial franchised real estate offices and more than 200,000 sales associates affiliated with the Century 21®, Coldwell Banker®, Coldwell Banker Commercial® and ERA® brand names, plans to speak to the company's brokers at this week's convention in San Diego where he will outline his concerns about the VOW and referral fee controversies at general session speeches to all three brands' brokers and agents.

"Their Primedia's business plan is no mystery," Smith told Realty Times last week. "In a recent meeting with the senior management of Primedia, they explained to me that their business plan is to manage - for a referral fee - leads from their site to the brokerage community, establishing a relationship with the consumer and, in effect, minimizing the role of the real estate professional. It is my opinion that they envision a future where their Web site stands between the consumer and the real estate professional in every home sale."

Many brokers who are not affiliated with Cendant are siding with the corporate giant, says Cendant leaders, in its views that VOWs should be regulated and that certain referral business models don't offer value to brokers and instead raise the cost of leads to an unsustainable level for brokers and their agents.

This is music to the ears of Mike Long, CEO of Homestore, operator of Realtor.com.

"It's such a simple model to explain," says Long. "You take a third of the income of an industry, and you give them traffic."

"Of course they look at the history of the industry," explains Long. "With referrals, brokers pay each other a zero sum gain. Nobody is hurt or disadvantaged. But now that money is being sucked away. How many broker models could survive by paying a 35 percent business tax? They are going to pass the cost on to the agents, but the agents can't make it either. It is seductive to pay in arrears and tell yourself that it is not a real cost. As more leads get sourced on the Internet, that's lack of strategic thinking and foresight."

Long says he thinks there are some smart people who are going to figure "this one out." "Richard is one of many who have," says Long. "I'm not going to speak negatively of Lending Tree. It is the strategic implications that if they (brokers) acquire Internet traffic through a referral model, it isn't affordable. We are going to have to impose the advertising model on these search engines in a coordinated industry response."

He says he is "impressed with the industry's ability to mobilize. "This is a real threat," says Long. "When this issue has been explained, there has been a universal negative response."

Yet, some of the biggest brokers are doing business with these companies. "When they fully understand the implications to their business model and calculate the true costs of these relationships, they will look for alternative sources. We think Realtor.com represents one of those sources."

He continues, "We are inside the tent of organized real estate. We don't have the referral fee issue, and that minimizes the impact. We'll deal with what is the cost of traffic from a number of industry sites."

Long says the industry needs to do three things right now:

1. Educate brokers and agents about the true cost of leads
2. Put in place policies that protect the interests of organized real estate
3. Organize

"There are smart people who will apply ways to disintermediate the Realtor," warns Long. "We have to be careful that our policies aren't self-inflicted."

What does Long mean by "organized real estate?"

Replies Long, "Increasing what I call the organized Intranet of organized real estate, so their (consumers) first point of contact is with an industry site. That reduces the impact of emerging referral models. One of many sites that we need to more effectively network are franchise.com, broker.com, and agent.com."

Realtor.com's challenge is then to convince as many Realtors as possible that doing business with the portal is a fair price to pay for third-party Internet traffic. While other competitors crown themselves with the halo of consumer-friendliness because they share their referral fees with consumers in the form of rebates, Realtor.com has to be more effective as an ambassador of Realtors to the consumer community.

"There is a cost associated with providing services to transactions," says Long, "and that there are some consumers that are capable of doing it without help, yes, but they are a small minority. But these sites that say they are serving the consumer are being disingenuous. They are after participation in the transaction fee, and the larger the better. That is what creates the opportunity to give money back to the consumers. They aren't just making the industry more efficient as they claim.

What about the brokers who support these other companies?

"Their intentions are honorable," concedes Long, "and unlike a few years ago, they have growing confidence that the Internet can help build their business. I think we have we have won the argument that this (Internet consumers) is real business. They are motivated to quickly drive incremental business and improve market share and this looks seductive in the near term - 'I only pay if I generate business.' Third, they are aware that traffic on the Internet isn't free, they have achieved a certain level of traffic, and as they become more dependent on the Internet, they need to increase traffic, and this looks good. But the unintended consequences are significant. If these providers can make their sites the first point of contact, register them, then they can demand referral fee, and as power increases and then the referral is imposed on all brokers' business. They haven't spent the last few years negotiating for traffic like we have, and these are very aggressive people we are talking about who are trying to protect shareholder value, and this looks like a straightforward way to do it based on the corporate relocation model and that is to sell traffic back to the industry."

So what's next? A lot will change with the recommendations proposed by the NAR on VOWs and referral fees that stem from VOWs and Internet data exchange (IDX) technologies.

"We have an obligation to share everything we know about creating consumer traffic on the Internet, and we have to share more effectively," says Long. "I think we need to be part of the industry but not drive the industry policy response. That has to come from leaders of organized real estate. We are part of the mobilization. From an organizational response to use the Internet to support the transaction, I think Realtor.com should prove to be the industry's biggest asset to generate traffic without a referral fee, using an advertising model and paying for that model by a re-allocation of marketing dollars by spending money online. It will cost the industry less. In an organized way, we will respond to third parties. They cannot be allowed to hijack this industry by shrinking its margins."

Long hopes his rallying message will dovetail nicely with changes in Realtor.com's advertising products and strategy. "We've made proactive changes since spring last year with a redesign to make the advertising model work better. The new site will be fully operational in three weeks. We think by making it the most effective and easy to use advertising site on the Web that the advantage is going to become more evident. We see it as major opportunity because customers are going to win. The Internet should be used as a forum to promote properties and Realtors and their brands. We are going shoulder to shoulder with the industry."