By Julie Landry
Redherring.com, March 30, 2000

Anyone who's haggled with a car dealer over price, options, and financing will see the appeal of buying online. Aside from kicking tires and taking test drives, consumers can use the Web to do everything else that's needed to buy a car.

Over the past year, at least 20 new Web sites have sprung up targeting the $534 billion new car market. Already, the first tremors of an auto-site shakeout is beginning. For example, Autoweb.com (Nasdaq: AWEB) and Carsdirect.com, for instance, announced Tuesday a broad content and revenue-sharing alliance. Driveoff.com announced Wednesday it hired FleetBoston Robertson Stephens to explore "strategic and financing alternatives."

Such consolidation comes as no surprise to industry observers. There's a dizzying array of business models in the online auto space struggling to overcome the same challenge: an entrenched dealer franchise system that's adamantly opposed to direct sales of cars by manufacturers to consumers. "In no instance, at present, is the dealer able to be eliminated from the new vehicle transaction," Robertson Stephens analyst Jordan Hymowitz wrote in a recent report. "Direct e-tailers must purchase every new vehicle ordered through a franchised dealer."

WHEEL DEALING
The first wave of online auto sites were mostly research tools that allowed consumers to browse models and options but ultimately referred them to a local dealer to finish the transaction. The second wave, the direct car e-tailers, allow consumers to complete transactions online; the direct e-tailer then processes the transaction through one of its preferred dealerships and has the car delivered directly to consumers. Because today's car-buying Web sites still must deal with dealers in some form, it's their own existence that's dispensable.

"The dealer is the critical cog in the process and the one who has the greatest amount of control over his or her own success," says Adam Weiner, senior auto analyst with Gomez Advisors. "All the problems and snafus with online buying services simply provides more opportunity for and greater validation of the traditional offline retail network."

A four-year alliance between Autoweb.com and Carsdirect.com will establish exclusive links between the two sites and eventually the integration of Carsdirect.com's service into Autoweb.com's site. The deal also calls for Autoweb.com to acquire a $10 million stake in Carsdirect.com, and for Carsdirect.com to buy $8 million's worth of Autoweb.com stock, in addition to referral fees the two companies will pay each other for customer leads.

"Ultimately, we expect this to translate into selling more cars," Autoweb.com CEO Dean DeBiase said in announcing the deal. While 55 percent of American car buyers used the Internet at some point when making or researching a new car purchase last year, according to J.D. Power, only 3 percent of all sales of new cars were made on the Web.

RUSH HOUR
Michael Kranitz, CEO of Driveoff.com, a Carsdirect.com competitor, says the deal likely will bring the two companies more traffic. He cautions that both companies will continue spending large chunks of their public capital on sales and marketing efforts. "They'll have to generate name recognition for what they'll be doing," he says. "If you live or die by the strength of your brand, you have serious problems."

Mr. Kranitz can afford to be critical. Driveoff.com, which is majority owned by Navidec (Nasdaq: NVDC), derives only 20 percent of its revenues from direct sales through its Web site. The remaining 80 percent comes from licensing fees it charges to its strategic partners, including Wells Fargo & Company (NYSE: WFC) and First Union (NYSE: FTU), who use Driveoff.com's system to offer direct-car sales on their own portals.

"We license our auto-buying model and technology to brands that are more powerful and have more numerous and loyal customer bases than we could ever hope to have," says Mr. Kranitz. "You are far more likely to buy a car from them than you are from some company that had a cute commercial or a full-page ad."

Driveoff.com's minimal-branding model -- which it expects will help it turn a profit by the end of 2001 -- is also a weakness. "Driveoff.com's financial backing and brand development is less advanced than its well-funded competitors," says Robertson Stephens's Mr. Hymowitz. "Thus, we would not be surprised if Driveoff.com was acquired and integrated by another company." Sure enough, the company has effectively put itself up for sale by enlisting Robertson Stephens to "evaluate and implement strategic and financial alternatives."

The direct e-tailers have a number of approaches to dealer relationships. Driveoff.com's parent company, Navidec, owns 15 percent of the Internet Auto Dealers Marketing Association, a 700-dealer association whose members make up the Driveoff.com network. Carsdirect.com and Greenlight.com, backed by Kleiner Perkins Caufield & Byers and Amazon.com (Nasdaq: AMZN), have established their own networks of preferred dealers. CarOrder.com, backed by software company Trilogy, plan to spend up to $100 million purchasing actual auto franchises.

TRAFFIC JAM
Despite the pains the many auto sites go through to distinguish their services from others, their efforts are lost on most dealers. "The way I see it, they're all the same," says Ray Tomeh, Internet sales and marketing director at Boardwalk Auto Center in Redwood City, California. Boardwalk works with Carsdirect.com and most of the referral-based auto sites to increase its online exposure. Mr. Tomeh says that although online shoppers tend to be well-informed and an "easier sell once they're on the lot," his sales through Carsdirect.com amount to less than 1 percent of all sales.

Mr. Tomeh adds that the proliferation of direct auto-buying sites makes his job harder, not easier. "Those companies have done very well, but for now, the model is questionable," he says, noting the difficulty of figuring out which companies still will be alive a year down the road. "I still believe the independent dealer Web site is the most profitable way of doing business, because we don't pay for that lead."

Not every dealer is as Web-savvy as Boardwalk, so dealer Web sites have been notoriously limited in scope. The proliferation of independent sites may light a fire under dealers to ramp up their own online selling and inventory systems. "As dealers' execution gets better, ultimately I think they'll be able to mimic these innovations," says John Holt, CEO of the Cobalt Group (Nasdaq: CBLT). His company, an Internet-solutions firm focused specifically on the auto industry, works with more than 5000 dealers (about one-quarter of the 22,000 dealers in the country) to develop their Web presences.

The National Automobile Dealers Association (NADA) is working with the Cobalt Group on its own NADAdealers.com site, which will launch in May with up-to-date pricing and inventory information. "The NADA model will eliminate the only perceived value of the dealer referral model -- the link of consumers with dealers," says Gomez's Adam Weiner. "If dealers are able to leverage the fact that they are the only reliable pricing guide and get that news out into the marketplace, then they'll have a sustainable, competitive advantage."