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Real estate lacks network effects, and I’m ok with it

Am reading a biography of Lew Wasserman, one of the most powerful people in the history of Hollywood, and it’s giving me plenty to think about.

Lew took over MCA, the first real powerhouse talent agency, from Jules Stein, its founder. Stein started MCA representing bands that played at dancehalls (this is way back, in the 1920s and 1930s).

Stein discovered a really powerful network effect that he used to grow MCA from nothing into the most powerful player in its market.

It worked like this: The more bands he represented (particularly popular ones), the more power he had over dancehall bookers. The more power he had over dancehall bookers, the more attractive he was to bands. Over time, he leveraged this network effect into exclusive relationships with talent and dancehalls, and from there into radio and them, with Wasserman’s help, into movies and TV.

Network effects are among the most powerful forces in business. When you harness them, you get rapid growth and, eventually, really strong margins for the dominant platform. Think of eBay: The more sellers, the more buyers, the more buyers, the more sellers. Or Uber: The more drivers, the more riders, the more riders, the more drivers. Or AirBnB: The more rentals, the more renters, the more renters, the more rentals. And so on.

I’ve always lamented the lack of network effects in real estate. It’s just not the case that it gets easier to rent apartments, the more apartments you manage. Nor does it get materially easier to buy deals as you buy more.

But this morning, as I was feeling down about the fact that our business can be a real slog, it hit me: The lack of network effects in real estate is the reason the business is so fragmented, which is what has allowed a newcomer like Adaptive to find and grow a niche.

You can’t be the 8th largest rideshare business and thrive. Or the 785th largest online market for secondhand goods. But you can generate very strong returns for your investors, and a great living for yourself, being the 2,016th largest multifamily owner.

Author Moses Kagan/Posted on 03/19/2019/Categories Uncategorized