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Are Internet auto dealers coasting on fumes?

With closures and layoffs hitting one overcrowded sector after another, a shakeout in the online auto industry appears imminent.

Virtual auto dealers may become the latest to spin into the dot-com ditch.

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Have car sales online stalled?
Rob Leathern, analyst, Jupiter Media Metrix
With closures and layoffs hitting one overcrowded sector after another, a shakeout in the online auto industry appears imminent.

The roll call of online industries already feeling the sting includes pet products, furniture, health and beauty and toys. The former head of Priceline.com's auto services business dropped a bomb on the way out of the door when she told the Wall Street Journal on Wednesday that people are not ready to buy cars over the Web.

Competitors Autoweb.com and Autobytel.com, which were once high-flyers, have also experienced some hard times. Autoweb's chief executive Sam Hedgpeth resigned Monday, and the company has seen its shares skid to about 60 cents. Meanwhile, Autobytel is spinning its wheels around $4.60 a share.

CarsDirect.com, which filed to go public in May, has yet to speed onto the public market. Purchasing cars over the Web is "just one of those things where adoption takes a little bit longer," said Darren Chervitz, an analyst at Jacob Internet Fund, who noted that it is high-time for consolidation in the online auto industry.

According to a study published last week by market research company Greenfield Online, 63 percent of those surveyed researched their cars online but bought them through a traditional car dealership.

Of the 2,000 people surveyed who recently bought a new car or used car within the past 12 months, 53 percent said they were uncomfortable with buying a vehicle online while 41 percent said they felt the purchase was too large to transact over the Web.

Maryann Keller, who ran Priceline's name-your-own-price auto division, resigned last week from her post at the same time that the company reported disappointing earnings and announced the departure of its chief financial officer.

Like many of the online industries, Internet car dealers came roaring out of the starting line with huge revenue projections to back their efforts.

During the past couple of years, several sites revved up to help consumers buy cars over the Internet. Some, like Autobytel and Autoweb, managed to go public during the now long-gone days of e-tailing euphoria. Priceline has also pushed into the industry, expanding its auto service to more U.S. states.

Autobytel has announced several initiatives to broaden the company's scope, including international expansion and providing software to help dealers manage their online sales and leads.

"We continue to believe that competition, particularly from manufacturers, remains the company's biggest challenge," Sara Farley, an analyst at PaineWebber wrote recently in a report.

Even with the resignation of Priceline's Keller, the Norwalk, Conn., company said Wednesday it has confidence in its ability to tap the industry and reaffirmed that its auto division remains strong.

Forrester Research has estimated that the market will grow to about $16.6 billion in 2004 from about $400 million in 2000. Nearly 40 percent of new car buyers browsed and did research on cars online last year, according to J.D. Power & Associates, an automotive research and marketing firm.

But will online auto dealers thrive long enough to reap any of this potential?

Chervitz said there are a number of companies that are in danger, most of which will not be around for much longer, especially the ones that have been unable to go public.

"We're just not seeing enough cars being bought online to make it a place for a lot of players that can participate," Chervitz said. "People (tend to) use these sites to research cars, but for the most part, customers still don't feel comfortable going online and doing the whole (car-buying) process over the Net."

People still want to be able to test drive cars and check out the merchandise in person, he added.

The road is becoming less clear as traditional car dealers are taking strides onto the Web. Earlier this year, AutoNation, one of the countries largest dealers, struck a deal with online giant America Online to allow its members buy trucks and cars through a co-branded site.

Unlike other areas of e-tailing, the online auto industry faces heavy state-level government regulation. About 33 states bar anyone, including independent Web sites, from clinching the final sale. And most of those states also require the new owner to pick up the car at a dealership.

Texas has the strongest so-called franchise laws. But other states are considerably more lax, allowing independent sites to act as third-party brokers or allowing actual dealers to deliver cars to a customer's home or work.