Glad to have the AOL arbitration settlement "in the rearview mirror," Homestore CEO Mike Long and lead negotiator on the AOL settlement, executive vice president corporate development group Allan Merrill, are looking forward to a bright future for Homestore.

What does the settlement mean for Homestore? AOL and Homestore had been at odds over payments. Homestore wanted more attention to Homestore from AOL, and AOL wanted to get its hands on large balloon payments due the company promised in a 2000 contract written between previous management at both companies.

"It was a bad contract," explains Long. "We were staring at a $57 million contractual payment in July. We were disputing that all the services had been delivered and went through arbitration. They hadn't ruled yet, and we were seeking a business settlement. We came out of the settlement with that payment eliminated, we retained exclusivity, and lowered our go-forward carriage costs by two-thirds. We have a better distribution arrangement, but our costs are about one-third what we were paying under the old agreement."

Merrill was the lead negotiator on the settlement and managed the event from day to day. How difficult was it to pull an elephant out of a hat?

"It was an extraordinary environment," recalls Merrill. "These are two public and prominent companies, and everybody wants to write about us, but if you strip all that away, AOL is the largest source of online audience, and we are the real estate leader. Shame on us if we can't figure out a way to work together. With the changes in personnel, we were able to hammer it out."

"There's no question that the one with the greatest leverage was AOL," says Merrill, "but we do offer a unique service and there isn't a comparable service. The content we aggregate offers AOL users a lot of benefits. They also got a $90 million draw down, a $7.5 million payment, and a new agreement, so they ended up with things they wanted, too. Both sides wanted to do business going forward. We had to balance the past, present and future. We tried to get all three lined up so that we have a settlement that makes sense and an attractive deal for our customers."

Just how important is AOL traffic to Homestore? "We don't release our traffic numbers by source," says Merrill, who says the new agreement precludes the forecasting of revenues, "but it is important. It isn't life-threatening, but it is very desirable and our customers benefit."

Adds Long, "The parties have agreed that we have settled, and no one is taking a victory lap. We had alleged that they hadn't done everything to promote Homestore, but when you reach a settlement, both sides walk away and say 'I'm happy,' and neither side gets poked in the eye."

In fact, the companies are extending their revenue-sharing agreement. What do shared advertising revenues mean?

Explains Merrill, "This is a subject of confidentiality since April 2000. There are categories of advertisers when they advertise with AOL, AOL is required to share with us a certain portion of those revenues, and the justification is that if they didn't have our content, there wouldn't be screens to provide advertising on."

Since taking over the helm of Homestore, Long and company have faced an SEC investigation (the company was cleared,) major revenue negatives (the company now reports itself cash-flow positive), and the AOL dispute. One by one, Homestore has put these threats behind them.

Only one remains.

Both AOL and Homestore are embroiled in a class-action lawsuit in which both companies and their former management have been accused of fraudulent behavior by shareholders. With that sword hanging over both companies, the time seemed right to kiss and make up. Is there any progress on that front?

Says Long, "It's a reality that it is difficult to resolve quickly. This isn't a negotiation and settlement like a business deal where you align business objectives. There are law firms involved that represent the plaintiffs. We believe that California State Teachers' Retirement System is a sophisticated investor, but they will have to reach agreements with all the consolidated shareholders. It takes a lot of time and patience. We have never forecast a quick settlement; when there were more suits pending we did forecast they would consolidate. We hoped that a sophisticated lead plaintiff would be appointed and that happened. Now we have a dialogue with the plaintiffs to resolve this - because of the number of parties it takes time. I remain optimistic that this willl be resolved affordably, and allow us to develop as an independent company."

Meanwhile, there's reason to break out the champagne.

"We've got the water bottles out," jokes Merrill.

Bob Goldberg, NAR's senior vice president of marketing and business development tells Realty Times what he thinks the AOL/Homestore settlement means for Realtors. Homestore is the operator of Realtor.com, the NAR's listings and information portal for consumers.

"NAR is very happy that this issue has reached a positive conclusion," says Goldberg. "This clearly benefits our Realtor members by ensuring the large number of consumer eyeballs on AOL looking for real estate can be directed to Realtor members on Realtor.com."

Says Long, "We will increase the traffic and qualify home seekers to our customers. We are going to maintain our leadership. It is an exciting event, and a dark cloud of unresolved stuff is now in the rearview mirror. That's good for customers."

Published: January 10, 2003

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