The news from Homestore.com was hardly unexpected: After months of falling share prices on Wall Street, ongoing broker complaints, and doubts regarding its business model, the online giant announced yesterday that an "organizational realignment and cost reduction plan" were underway.

The company said it would "focus the company more tightly on its core customer segments" and that as many as 700 jobs would be lost -- about 20 percent of the company.

The stock closed at $6.25 on Thursday, down .$25.

What's happening?

In essence, the core of the company's operations have been questioned by a number of Wall Street analysts.

• In May, Merrill Lynch analyst Henry Blodgett said the company was a "buy" but took issue with the way the company reported the use of stock to obtain services. Blodget said Homestore's use of stock is a "legitimate, defensible, and even shrewd decision for a young company with a strong currency, in that it conserves cash." But, he explained, when the company reports pro forma results to investors, they "exclude some non-cash, stock-based expenses that we regard as operating expenses."

• In July, Blodget issued another Homestore report, this time downgrading the company to "accumulate" from "buy." The concern, said Blodget, was that Homestore "continues to generate incremental revenue per subscriber through price increases and the rollout of additional products, and continues to develop other subscription markets, such as rental agents and home builders. This said, we do not yet have enough detail about the composition of the professional services revenue line to be comfortable that the company can maintain similar sequential revenue increases for the next several quarters."

• In September, a survey by Salomon Smith Barney suggested that more than 100,000 current subscribers might not re-new with Homestore. Nevertheless, said Salomon, "We found broad enthusiasm 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." The Wall Street firm rated Homestore "3H" meaning neutral, high risk.

But the biggest problem for Homestore as well as real estate advertising sites in general is this: Broker results from online marketing are mixed.

According to The 2001 National Association of Realtors' Member Profile the "use of e-mail is related positively with personal income. Realtors who use e-mail have a median gross personal income that is $16,200 higher than those that do not use e-mail."

The report also says something else: Despite the hype, most brokers get little business online. Among NAR members, 29 percent generated no income from the Internet, 49 percent generated less than 10 percent, 14 percent of all Realtors generated 11 to 25 percent of their income from the Web, 6 percent of all NAR members earned 26 to 50 percent of the income from Internet marketing, and a scant 3 percent get more than half their business online.

Reading these numbers, it's clear that brokers need e-mail. But beyond that, how much are brokers willing to pay for an online presence, especially when they likely can be found on individual, broker, franchise, association, MLS, local, regional, and national sites?

Homestore has scheduled a conference call for Nov. 1st and the questions from reporters will not surprise anyone:

• Is the Homestore business model viable? Can the company generate GAAP net profits? When?

• What is happening with the subscriber base? Is it increasing or decreasing? How many subscribers are projected in six months?

• Is revenue per subscriber increasing or decreasing?

• What is the subscriber renewal rate?

• Is non-subscriber revenue increasing or decreasing?

• What is the cost of the re-organization? What revenues and services were lost with the release of as many as 700 employees?

• How much cash does the company have on hand?

• What steps will the company take to attract new subscribers and retain existing broker customers?

• How will the introduction of Internet Data Exchange (IDX), scheduled for January, 2002, impact the company? Under IDX, brokers will be able to display MLS listings on their individual web sites.

• What new products and services does the company expect to offer in the next six months?

• What products and services does the company expect to discontinue in the next six months?

• Are any changes expected among top management?

• Given the current valuation of the company's stock, will it buy back shares on the open market?

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

Published: October 26, 2001

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