Great radio portrayal of how the real estate/mortgage bubble happened

It's always struck me that the news stories covering the real estate/sub-prime bubble and collapse have either been very superficial or too complicated for the average person to understand. When a friend or colleague casually chalks the problems up to "greedy Wall Street," "stupid consumers," "unprofessional real estate brokers/mortgage brokers/appraisers," I wanted something I can refer them to – a source that will give them a more nuanced understanding of what amounts to a very complicated problem. I didn't have one.

That changed yesterday – I listened to a one-hour program on public radio's This American Life, called "Return To The Giant Pool of Money," that provided the best balance of nuance, completeness, and comprehensibility to this subject that I have heard so far. Normally, I find this program a little annoying (not sure why), and even this episode gets a little sentimental at the very end. But if you want friends to understand how we got into this mess, regardless of their level of education or familiarity with economics and the business, I recommend this program.

Looks like it's only available on iTunes as a podcast for a week after it plays on the radio. So if you want it, get it now!

-Brian

Bonuses and Conditions on MLS Offers of Compensation

Ok, so I posted earlier about why I think bonus offers are bad PR for the industry. But it is also unclear to me whether bonus offers can be allowed in MLS.

Policy background

If we take the example of MLSs affiliated with the National Association of REALTORS® (NAR), they should be complying with NAR policy. NAR's model MLS rules address inter-broker compensation in pretty strict terms: One section provides that "The amount of compensation offered by the listing broker must be indicated either by showing a percentage of the gross selling price or by showing a definite dollar amount." (At local option, MLSs can permit the compensation to be expressed as a percentage of the 'net sales price' instead of the gross.) Another section says "The listing broker shall specify, on each listing filed with the Multiple Listing Service, the compensation offered to other Multiple Listing Service Participants for their services in the sale (or lease) of such listing. Such offers are unconditional except that entitlement to compensation is determined by the cooperating broker's performance as the procuring cause of the sale (or lease)."

(Note that a listing broker can under NAR policy vary the compensation she offers to other brokers by correspondence outside of MLS - e.g., by sending a letter to a particular broker saying, "Despite what I offer on my listings in MLS, I'm paying you y%." This practice also deserves a couple posts, but that will have to wait. But even these superseding offers have to come in the form a dollar amount or a percentage of the gross or net selling price.)

The "unconditional" thing is important. It's not consistent with NAR policy for a listing broker to put a comment on the listing that says, "buyer broker receives compensation only if she shows up at all finish selection conferences with buyer and builder" (as some builders have tried to do). It cannot say "buyer broker must do X and Y to be compensated." The only condition for the buyer broker's compensation is whether she is the "procuring cause" of the sale.

The procuring cause standard of NAR is a test that takes into consideration many factors but with no factor being predominant. So, from the procuring cause standpoint, the absence or presence of any one condition is not determinative, and the demands of the listing broker are probably irrelevant.

But most MLSs, even those that aggressively enforce the "no conditions on offers of compensation" strictures, permit brokers to make bonus offers in MLS. Some MLSs have requirements about how bonus offers are expressed and indicated on listing records, but most accept them.

The bonus exception swallows the unconditional rule

The exception swallows the rule. Isn't a bonus offer just a conditional offer of compensation? And couldn't the bonus exception to the "no conditions" rule eventually swallow the rule? For example, as a listing broker, I could put a listing in MLS offering $1 of cooperating compensation, but then, in the remarks, say "Cooperating broker will receive compensation equaling y% of the net selling price if she meets the conditions on listing broker's web site at www.xyzrealty.com/compconditions.htm." Now, the listing broker can demand all sorts of things from the cooperating broker not contemplated in the MLS policies.

It's hard to imagine the variety of creative ways that listing brokers might describe cooperating brokers' obligations in the previous example. The probability is that there will be many poorly drafted statements of performance requirements. Arbitration panels will be confronted with the need to interpret those statements; and panels will not be able to rely on the (relatively) well-understood procuring cause standard.

I'm also worried about listing brokers using bonus offers to disadvantage new brokerage models. I've already seen one case where a listing broker has said in MLS: "Coop compensation is 1%; if cooperating broker does A & B, compensation is 2.5%." This would be prohibited in this form, but would it be permitted if the listing broker characterized the additional 1.5% as a "bonus"? What if other brokers pick up on the practice (because these offers are all published in MLS)? Will brokers who tend not to do A&B (despite the fact they are procuring cause of their transactions) end up effectively boycotted by listing brokers? I don't really want to think about it...

To the extent you think compensation through MLS is important, allowing it to be muddled in this way without some clear guidance as to how these provisions should be interpreted is a bad idea.

What do you think?

-Brian

Bonus offers in MLS are bad PR for the industry

This post and the next are revised versions of posts I did on my short-lived ActiveRain blog a couple years ago. They came to mind because of an Inman column by Teresa Boardman two weeks ago regarding the amount of cooperating compensation offered in MLS.

Some listing brokers in many markets are offering bonuses to buyer brokers in an effort to speed the sale of their listings. Bonus offers of this kind are bad for the industry.

What bonus offers look like

Here are examples very similar to bonus offers my MLS clients have asked me to evaluate.

"$5000 bonus to selling agent on sale closing before July 31"

Listing broker puts 1% in the MLS compensation then in agent remarks says, "1.5% of sale price as bonus if you negotiate for your buyer and arrange inspection and appraisal"

Example 1 is the typical bonus offer that has been around since before my time. Example 2 is of a type that is showing up more frequently as listing brokers want to try to specify exactly what a buyer broker must do to earn her commission. There are also very poorly worded bonus offers, ones so confusing that I can't imagine anyone being able to figure out whether she had satisfied the conditions or not; that's a discussion for another day.

Bonus offers send the wrong message to consumers

Why do listing brokers make bonus offers like example 1 above? How do they justify them to sellers? The only justification I can think of is that it will encourage a sale because cooperating brokers will be motivated by the opportunity for personal gain to show buyers the listings with bonuses, or to show such listings more favorably.

Many brokers have told me (1) that they would never put their own interests ahead of their buyers' to obtain a bonus, and (2) that they do not believe other professional brokers would do so. I hope they are being honest about (1), but if they are putting bonus offers on their own listings, I think they are being less than honest about (2). Why would they put bonus offers on their listings unless they believed they have an impact?

Brokers point out that it is nearly impossible for a buyer's broker to conceal listings from her buyer that pay less and show only ones that pay more, because consumers have access via IDX and sites like REALTOR.com to nearly complete listing compilations. They can thus "check up" on their brokers. This may be true, but the broker holds more subtle influences than just choosing which listings to show; she can also influence the buyer by the order in which she shows listings, how she shows the listings, what features of each listing she identifies as being important, etc. That's why consumers hire brokers - for their expertise.

Consumers know about the bonus offers: A listing broker generally needs consent from the seller to offer a bonus under the Code of Ethics and other regulations. I'm assuming every broker is aware that she must disclose bonus offers to her buyer in a transaction, at least in every state I can think of.

What messages do these disclosures send to sellers and buyers? Simple: "Listing brokers believe they can buy influence with buyer brokers by offering them extra compensation - despite the buyer brokers' duties to their clients." Does anyone think that's a good message for the industry?

There are other problems with bonus offers in MLS - I'll try to tackle them in the next post.

Your thoughts?

-Brian

‘Core’ vs. ‘optional’ Pt 4: Legal issues

(This is Part 4 in a four-part series. I started with some definitions to get us on the same page; we then looked at NAR policy on the issue (for those MLSs that are bound by it); I provided some of the arguments for and against making services 'core'; here, I'll touch on the legal dimension.

When an MLS makes a service a 'core' service, there is at least some risk it can face antitrust challenges claiming the MLS is engaged in an unlawful 'tying' arrangement. Under the Federal Sherman Antitrust Act and related statutes, unlawful tying occurs where:

• A seller of a product or service has 'market power' in the provision of that service in a 'relevant market.' This is called the 'tying product.'
  
• The seller requires purchasers of the tying product to buy another product or service as a condition of purchasing the tying product. This is the 'tied product.'
  
• The result of removing the buyers' choice with regard to the purchase of the tied product 'harms competition' in the market for the tied product.
  
• The harm to competition outweighs the pro-competitive effects of the tying arrangement.
  

The laws governing tying and related conduct are complicated. This post can really only scratch the surface. There are a few points I'd like to make immediately.

• The use of apostrophes around terms like 'tying,' 'market power,' and 'relevant market' is meant to point up that these terms have special meanings in the law, meanings that may not be the same as the common meanings of the same words. I don't recommend running about making shoot-from-the-hip antitrust analyses based on the outline here unless you understand what these terms mean in the legal context.
  
• We traditionally think of MLSs as monopolists within their markets, which by definition would mean they have 'market power.' But the analysis required to determine whether that is a legal fact is complicated. Don't assume that your MLS has market power, but recognize that others may make that assumption.
  
• In the MLS context, the basic access to MLS – what NAR calls 'participation' – would probably be the tying product. If MLS conditions participation in MLS on the purchase of something more than the basic level of service, that 'something more' would be the tied product.
  
• Bundling services and tying the purchase of one product to another is a very common practice in business. In the vast majority of circumstances, it is perfectly legal. Don't assume that an MLS tying the purchase of a core service to participation in the MLS is breaking the law.
  
• The harm the antitrust law is designed to prevent is a harm to competition, not harm to a particular competitor. Companies engage in conduct all the time that harms their competitors – that's what competition is about. See the brief discussion below about themes of antitrust law to understand what a harm to competition looks like.
  
• The law recognizes that tying arrangements can have pro-competitive effects. See the brief discussion below about themes of antitrust law to understand what a pro-competitive effect looks like.
  

The upshot of all this is that an MLS board considering whether to adopt a core service should consider both the pro-competitive and anti-competitive effects of making the service part of the core. Usually, legal counsel will advise you to consider the impact of your conduct based on the objectives of the antitrust laws. Stated very loosely and informally, the antitrust laws are organized around the following six themes:

1. Lowering prices
   
2. Increasing quality
   
3. Increasing output
   
4. Curbing power
   
5. Preserving freedom
   
6. Promoting efficiency
   

(My thanks to Prof. Brad Clary at the University of Minnesota Law School for this simple formulation of the themes of antitrust enforcement.) Note that many of these themes fit in with the arguments for and against core services I discussed last post. Making a service core might serve some of these themes and not others. The question will usually be one of magnitude in each case. There is no simple formula.

Conclusion

This series of posts provides a framework for thinking about the core vs. optional question, but every service in every MLS is different. In general, you should feel more comfortable with a service being core if it's integral to MLS than if it's only tangential: a help desk and training for the MLS system are better as a core service than a dry-cleaning pick-up and drop-off service. Smaller financial magnitude usually raises smaller concerns: an increase in core service fees of $3 per agent per year is less distressing than one of $3,000 per year. But the outcomes cannot be predicted based on any formula.

My sense is that NAR's policy on what is 'core,' 'basic,' and 'optional' was really intended to address potential antitrust issues. I don't think it's much help, unfortunately. MLS boards in the midst of these kinds of decisions will have to exercise their judgment, but I hope this series will help frame up the discussion.

As always, your comments are welcome. But please don't ask me in a comment whether a given instance of a service being core is an antitrust violation. For me to do that analysis takes a whole lot of information, some time, and plenty of attorney fees ;-)

My friend Matt Cohen has also suggested that I reiterate a point I made at the beginning of the first of these posts: "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." All the analysis I've proposed in the last three posts should be necessary only after the MLS has concluded a service is near to the MLS's strategic objectives. If the service is not strategically related to your MLS's purpose, you shouldn't be offering it at all.

-Brian

Extent of MLS’s VOW rules enforcement duties

I'm taking break from the MLS core vs. optional services series to get out this post. An email has been circulating in the MLS community that has been misinterpreted as saying MLSs have some extraordinary obligations to police the VOW rules. The language that has folks confused reads this way:

"With the shadow of the DOJ hanging over real estate, MLSs are starting to come to two conclusions:

"1) Audits must be performed regularly on each VOW (at least yearly). If MLSs audit only a few brokers or audit on an irregular basis it will invite speculation regarding, or lawsuits alleging, preferential treatment of some brokers or AVPs (Affiliated VOW Partners) and/or discrimination against others.

"2) The audit should ideally be performed by an independent third party using standardized criteria. It is very important that MLSs establish consistent standards for VOW auditing, to a level of detail far beyond the NAR policy, ideally starting from the very first VOW audit."

This is not, nor do I think the email's author intended it to be, a statement of some kind of requirement of NAR policy or the settlement between NAR and the Department of Justice. Rather, it's an assertion that the email's sender is urging on the industry (thus the language "MLSs are starting to come to two conclusions").

Unfortunately, within a couple hours of this email going out last week, I had inquiries from clients about whether there is some enforcement requirement in the VOW policy or the NAR/DOJ settlement.

Here is a summary of my understanding about MLS enforcement of the VOW rules:

1. Your MLS should run its own plans for enforcing the VOW rules by its legal counsel. (This blog post is not intended as legal advice.)
   
2. As far as I know, MLSs are under no obligation to police the VOW rules proactively. MLSs are not required to 'audit' or review VOWs on any interval by the NAR VOW policy or by the NAR/DOJ settlement. Nothing I'm aware of in the law or VOW policy requires MLSs to go out looking for rule violations.
   
3. I have not seen any legal analysis that suggests MLSs have to be more proactive policing VOWs than they are with IDX sites. In fact, because the DOJ mistakenly views VOWs as tools of 'new-model' brokers and IDX as a tool of 'traditional brokers' – reviewing all VOWs proactively may look suspicious to DOJ if MLS does not also review all IDX sites proactively. (That would be very expensive in many markets.)
   
4. MLSs can probably use the 'tattle-tale' model to police VOWs. That is, MLS investigates a VOW if and when someone complains about it. That has been the model of rule enforcement with regard to IDX and many other parts of the rules in most MLSs as long as I can remember. I have seen no legal analysis to suggest that it is no longer appropriate.
   
5. If your MLS does want to review VOWs for rule compliance, it should do so on a non-discriminatory basis. That might mean reviewing all VOWs (which is easy when there are only two or three). Or it might mean reviewing a sample of VOWs selected at random (which would properly be called an 'audit').
   
6. MLS must apply the VOW rules in a non-discriminatory manner. Of course, most MLSs have plenty of experience doing that in the IDX context.
   
7. I don't know of any reason why an MLS would need an independent third party to conduct reviews of VOWs, at least with regard to compliance with display and registration rules. An independent third-party evaluator might provide valuable assistance with reviewing a VOW's compliance with some of the more technical provisions of the VOW rules or in cases where the MLS management does not believe it has staff that are well-trained enough to handle the task.
   

As to that last point, we have assisted a couple MLSs with their first reviews of VOWs to help them establish an approach and procedure; after that, they seem to manage on their own.

Note that on many of these points, I've said I'm not aware of any line of reasoning that contradicts the views I've expressed here. That doesn't mean I'm not open to arguments to the contrary. If you've got some, serve 'em up!

-Brian

‘Core’ vs. ‘optional’ Pt 3: Arguments both ways

(This is Part 3 in a four-part series. I started with some definitions to get us on the same page; we then looked at NAR policy on the issue (for those MLSs that are bound by it); here, I'll provide some of the arguments for and against making services 'core'; last, I'll touch on the legal dimension (but only briefly).

There are arguments for and against making services core. The weight your MLS gives to each argument is as important as the number of arguments; so there might be three arguments for making a service core and four arguments against it, but the three arguments for making the service core may be more weighty. The discussion that follows is thus necessarily just a framework for thinking about these issues; it is not a formula for resolving them.

Arguments for making services core

The key arguments for making a service a core service are that it provides economies of scale; it can promote individual broker investments based on the platform that MLS makes available and nudges brokers to be on the leading edge; it facilitates making the service as integrated with other MLS functions as possible; it makes MLS business planning much easier; it addresses the 'small incremental price' problem; or it addresses the unwillingness of a third-party provider to sell into the MLS subscriber base.

Economies. When the MLS purchases a site license for an application, it may get an incredible deal on a per-unit basis for the service. Volume discounts are frequently the foremost consideration in an MLS board's mind when it considers potential core services. Of course, this cannot be the only consideration. After all, an MLS with 2,000 subscribers could get a good deal on 2,000 Cadillac Escalades, too, but making a Cadillac Escalade part of the MLS's core services would not cross most folk's minds.

Encourage brokers to use advanced technology. The MLS may make a strategic decision that the industry as a whole needs to move in some direction technologically. Making some aspect of a new technology part of the MLS's core services removes one of the barriers that may prevent brokers adopting the technology – cost. If the MLS provides or arranges for training in and support of the service at the MLS level, it may remove other barriers.

Integration with MLS. Sometimes, for a service to be fully integrated into the MLS, it needs to be available to everyone. This is not true with all integrated services: The way that web-based MLSs are built, it should generally be possible to integrate a feature without it being available to or visible to all users. But on occasion, it's hard to make that work.

Easier MLS business planning. It's much easier for an MLS with a small staff, especially if it has no substantial marketing or sales staff, to take the cost of providing a service to all subscribers and just spread it across all the subscribers. The alternative is more complicated: the MLS must create a budget for the costs to deliver the service based in part on estimates of how many subscribers will buy it. Many MLSs do not have the business planning, marketing, and sales expertise on staff to do this kind of planning.

Addresses 'small incremental price' problem. There are services that are so trivially expensive that billing for them separately might cost more than the service itself does. For example, in one large MLS client of ours, a service to be integrated into the MLS worked out to cost less than $3 per subscriber per year. The MLS would have spent more than that to bill and collect fees for the service on an optional basis. Of course, the risk if MLS finds too many such services is core cost bloat (see below).

Third-party provider requirements. Sometimes a strategically important service is available only from third-party providers who insist that they will work with an MLS's subscribers only on an all-or-nothing basis.

Arguments against making services core

The key arguments against making a service a core service are that it 'bloats' the core cost; it make create an artificial adoption curve; it can overlook superior competitive offerings or stifle their development; and it may pre-empt offerings being developed by participating brokers internally.

Core cost 'bloat'. Every additional service offered as part of the core of MLS increases the cost to the subscribers, even if only slightly. Over time, such additions can lead to increase in the core cost. Many MLSs avoid this problem by adding new core services only when they have been able to press costs out of other services or eliminate services that are no longer useful. They avoid increasing fees and the problem of core cost bloat.

Artificial adoption curves. Sometimes the MLS may choose a service that ultimately does not have legs; or perhaps it chooses a service whose time has not yet come in the industry. The MLS may create a scaffold for brokers to engage in using this service at a time when the benefits for using the service do not match well with the costs.

Stifling superior offerings. This is an important issue. If the MLS makes a service core, one of two things commonly happens. One possibility: The core service is at least 'pretty good,' and because MLS subscribers are paying for it whether they use it not, they are not inclined to consider other products that they would use instead if they had the choice (assuming switching costs would not make it unreasonable to change). Another possibility: The core service is less than 'pretty good,' and many MLS subscribers buy a superior alternative on the market; but MLS's support of the inferior product prolongs its existence in the market and imposes costs of competition on the superior product it would not otherwise experience if the inferior service were allowed to die a natural death. Making the service a core service also increases the barrier for competitive service providers to enter the market.

Pre-empting brokers' own investments. Brokers are always seeking to distinguish themselves. One can debate at length whether they succeed at doing so – as others already have – but brokers nevertheless invest a lot of money in competitive marketing with each other. If a broker has deployed or is deploying a service within the firm, and the MLS adopts a competing service as a core service of the MLS, you can imagine the broker's displeasure. (I'd expect you would not have to imagine it – most brokers will be very vocal about it.)

Others?

I expect there are other arguments for and against making certain services core. Please comment to share your thoughts.

Next: Legal issues in the 'core' service debate

MLS services ‘core’ vs. ‘optional’ Pt 2: NAR policy view

(This is Part 2 in a four-part series. I started with some definitions to get us on the same page; in this post I'll look at NAR policy on the issue (for those MLSs that are bound by it); next, I'll provide some of the arguments for and against making services 'core'; last, I'll touch on the legal dimension (but only briefly).

Most MLSs are affiliated with NAR. If yours is not, you can skip this post. If your MLS is NAR-affiliated, it is bound by NAR's statement of multiple listing policy 7.57, which divides MLS services into three categories – core, basic, and optional – and provides guidelines about which services can be in which category. As a practical matter, though, this policy section appears to have little effect because in almost every case either (a) it is vague enough to permit almost any choices MLSs make or (b) MLSs really don't pay all that much attention to it.

Here are NAR's definitions. (All references here to NAR policy are to NAR's Handbook on Multiple Listing Policy, 2009 ed. Link requires password to access.)

"Core: Core MLS information, services, and products are essential to the effective functioning of MLS, as defined."

NAR says this boils down to current listing information and information communicating compensation to potential cooperating brokers.

"Basic: In addition to core services, an MLS may also provide additional information and services in a basic package of MLS information, services, and products, as determined locally and provided automatically or on a discretionary basis."

Among the 'basic' services NAR expressly says that MLS's may offer are sold and comparable information; pending sales information; expired listings and "off market" information; tax records; zoning records/information; title/abstract information; mortgage information; amortization schedules; mapping capabilities; statistical information; public accommodation information (e.g., schools, shopping, transportation, entertainment, recreational facilities, etc.); MLS computer training/orientation; and access to affinity programs.

"Optional: An MLS may not require a participant to use, participate in, or pay for the following optional information, services, or products: lock box equipment including lock boxes (manual or electronic), combination lock boxes, mechanical keys, and electronic programmers or keycards; advertising or access to advertising (whether print or electronic), including classified advertising, homes-type publications, electronic compilations, including Internet home pages or websites, etc."

There is a great chasm between the examples NAR offers for 'basic' and 'optional' services; one in which many MLS services exist. Consider online contract forms that populate with MLS data; online showing scheduling utilities integrated with the MLS system; open house databases; and automated transaction management applications. Each of these is arguably similar both to the example 'basic' services and to the example 'optional' services.

The following paragraph opens this chasm a little further:

None of the foregoing precludes an... MLS from utilizing... MLS reserves, dues, or fees or special assessments... to acquire assets (including hardware and software) necessary to make optional information, services, or products available, nor does it preclude an... MLS from making nominal administrative expenditures out of such funds to initiate or maintain such optional services.

NAR's definition of 'basic' services permits the basic package of services to be 'determined locally,' and the definition of 'optional services' just specifies two services that cannot be made 'basic' or 'core,' namely lock boxes and advertising; I interpret them together to mean that an MLS can make any service 'basic' except the two enumerated 'optional' ones. As for the two enumerated optional services, many MLSs heavily subsidize electronic lockbox systems and advertising (in the form of MLS public-facing web sites); I presume those efforts take the form of capital investment and 'nominal administrative expenditures.'

Consequently, though Statement 7.57 technically binds NAR-affiliated MLSs, it appears to have little impact on their practices.

Note: I think NAR could premise a denial of umbrella insurance coverage to an MLS on this argument:

1. Your MLS is offering a service as 'core' ('basic' in NAR's terminology) which it should not, and thus it is violating Statement 7.57.
   
2. Your MLS is being sued because of some alleged error or omission with regard to that service.
   
3. Thus, NAR is not required to extend coverage to you for that suit.
   

I've never heard of it happening, but my mom always says there's a first time for everything.

Next: Advantages and disadvantages of making services core and optional

-Brian

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