Zillow Group (Z), operator of the online house-hunting network that dwarfs all competitors, has the inside track for winning a dominant share of real estate agents’ digital ad spending.

“Their competitive position is quite strong,” said Macquarie Capital analyst Tom White.

While the homes-for-sale data that underpins sites like Zillow and Realtor aren’t proprietary, White notes that Zillow “is out-innovating its competitors in augmenting that basic listings data” with other data, including listings of homes not for sale, and by investing heavily in mobile.

Citing comScore data, Zillow says its five brands account for nearly two-thirds of the total online real estate category and nearly three-quarters of the mobile segment.

Yet White notes that there’s “a big disconnect” between Zillow’s majority share of traffic and its slice of the real estate advertising pie.

Turning clicks into commission for agents and more ad dollars for Zillow turns out to be easier said than done.

Fast Company

A partial explanation is that a big slice of real estate advertising dollars is going to companies that aren’t direct competitors, like Facebook (FB) and Alphabet’s (GOOGL) Google.

But the good news for Zillow is that it has been getting better and better monetizing that traffic, growing sales by upwards of 30% over the past year even as real estate agents have lowered their overall spending on digital advertising.

The bulk of Zillow’s revenue — 70% in the last quarter — comes from its Premier Agent program, where sales rose 32.5% from a year ago. Real estate agents pay to have their picture, credentials and ratings linked to Zillow’s listings of homes for sale, with up to four agents attached to each listing.

Home shoppers who don’t have an agent are likely to click on those with high ratings and a history of similar transactions, and that’s exactly what Zillow wants to see.

Zillow has a strategy to help accelerate the real estate industry’s evolution to the survival of the fittest. Zillow is looking to help the best real estate agents — the ones who can best capitalize on the leads that Zillow generates and will therefore pay the highest ad prices — to extend their domination.

“We are accelerating the broader trend across the real estate agent population of higher-producing agents gaining market share from those who are less productive,” Chief Executive Spencer Rascoff said on a November conference call with analysts.

Agent Overhaul

Rascoff also noted that Zillow overhauled the ways it sells ads to its Premier Agents last quarter. Under its old model, Zillow came up with a price for a fixed number of ad impressions based on a ZIP code’s characteristics.

But Rascoff noted that the fixed-price model sometimes sold out impressions in desirable ZIP codes, requiring the company to call up agents to increase ad prices. So now prices will be set dynamically, based on the total dollars agents budget to advertise on Zillow in a given ZIP code.

The goal is “to have the marketplace” determine ad costs, Rascoff told analysts.

Zillow, which reports fourth-quarter earnings on Tuesday, advised analysts on its November call that its guidance carried an extra margin of error because of the nationwide rollout of the new pricing strategy.

Analysts expect the company to earn 11 cents a share vs. a one-cent loss a year ago, as revenue rises 31% to $222 million. In 2017 revenue is expected to grow 23% to $1.038 billion.

Smaller Number, But Bigger Spending

The number of agents advertising on Zillow declined modestly in the third quarter to 89,147, but that was part of a planned shakeout. At the same time, the number of advertisers spending at least $5,000 per month rose 79% from a year ago, while average spending per agent rose 46%.

Tuesday’s results also will provide a checkup on two other new initiatives: a partnership with Facebook and Zillow’s first effort to monetize the sell-side of the housing market.

Zillow is partnering with Facebook to offer a precision-ad targeting program that enables real estate agents to connect on Facebook with home shoppers who are using its site or Trulia, its sister property acquired in early 2015.

Zillow also announced its Seller Boost program in October, involving the placement of Premier Agent ads on listings of its huge inventory of homes not for sale to provide potential leads for agents if the homeowner decides to sell.

Leveraging The Network

At the same time, Zillow is trying to leverage its large network of users — 164.5 million in the seasonally slower third quarter — to get a broader slice of advertising dollars.

Zillow’s marketplace for mortgages, which connects homebuyers to area mortgage lenders much like LendingTree (TREE), generated $19.8 million in revenue in the third quarter, up 57% from a year ago.

The traffic at Zillow properties is roughly triple that of its closest direct competitor, Realtor.com, which was acquired by News Corp. (NWSA) in November 2014.

Thanks to the merger with Trulia, Zillow removed a major competitor. Meanwhile fears that News Corp. might jump-start the growth and promotion of Realtor.com have been mostly unfounded, Macquarie analyst White said.

Bigger Slice Of Pie

By some measures, though, Zillow has a growing slice of a pie that has been shrinking in recent years. Borrell Associates estimates that real estate agents spent $7.7 billion on digital ads in 2016, down from $9 billion in 2014. Some 78% of real estate ad spending was done online in 2016, Kip Cassino, Borrell’s executive vice president of research, told IBD.

The decline in spending partly reflects a relatively modest pace of home sales, especially among millennials, Cassino says. The other reason is that agents “have become more discerning about how they spend,” using Google keywords, social media or unpaid search engine optimization strategies.

Still, digital spending, including spending on related technologies, has been growing as a percentage of agents’ marketing budgets, Zillow says.

Rascoff’s focus is making sure Zillow is “well-positioned for the billions of dollars of real estate agent ad spend which will surely migrate on to the internet over the next couple of years, and making sure that we’ve the right ad model to capture the lion’s share of that.”

After several days of losses, shares of Zillow reversed course late last week. The stock ended trading Friday up 1.6% to 35.93 and climbed another 1.9% Monday to finish the day at 36.62, right on its 50-day moving average.

Read more: http://www.investors.com/research/the-new-america/zillow-starts-bidding-war-for-prime-real-estate-between-agents/