Like other dotcoms trying to test new business models in the Internet economy, e-broker eHome is finding that it has to make some quick, seismic shifts in its business model in order to remain operational. But is the basic e-broker business model to blame?

Finding its recent four-month expansion into Florida to be a long ride for a short slide, eHome is letting go 12 Orlando, Plantation and Tampa employees and reducing its operations to a skeleton crew of six to maintain its presence in the state. While 150 employees will remain with the company in Texas, Washington and California, eHome plans to focus its remaining resources in key cities which may have a better chance for success.

Also disclosed by the company was its retreat from the progressive-sounding salaried field agent model back to the time-honored brokerage tradition of hiring independent contractors and paying them only when they produce sales, a fact that no doubt has the traditionals holding their sides with laughter. eHome may have slipped on a banana peel, but that doesn't mean it won't get back up again.

What eHome is finding out is that the agents are competing not only against other e-agents, but traditional agents who are willing to promote themselves as individual brands - with their own money. Personal advertising isn't built into the cost accounting of most e-brokers' business models, nor do they encourage personal promotion of their agents to consumers. In fact, most e-brokerages operate by serving the consumer with a team of agents with non-overlapping areas of expertise and duties.

Without having to make embarrassing pull-back announcements, some other e-brokers are quietly doing the same thing as eHome - consolidating their resources in cities where they have the best opportunity to gain brand traction. But are they doing so for the same reasons? To reserve cash, or to prove up the business model?

eRealty, out of Austin, is not planning any further expansions at this time, according to CEO Russell Capper in a recent phone interview. He says the company will hunker down and build the brand where they are.

zipRealty also has not announced any plans to expand and has not added any new cities since June, when it expanded into the Philadelphia market.

A notable exception to the build-where-you're planted strategy is Homebytes.com which is the only e-broker to expand to all fifty states, before attaining its most recent round of financing. The company has just closed a second round of $12 million, bringing the company's seeds to just over $30 million, including money also raised by Homebytes' subsidiary Owners.com.

A better guess is that companies are proving up the business model in the wired cities before rolling out to areas where consumers are less enamored of the Web. eHome got the lesson early and pulled back. Others may have anticipated that they would experience the same expansion problems eHome had in a less-wired market like some parts of Florida. So they got singed, and pulled back on their burn rate. That doesn't mean it's over, yet, but they have a lot yet to do.

Are backers a factor?

Homebytes got lots of publicity for its second round because it raised money from none other than America Online, Inc., and LandAmerica Financial Group, Inc. both publicly held companies who are leaders in their categories. Clearly the companies are planning a transaction-based strategy in which Homebytes will be the first national real estate company with AOL as its advertising portal and LandAmerica as the closing agent. Killer.

zipRealty is backed for an undisclosed amount by VC wunderkinds Benchmark Capital, which has been in business less than five years, but is able to count among its successful ventures eBay, Scient, Webvan, E-Loan, Ariba, and Critical Path, among others. Other investors include Vanguard Venture Partners and Barrington Partners.

eHome has been able to raise about $23 million in three rounds of financing from venture capitalists and strategic partners, including TMCT Ventures, AEW, Garage.com and Gary Sparks LLP., but although those partners may have successes under their belts, none have quite the instant name recognition of AOL or Benchmark, and in today's topsy-turvy Internet economy, new investors want little to no risk. They wan to know who has put their money down as well as how much, and they also want to know who is emerging as the market leader. If one can be identified, funding quickly dries up for all other comers. Just ask Realestate.com and Homes.com, who have both let large chunks of employees go lately in "redundancy adjustments." So there you have it, as dirty as it sounds, Wall Street loves a monopoly, and it could well be that eHome is not finding more VC because investors are anointing a category leader, and they aren't it.

eHome and eRealty are both seeking additional financing at this time, but that in and of itself is not an indication of solvency or lack thereof. A marquee name investor could make all the difference. One of the reasons Homestore's stock never crumbled to below its debut price was because of its do-no-wrong investors, particularly Goldman Sachs, which at the time of Homestore's debut was on an incredible winning streak. Just the whisper of a rumor that Benchmark is looking at HomeSeekers was enough to pull the stock out of danger of losing its NASDAQ trading position last week, and has kept it above the critical one dollar trading horizon for over five days. So the right investors and business partners do matter, and the bigger the name the better.

Duplication of efforts

One thing that could be hurting eHome is the fact that the e-brokers use similar metrics to decide which jurisdictions are appropriate for expansion. Duplicating expensive brand-building efforts, eHome has found itself going up against not only established traditional brokers but e-competitors with nearly identical business models in almost all the cities it serves, particularly Austin, Dallas/Fort Worth, Houston, Los Angeles, Orange County, Sacramento and San Diego where it is competing against either zipRealty or eRealty and others.

This raises the question why they don't merge and conquer? With nearly identical business plans, merging corporate cultures wouldn't be hard, and it could help them gain traction against entrenched market leaders with a bigger invasion of field agents. At the least, this would strengthen the message of the e-broker agenda - discount Web-based full service. But, if the companies aren't willing to merge, why not at least create strategic operating alliances with built-in referral agreements for markets of similar potential? Why couldn't one company open Atlanta while another takes Chicago? Then, should a merger take place, more key markets are already covered at half the cost the two companies would have had competing against each other, and the lower overhead would make merging more attractive.

According to Oldham, venture capitalists don't see it that way. "They believe that mergers aren't a good idea because you will temporarily increase your burn rate during the consolidation," he explains.

I guess that's why I'm not a venture capitalist. By that logic, there is no reason for anyone to get married either. That's like saying the high cost of weddings isn't worth consolidating households. With today's divorce rate, maybe that's true, but merging companies typically don't get divorced. But, hey, one good thing is I have a cool new reason to tell people why I'm not married. "My venture capitalist doesn't think it's a good idea for me to merge."

Are lower closing rates to blame?

Another problem facing eHome is low closing rates. eHome's current closing rate is about half what a traditional brokerage's is in the same market areas. Most brokers close approximately 40 percent of the homes they represent; eRealty's closure rate is less than half of that.

One reason for eRealty's lack of distinction may be an overreliance on automated lead capture tools, which rely heavily on e-mailing customers matches to their property requests. But that hardly wows e-consumers anymore since virtually all portals, franchises, brokers, and e-brokers do exactly the same thing. eHome needs a point of difference, like other ways to stay in touch with customers with information that they need so they will remain interested in eHome or its agents when they are ready to pull the trigger on a sale or purchase.

According to competitor Capper's research, e-customers can take as long as six months before closing a home, giving rise to speculation that e-customers may begin looking at homes far earlier than other studies indicate that they do. While eRealty has an internal newsletter and other tools to stay in touch with the consumer over that six-month period, eHome has spent its technology energies on a cool transaction platform. But that isn't the same as marketing, is it? You have to have the customer to close and getting customers is much harder to automate than closings, particularly when you are trying to build brand loyalty, not agent loyalty.

There is a surprising lack of creativity in attempting to generate a relationship online in a human-to-human way by most of the e-brokers, I think, mainly because the value of customer nurturance can't be quantified. The real goal of the e-brokers isn't to serve consumers but to go public. They have all tried to ramp up as quickly as possible with the least amount of programming and technology possible so they could expand the fastest and be the first one on the NASDAQ. But customer nurturance is one area that shouldn't be overlooked in favor of other services that can be automated, and that is the lesson all e-brokers need to take to heart. Without customer nurturing tools, e-brokers could end up looking more like their offline traditional competitors than they may want to do, which is exactly what is going to happen to eHome with their commission-only agents. Nurturing can be automated, too, and it's never too late to incorporate it into the business model. Just ask HomeAdvisor, which keeps adding automated nurturing tools that don't result in immediate sales, but keep customers coming back to the site, over and over.

Oldham, at least, recognizes the problem and is planning to take steps to provide more "high-touch." Hopefully, the new commission structure, two percent on the listing side to eHome and full cooperation with co-brokers will give the commission agents more edge with potential sellers.

For those of you still sniggering over eHome's slip, it's only fair warning to tell you that eHome may have the last laugh yet.

As part of its new initiatives, the company will also be rolling out new business alliances, including its new partnership with Kaufman Broad, one of the nation's largest new home builders. In a sweetheart deal for the builder, eHome will market about 1,400 new properties with a new avenue of visibility on its Internet site, and collect commissions only when eHome represents the buyer side of the transaction - at one and a half percent commission. This deal alone could revolutionize online builder/agent relationships if the Los Angeles test marketing of the concept goes as planned.

See? Marquee names do help.

What do you think?