The auto-buying revolution that wasn't

One exception to the general rule is AutoTrader.com. Improving upon a tried-and-true model, the company has concentrated on classified ads for the resale of used cars, an approach that has demonstrated far more promise than others.

Surviving a shakeout that claimed the likes of Amazon.com-backed Greenlight.com, iMotors and CarOrder.com, Autotrader.com now hosts some 2.2 million listings on its own site and has a partnership with eBay Motors that makes up a small part of that number. That means Autotrader.com now represents more than half of all the used cars for sale in the United States at any one time, according to CEO Chip Perry.

Although the company is private, Perry says it just turned a profit on improving revenue. CNET News.com recently sat down with Perry to talk about the future of the online automobile business.

Q: Why has the online auto business struggled?
A: Customers quickly discovered that online car buying wasn't what it was cracked up to be. They mainly ended up using the online quote to shop and negotiate offline.

What dealers experienced was that price-oriented new car shoppers were demanding quotes. But the conversion rates on leads turned out to be really low--5 to 15 percent--sometimes lower. The economics of how (the online car sites) set themselves up turned out to be a cost per lead of about $25 to $30. If you have a 10 percent close rate, then the cost per sale was about $200 to $300 for those leads. And dealers paid for those leads, regardless of whether they got the sale.

Why hasn't the Web been an attractive way for them to advertise?
At a conventional dealership the average advertising cost per sale is about $300 to $400, for all media. So the Internet was not an economically attractive proposition compared to traditional media. So the online car business peaked out fairly quickly.

So online car sales turned out to be like selling pet food online?
Online car buying was intended to be this revolutionary thing. It was going to revolutionize the car business and eliminate the need for a dealer. But none of it turned out to be true. Online buying services were not able to create services that moved the benefit needle for buyers or sellers.

The car-buying experience is more complicated than that. It often involves a trade-in or a loan. It's more than the price of the car itself. There's a benefit to the dealership experience. Consumers have different purchasing styles, and it's a very complicated industry.

What's the difference between AutoTrader.com and the other online car businesses?
We came at this whole thing from a completely different angle. We decided to focus on used cars. We created a different business model. Rather than the lead-referral model that the other companies used, we created a classified marketplace model.

We felt our role of being an electronic matchmaker was the most attractive business in the online auto world, not being a new car marketplace. We started the company with a free-listing offer, which allowed us to create a huge database of cars. When we launched the database in May 1997, we had 200,000 cars. By the end of the year, we had about 500,000 cars and 20,000 dealers. We now have 2.2 million listings.

This marketplace idea is one that has a lot of legs. Our revenues over the past five years have consistently increased. In 1998, we did $1 million in revenue. In the next year, it was $5 million. By 2001, we had $57 million. This year we expect to have in the neighborhood of $100 million in revenue. Those numbers include eBay Motors revenues.

Why do you think you've succeeded?
There are such huge inefficiencies in ways people traditionally shop for cars in the traditional media.

When you place an ad in a newspaper or in radio, well over 90 percent of the people who receive it aren't in the car market. Meanwhile, when you are looking for car for sale, if you go to a local medium, they only have a very small view of what's for sale in comparison to what's really available in the market. Dealers typically list less than 10 percent of their inventory in newspapers, for instance.

We're going to completely leverage the strength of the Internet. We're not trying to change how retailers do their business. Our target is the inefficient traditional media.

And it's turned out that we were exactly right. We hit critical mass about two years ago, and traffic on our site has exploded. We now have more than seven million monthly visitors, including eBay Motors. Our revenues are up 80 to 90 percent. And we are profitable. We achieved profitability in the second quarter of this year.

Did you have to have job cuts or make any cutbacks to hit profitability?
Today, we have over 500 employees. We've done nothing but hire since I started at the company. We've not had any layoffs.

We've been growing our revenue at a rate of 7 to 8 to 9 percent per month from the beginning. We haven't felt any of the effects of the overall economic recession or the advertising slump out there. We are growing rapidly into the teeth of a recession. That tells you that the better-mousetrap phenomenon is driving the growth of AutoTrader.com.

How are things going with eBay Motors?
We are a 50-50 partner with eBay on listings in eBay Motors, except with collector cars. We partner with them on everything else.

There are between 12,000 and 15,000 cars for sale on eBay Motors today. Part of those cars comes from AutoTrader.com sellers, on the order of 30 to 40 percent. But half of the revenue comes to us regardless of whether we generate the seller or not.

We also promote eBay Motors within AutoTrader.com. One of our roles in the partnership is to drive mainstream car buyers to eBay Motors. So eBay Motors listings are mixed in with AutoTrader.com listings. eBay Motors represents about 10 percent of our revenues.

What do you make of online car auctions?
Auctions are a potent and viable and rapidly growing segment of the industry. But 15,000 of the cars on our site come from eBay Motors out of 2.2 million total listings. That's well less than 1 percent of our listings.

There's 400 billion dollars' worth of used cars sold each year. That's the total market. eBay is an interesting niche. It's a pretty small but rapidly growing part of the industry.

Do you get frustrated by all the hype about eBay Motors?
It doesn't bother us. They're a partner of ours, and we're proud to have been a part of it.

We're very pleased with the progress of our company. We're one of the few dot-coms that made it through the woods. We think we have a huge upside opportunity ahead of us. But we're a private company. We're not trying to hype our stock price.

Do you plan to allow customers to buy cars through AutoTrader.com?
Not necessarily. We like our partnership with eBay and would like it to continue. But one of main things that we didn't think made sense was to focus on transactional features--click here, buy now. There's only a small percentage of consumers that are willing to do that. The transactions that are occurring at eBay Motors, those are the only true online used car transactions that are occurring anywhere. No one else has them; eBay is a unique environment to facilitate car buying.

The "click here, buy now" style appears too risky to most car buyers. Not many people are willing to pay up front the asking price of a used car dealer. It's too foreign, too different from the traditional way people buy used cars. We think that online used car buying will grow, but it will never become a huge segment--not more than 20 to 40 percent.

Who do you see as AutoTrader.com's competition, and what do you think of Cars.com?
Traditional newspapers are our biggest competitors, but Cars.com is a distant, distant No. 2. Cars.com was a defensive play on the part of the print industry trying to protect its revenues. Our DNA is all offensive.

There are a few other online sites that are competitors. Yahoo has some used car listings. Kelley Blue Book is one of the most popular used car sites, but people go there not for listings, but for prices.

Are you going branch out into new cars?
We are already in new cars, but that's not the main line of our business. There are some new car listings on our site, a couple hundred thousand of them. You can configure them online and request a quote from a dealer. We created some of the same capabilities that other sites have, but we do it as adjunct to our core car services that we have. It's easy to do. It's not very expensive.

There's a large used-new car crossover audience. About 30 percent of the audience hasn't decided between a new and used car. And new car dealers can list both on our site.

What's surprised you about how the online car market has panned out?
It was assumed in the online car business that the main avenue of consumer demand was going to be through e-mail. A lot of work was put in to deal with that consumer demand.

We have 7 million people doing 30 million searches, looking at 70 million cars, and most of them click to get the phone number. Nine times out of 10, the average consumer wants to call the dealer. They don't prefer e-mail as a communications channel. The vast majority of dealers don't return e-mail. If you're shopping in the middle of week and you want to plan a weekend shopping trip, it's a lot quicker to pick up the phone.

This massive investment that dealers made in Internet managers is being rethought as we speak. The Internet is playing an important role, but it's a much different one than most of the experts and pundits thought it would be. Initially, it was promoted as an economically revolutionary tool in the auto business. But it's turning out to be basically an advertising medium for dealers and individual sellers.