When should MLS services be ‘core’ and when ‘optional’? (Potential CMLS topic 4)

(Note: Shelley Specchio is CEO of the Northern Nevada Regional MLS, Inc., a host of the CMLS Conference in Lake Tahoe, September 30 – October 2. She and I have been discussing topics for the legal panel there. Shelley wants input and feedback from those likely to attend: Which legal topics are of greatest interest and what aspects of them are most important for MLSs? I agreed to do a series of blog posts on some of the candidate topics, cross-posting links to them in other forums and asking folks for their input. This is the fourth. If you have other topics to suggest, email me or comment on any of these posts.)

Almost every MLS is bombarded with proposals from service providers to cooperate with them in the delivery of their services to MLS subscribers. If after reasonable research the MLS believes that a service aligns with MLS’s strategic objectives and will provide real value to MLS’s subscribers, the MLS may decide that it should offer the service. The next question, and one that often challenges MLS executives and boards of directors alike, is whether to deploy the service as ‘core’ or ‘optional.’

I’ve broken this topic into four posts to avoid one giganto-post. As usual, I’ll start with some definitions to get us on the same page; then I’ll look at NAR policy on the issue (for those MLSs that are bound by it); third, I’ll provide some of the arguments for and against making services ‘core’; last, I’ll touch on the legal dimension (but only briefly).

What do ‘core’ and ‘optional’ mean?

In simple terms, a ‘core’ service is one that all MLS subscribers pay for, whether they use it or not. An optional service is one that has a fee associated with it; if the subscriber declines the service, she does not pay the fee.

In practice, things are a bit more complicated. Often MLSs offer optional services where the fee associated with the optional service does not exactly match its costs to offer the service. The MLS may collect less than 100% of its costs to operate the optional service; in this case, all MLS subscribers are subsidizing the service. In a way, that means all MLS subscribers are paying a portion of the service’s costs, whether they are using the service or not. That makes the service look a little more like a core service. This may not result from any attempt of the MLS to subsidize the service. For example, if the new service takes two or three years to reach peak adoption levels, it is likely that the first year or two will be unprofitable and that later periods will make up for that.

The MLS may also collect more than 100% of its costs to operate the optional service. Many MLSs do so in order to make a reasonable profit and support establishment of appropriate reserves and research and development. An MLS may collect substantially more than its costs to operate the optional service; in that case, it is making the subscribers to the optional service subsidize the general operations of the MLS.

So, my vocabulary:

An ‘optional service‘ is one that (a) subscribers must pay an extra fee to use and (b) the MLS makes reasonable efforts to break even or make a profit on the service over the service’s lifetime.

A ‘profitable service‘ is one that (a) subscribers must pay an extra fee to use and (b) the MLS makes efforts to make a profit on the service in excess of that profit necessary to fund R&D and a reasonable reserve. (Every profitable service is also an optional service; profitable services are a subset of optional services.)

A ‘subsidized service‘ is one that (a) subscribers must pay an extra fee to use but (b) where the MLS does not plan to recover all the costs of the service from the fees it charges.

A ‘core service‘ is one where all the costs for the service are included in the base periodic broker/agent/office fees; that is, all brokers and agents are required to pay for the service whether they use it or not.

Next: How NAR policy sees this discussion