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Is Domain catching up to realestate.com.au?

REA Group Ltd (ASX: REA) – the owner of realestate.com.au – might not want to admit it, but rival Domain appears to be growing faster that it.

Domain – owned by Fairfax Media Ltd (ASX: FXJ) – has recorded higher growth in earnings before interest, tax, depreciation and amortisation (EBITDA) over the past two years than REA Group’s Australian business.

Domain has seen EBITDA rise by 107% in the past two years compared to REA Group’s Australian division of 75%. Back in 2013, REA Group’s EBITDA was 4.0x bigger than Domain’s. Last financial year, it was just 3.4x bigger and the trend suggests that that gap will narrow even further in the next few years.

In fact, in the second half of the 2015 financial year, REA Group’s Australian business saw EBITDA fall by 1.2%, the first time that has happened in many, many years. There may be one-off or mitigating factors to explain that, but it does show that any slip up by the market leader can allow its strong competitors to make up a fair amount of ground.

As much as conventional analysis suggests that companies with strong network effects obliterate their competitors, it seems that’s not always true. Both realestate.com.au and Domain have strong network effects – which refers to the ability of the sites to attract agents and advertising, which then attracts more buyers, which drives growth in more agents and the circle repeats. Growth in the number of agents and website visitors is strong for both websites.

Interestingly, roughly 50% of visitors to REA Group’s Australian site also visit Domain, suggesting that both real estate portals have strong network effects. It makes sense. If both sites attract a lot of buyers and agents, no-one selling their house wants to advertise on one and not the other. Real estate agents could potentially be called negligent by their clients if they failed to advertise on both sites.

Foolish takeaway

So what exactly does all this mean?

It suggests that REA Group is not having it all its own way in the Australian property advertising market. But the company is still generating at least three times more in earnings than Domain annually and its earnings margins are much higher (60% vs 39%), perhaps indicating that REA Group’s Australian division is likely to remain the market leader for some time yet.  It also indicates that REA Group’s competitive advantage or ‘moat’ has yet to be breached, in spite of Domain’s strong growth.

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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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