OPINION: When Australian media company Fairfax reported its results late last week, the improved performance of its online real estate business, domain.com, appeared to violate a widely held “law” of the digital economy - that digital creates a winner which takes all markets.

After a number of years trailing behind News Corp Australia owned realestate.com.au (REA), domain.com appears to have narrowed the gap with its major rival and its aggressive strategy of growing its user base is translating into improved revenue. Closer examination however suggests this result might just be a temporary pause in a much more profound transformation taking place for digital in the residential real estate industry. One that is likely to see the emergence of a new set of players.

Can there only be one?

It’s become commonplace for observers of the digital economy to claim that digital creates “winner takes all” markets. The classic example is Google’s dominance in the search market. Estimates suggest Google accounts for more than 75% of search, and almost 90% of organic search traffic, with its major rivals, Microsoft’s Bing and Yahoo struggling to get out of single digits. This effectively places Google in a monopoly position and allows it to create enormous revenues through products like paid search and adwords.

Using this example it would be tempting to conclude that REA, having established a healthy lead over domain.com in terms of unique visits and exclusive listings, would pull away from its Fairfax rival and come to dominate the Australian residential real estate market.

Instead, Domain is closing the gap on its rival. In part this reflects domain.com’s aggressive strategy of driving traffic to its site, one that ironically parallels the approach taken by News-owned carsguide.com.au in its battle with caresales.com.au. It also suggests that domain.com’s focus on the user experience is beginning to pay off.

Unlike REA, which has made a virtue out of outsourcing all its development, Domain has retained in-house development expertise and this has given it the ability to more rapidly add new features that enhance the user experience, such as its mapping functionality.

While there are important lessons here for business about not giving up and continuing to focus on the customer, viewed in longer perspective, it’s hard not to conclude that domain.com’s improved performance might just be a temporary reversal of a much more significant transformation taking place in the domestic real estate market.

There can hardly be a market more ripe for disruption than residential real estate. Australian residential housing stock is worth an estimated A$5 trillion and the market is riddled with the type of information asymmetries and inefficiencies that emerging technologies are ideally suited to address. While REA and domain.com have displaced the listing of properties in newspapers, they have hardly transformed the industry. Rather they seem to offer a digital version of traditional real estate listings with a few additional bells and whistles. Both are underpinned by largely similar revenue models.

Reinventing the market

It’s worth remembering that before Google, search was dominated by Yahoo, Alta Vista and Netscape. Google transformed search by developing an algorithm based on relevancy that improved the results users gained from searching the web and by rethinking how it monetised search. Rather than try to keep users on its page and bombarding them with advertising, Google directed users away from its page and towards the pages they were looking for. It’s reasonable to expect that the residential real estate market is likely to undergo a similar transformation over the next few years.

It’s interesting to compare the very traditional approach of realestate.com and domain.com with the radically different business models that are emerging in startups looking to disrupt the residential real estate market.

A good example is openagent.com.au, an Australian-based startup founded by two young women who started their careers in consulting. Recognising the highly localised nature of real estate markets and the importance of agents, openagent.com.au takes advantage of publicly available data sets and user reviews to provide sellers and buyers with reviews and metrics on agents in their local areas. Rather than attempt to charge users for accessing the information, or agents for better listings, openagent’s revenue comes from the referral fees payable by agents who get listings as a result of the reviews on the site. This is a much purer digital play than either REA or domain.com. By providing them access to data in a usable form openagent.com.au seeks to empower buyers and sellers and increase transparency in this very opaque market.

Perhaps the most important lesson Fairfax could draw from the performance of domain.com is not that the winner takes all logic of digital markets is reversible, but that they should have the courage of their convictions and go all in on digital, in the residential real estate market. Rather than just try to close the gap on REA it should be seeking to build a business that will do away with the need for businesses like domain.com at all. It might just find that if the solution it develops is good enough, the law of winner takes all will reassert itself.

Nick Wailes, Associate Dean Digital and Innovation, UNSW Business School.

This opinion piece was first published in The Conversation.