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This story originally appeared in Issue #179 of MicroTimes, California's Computer Magazine, and is copyright © 1998 by Mary Eisenhart and MicroTimes. All rights reserved.

Turning The Car Business Upside Down

Auto-By-Tel's Customer-Friendly Digital Revolution

By Mary Eisenhart

Pete Ellis thinks he has a better way for you to buy your next car. So far, upwards of a million customers agree with him.

If you've ever bought a car the old-fashioned way, you probably haven't forgotten the experience, which despite the best intentions of all concerned is rarely pleasant.

You may have found the dealer from reading a newspaper ad, seeing a TV spot, or just passing by, but once you were inside the door, you were almost certainly set upon by a two-legged piranha determined to browbeat you into buying a car then and there. If you managed not to flee (no doubt realizing that just down the street was another dealership and another piranha), you'd discover that the relationship of actual information to sales pitch was fairly insignificant, that the relationship of the sticker price to any money that had ever changed hands in real life was a carefully guarded secret, and that the louder this guy claimed to be your bosom pal the more diligently you watched your wallet.

If your determination to buy a car was such that you survived the ministrations of the salesman, the closer, the financing czar, and the person trying to sell you add-ons, you eventually drove off the lot in your new wheels, absolutely certain your brother-in-law would gloat that you'd paid too much.

And, if the shopping experience wasn't noxious enough from the customer's standpoint, it was no day at the beach for the dealer or the salesperson, either. The salesperson, being on straight commission, was under tremendous pressure to part you from the largest possible number of bucks while convincing you that you were getting an incredible deal; the dealer, carrying a huge overhead while also under tremendous pressure from the manufacturer, was similarly incented.

In short, what should have been a symbiotic relationship turned out to be adversarial in the extreme. Which provides the classic scenario for an Internet Business Opportunity.

The most appealing potential of the personal computer in general, and the Internet in particular, is the ability the technology gives individuals to bypass traditional inefficiencies, circumvent informational priesthoods, be more nimble than larger and more established entities, and, in general, evade obstacles between them and their chosen objective.

A business based on making life easier for a customer rather than strewing (perceived or otherwise) obstacles in said customer's path can use the tools to achieve a success and an efficiency level undreamed-of in earlier times.

So, for example, Amazon.com, with a big investment in technology and a negligible one in bricks and mortar, was able to form alliances with a host of distributors and independent publishers to ensure near-instant access to an inventory even big-city bookstores can only dream of, delivered to customers worldwide.

On the other hand, if your business model involves being a gatekeeper between the customer and the customer's goal, or concealing information the customer wants, the Web has you in its sights.

Nowhere is this business culture clash more evident than in the ongoing saga of Pete Ellis and his brainchild Auto-By-Tel (www.autobytel.com), which, from its unobtrusive Irvine headquarters across Macarthur Boulevard from John Wayne Airport, is shaking the very foundations not only of the automobile business, but of other businesses, including traditional media, that depend on it for revenue. Says Melanie Webber of Auto-By-Tel's PR firm, "There's a national magazine whose name I won't mention that told us flat-out they won't do a story on Auto-By-Tel because of the power of the car dealer advertising."

Ellis started out in the car business the old-fashioned way, selling his first car at 16 and launching his first dealership at 24. Eventually he became one of the largest car dealers in the United States, with 16 dealerships and related businesses in California and Arizona. Economic shifts caused him to lose it all in the early '90s, and to ponder his next move.

Since he'd hated a good many aspects of the way he was compelled to do business as a car dealer, and had pioneered such radical concepts as haggle-free pricing at his dealerships, he knew there had to be a better way.

First launched on Prodigy in March 1995 and opening on the Web three months later, Auto-By-Tel offered customers the chance to spec the car they wanted and get a firm, but low, price from the participating dealer in their area. As the system evolved, Auto-By-Tel became ever more a one-stop shopping resource, where you could first research possible purchases, including such formerly closely-guarded info as what the dealer paid for the vehicle in question and what various consumer publications thought of the car. Having settled on the car you wanted and filled out a form with its desired attributes, you could also qualify for a loan online. Within 24-hours, you'd get a call from the local participating dealer and, if you accepted the offer, you'd be on the road after a quick and painless visit to the showroom. No piranhas. No haggling. No lingering conviction that you'd been ripped off again.

Still privately held, Auto-By-Tel currently operates in the US and Canada, and is in the process of opening a subsidiary in the UK. It presents a classic case study of what works in online business, and why it works, so with that in mind, we sat down with Ellis for a little enlightening chat.

It's pretty clear that Auto-By-Tel is one of the more shining examples of what Internet business is good for and how to do it right. In order to explain that, let's first talk about the conventional car buying process. How does it work, and why is that not necessarily wonderful in this day and age?

Conventionally, consumers go from lot to lot looking at cars and picking up information on vehicles and deciding what they potentially may want to buy.

Every time they go into a facility to look at a car, they get besieged and jumped on by car salesmen who are interested in selling them a car today, because a car salesman is paid a commission, and his whole life depends upon what he sells today and how much money he makes for the dealer on that car.

There is very little rationale for a salesman on a car lot to shake your hand, talk to you nicely, not talk price, not try to sell you a car, just give you some information, and go on about his business.

One reason is because there are too many dealers in the United States; this car salesman may know that if he didn't comb his hair right that morning, or say the right words to you, you're going to be down the street talking to another dealer, who could be as little as ten minutes away. So there's a lot of incentive and pressure for him to try to sell you that car right away.

What's driving the fact that there are too many dealers?

In the '50s and '60s, the manufacturers thought that they would sell more cars by having more distribution points. They figured they would maintain increased market shares, more sales, and they just kept putting dealerships on a lot of different corners.

Right at the end of World War II there were fifty-some-odd thousand dealerships in the United States; it's now down to 22,000 because they can't support that infrastructure and, they probably really need to go down to about 12–14,000. That would give them a lot more economies of scale and efficiencies. It would also ultimately affect positively the experience for consumers, because the dealers would be selling more cars in their local market areas and would drive more efficiencies through higher volumes. But it seems to have stalled in the last 15 years at about 20–24,000 dealers. Just stalled. There's been no more consolidation because the dealers have either hung on or the factories have continued to replace dealers that have gone out of business.

And thus, a continued unsavory sales process at the time you go in to buy a car.

The only one that made huge inroads to it was Saturn, because Saturn went into a marketplace and they said, "Okay, we're going to give you Oakland." But if you go to Oakland and you look for Ford, I'd bet you find three or four Ford dealers in Oakland. So, that's a problem.

So that's what creates some of the unpleasant sales practices. Even if you're just looking, you're going go through that.

Also the dealer's got to have all those salespeople to take care of you when you walk on the lot to look at a car that you may not want to buy, and then he's got to spend money to attract you to his store. For every customer that walks on the lot he will spend about $100. Just for you to walk on the lot.

What's the breakdown on those costs?

Just advertising. No more cost than advertising. Just to get the warm body in the door.

A traditional dealer sells about 17–20% of the people that walk on his lot. So that means, for every car that he sells, he is spending between $350 and $400 because he's going to talk to four or five people before he sells one. So when you come on the lot, his salesmen are compelled to try and sell you, because there's a cost.

The other thing is that when he does sell the car, he's got a $350–$400 cost per car sold, but he's got an infrastructure of salesmen in play that put you through systems.

The model's now starting to really be challenged, but dealers found out a long time ago that if they put the customer through systems, somehow their closing ratio is improved and their gross averages improved. Thus, you talk to three to five people when you're looking at completing a transaction: You talk to a salesman; if he doesn't sell you a car, he may turn you to another salesman; you may end up going through what they call a closer who then will close the deal; then you might talk to a finance manager who writes a contract and tries to sell you financing or sell you after-market product.

All those people add to the cost. Dealers moved into that inefficient model over the years because they thought that was actually going to be more efficient for them.

To sell a car, marketing costs 300 to 400 bucks, based upon some of the numbers we look at from NADA and national numbers. I know my numbers were about $500 a car as a dealer. And the personnel cost to sell the car with those three to five people is about $800. This process brings the cost to sell you a new car to somewhere around $1200.

Which, of course, is passed on to the customer.

Oh, absolutely.

So, basically, everybody who actually buys a car is paying for a lot of tire-kickers, among other things.

Well, they're paying for what's called an outmoded distribution model. Its time is come.

So now the Internet comes along, and instead of you going from dealership to dealership, you do your research online. You learn pricing, cost...

In the traditional model they don't really like it if you have done any research. The more ignorant you are, the better they like you.

The more money they'll make. You know, ignorance is bliss for auto dealers.

If you walk in waving Consumer Reports, they give you the hairy eyeball.

But I'll tell you what—you walk in bringing in Consumer Reports, they'll talk to you differently.

And essentially that's what Auto-By-Tel has done. We have customers now that go through our service, and they'll walk in to another dealer somewhere and say, "You know, I went through Auto-By-Tel..." and they get, "Oh, you're one of those." Then they go talk to a manager, and they treat you differently. They treat you at a higher plane, because now they know that you're educated.

It kind of upsets me, because we've kind of trained dealers that aren't Auto-By-Tel dealers how to do a better job, but that's part of being where we are.

Here's how the model got put together by this company and through my thought processes.

I used to have companies that would come to me and say, "We're going to send you a lot of business, five or ten deals a month." Maybe some broker or a credit union program or something, you know.

If that person came to me and said, "We want you to work this way when you talk to the customer," and, say, it was four or five cars a month, I probably wouldn't pay much attention to it. It didn't do anything to my bottom line. It didn't do anything for my business. And I'd say, "Yeah, yeah, I'll do it." And then not do it.

I knew if we were going to make a difference in this business, what we had to do is send huge incremental volume to a dealer as the carrot. The stick was, "You need to call the customer up within 24 hours"—we had it at 48, but we cinched it up—"and give them a price over the phone." If they give a lousy price to a customer that's been on the Internet and been educated, they will not sell a car.

So they've got to give a competitive price up front or they will lose a customer; if they're not professional they'll also lose a customer. We train our dealers. We have 21 training seminars a month across the US training dealers on how to take care of the Internet customer and how to change their financial model.

Believe me, we had a lot of trouble in the early days. I had one dealer call me up and say, "You're not going to tell me how to sell cars." I said, "You're right. You're not going to be an Auto-By-Tel dealer. That's it."

In most cases they'll go: "Well, I didn't mean that. But I don't want you telling me how I'm going to go sell cars." I say, "We're not telling you how to sell cars. What we're doing is telling you what the customer wants. And if you can deliver what the customer wants, you can be part of Auto-By-Tel, and if you can't deliver what the customer wants, then you need to go away."

By the fact that there's 22,000 dealers in the US, and we're going to work with approximately 3,000, we have consolidated the marketplace to a manageable number where we act as a big funnel. We take all these deals and we send them to a dealer. We say, "Mr. Dealer, you're going to get all the people that come out of this funnel. You got to call 'em. You got to treat 'em right. You got to be professional. You got to give them a price over the phone. And you've got to be competitive."

And the funnel is governed by their physical location and what line of cars they sell?


We survey all the customers, and we get reports back. We either do post-mortems, where we actually call customers when we suspect something's wrong, or we have electronic surveys. If we find a problem, we put the dealer in training; if we don't see an improvement, we take that funnel and we move it to another dealer.

And the dealers? I tell you what. They pay attention. They take care of it. Because when a guy comes to me and says, "We're going to send you 100 deals a month," what am I going to do? And that's why it works real well.

We've had Toyota say to us, "You know, you do what we can't do. We can't do what you do." The factories cannot do what we do because we are not involved in the same relationship with a dealer, as a distributor or as a manufacturer, and we can say, "Look, we have customer service standards, and you've got to adhere to them or we can pull with 30 days notice." And we do do that.

How is it, in your opinion, that this really customer-hostile model has survived as long as it has?

The US has probably the worst formula for distribution. The manufacturer's trying to control the distribution channel, and they're after sales. I don't care what anybody says to you, the manufacturer can say: "Look, I'm into air bags; I'm into safety; I'm into cars lasting long; I'm into 100,000 mile tuneups." They're into every one of those things because over the years this is what customers have said will make me buy your car.

They're not into developing better product because they have some altruistic motive. Their motive is profit.

Right. If customers wanted Pinto Flambé...

Exactly. So they're driven by what the public wants. But in the meantime they want to control what you think and what you want.

And they go to great pains to keep you from finding out all kinds of stuff.

Well, see, they don't want you to have the information we give out there to customers in terms of competitive analysis. It's not favorable to a lot of companies, and it's not favorable to dealers, but the reality is that our customer is a retail buyer.

Adding to the problem is that in the US, the dealers over the years have contributed quite heavily to local state legislators. With contributions, they convinced legislators that they had made an investment in bricks and mortar and in inventory and in people in that Congressman's or Assembly person's district; and that because they had made that investment, it is a detriment if there's some other type of distribution model that can be put together for less money.

A form of pork-barrel legislation.

Yes. It's a beautiful one.

So now, a lot of the state legislatures have enacted franchise laws for dealers that give them tremendous protection, where the factory has not as much control over the process. If you're a bad dealer, I mean, it could take them five years to get you out of business.

So the franchise dealers are protected; the manufacturer has put too many dealerships around; the dealer's trying to survive, so he puts in these competitive sales practices that are anti-consumer, but he didn't know that when he put them in.

A whole industry was spawned around a lousy model. And it was unable to be shaken down.

Now the Internet comes along, and it allows consumers to be educated. It allows them to inexpensively be routed through dealers. It changes the distribution model, and not without a lot of fear from car dealers and from the manufacturers. GM went up with GM Buy Power, Chrysler's trying to do Chrysler-By-Tel—I mean, they tell us. Toyota trying to do Toyota-By-Tel.

What they don't have is the ability to change what happens at the dealership level. We can. If there are three Ford dealers in Oakland franchises, Ford can't consolidate the people who come through the Internet and give those dealers incremental sales. All they're doing is just taking the sand pile and moving it around. They haven't done anything more for the dealer, so they haven't done anything more to create efficiencies for the consumer. Which means they will fail—that model.

They've got another gateway into the store, but that's about it.

Andersen Consulting came through here and they said they were impressed with our concept. They said: "The consumer value proposition is fundamentally sound. The service adds value to the consumers, low pressure, integrity, objectivity, speed, informative, et cetera, and the process reduces the dealer's selling cost, which enables competitively managed prices for ABT products and services."

Our surveys show us that the customers are essentially paying the dealer about half the margins they normally do. Here's the funny part of that: The dealer makes more money. [laughs]

Explain how that works.

Let's say that a dealer sells you a new car for $1,600–1,700 gross profit. He will have attached to that $7–800 worth of personnel costs, $3–400 worth of marketing costs, $50–100 worth of floor plan, which inventory costs. And then the fellow to wash the cars and the maintenance and stuff like that might be another $25–100 a car per month. And next thing is you're looking at a cost to sell a new car at about $1,550 or so for all expenses. The dealer sells you the car for $1,600 or $1,650, he makes $100 on the car.

Is that number real? NADA said last year that the dealers in the United States made $77 profit per new car sold. So those numbers are right on. We all know that in the car business. I knew it. I saw it. Most dealers lose money on new cars.

The average car salesman in the US sells nine cars a month. And in the Auto-By-Tel process, one person can sell 25 to 35 cars a month. The reason they can do that is because you're a highly qualified, educated, ready-to-buy customer, coming down through the Internet into a dealer, and he can call you up, give you the numbers, and you can be in and out of a dealership in an hour. It's not a half-a-day deal.

Plus, he doesn't have to have five people taking care of you. If the dealer adheres to our financial model, where they pay the person a salary and a stipend per car, he comes up with a cost—including personnel and marketing—at under 300 bucks a car.

So it's a huge savings. Now the dealer that sold you the car for $1,600 gross profit and, because he had all those other costs added to it, made $50 or $100 net, can afford to sell you a car for half his margins, or even less, and he might make, net, $2–3–4–500. So he sold you the car for less.

It's a win-win.

It's a win-win. And that's the same thing that Andersen said. They said the business [reads] "creates an attractive profit opportunity for dealers. That it creates incremental sales for a restricted number of market area for the dealers; it provides the ability to maintain or improve dealer margins by substituting ABT technology for dealer labor costs; and that it creates enhanced opportunities for an expanding array of consumer-oriented services such as finance and insurances where we can drop the cost for the customer."

We did that on financing. We went to Chase Bank and we're Chase's biggest customer right now. We said, "Look, we're going to take all of our Internet customers and if they want financing, we're going to send 'em to you. We want the best rate in the US." So they gave us an across-the-board rate that is almost unbeatable. We're at credit union numbers for customers coming through the Internet on a national basis.

What'd I do for you? I did a favor for you as a customer. I did a favor for the finance institution 'cause I lowered their costs with the amount of business we send them, incremental business that they would have never seen. And then—catch this!—we now brought the dealer into the equation, and they make money on the financing. And we've still got the lowest rate.

So we've taken nothing away from the dealer. All we've done is provide efficiencies that the Internet allowed us to do. And we have given the customer the benefit of those efficiencies.

Instead of having the five people that the customer gets marched through at the dealer's, they deal with one person, and on the back end, as it were, Auto-By-Tel is handling the things that those five people did.

Right. We bring the dealer a shrink-wrapped customer [laughs], you know, financing, sold, "I'm going to buy a 1998 Eddie Bauer Ford Explorer moon-roof, 246a package, cranberry, parchment interior." That's what we do.

Then there's the financing, there's add-ons—how does that work?

We've moved the financing onto the Internet. The after-market product will be moved on within the next couple of months.

After-market is like moon-roofs and...

Service agreements, telephones—whatever. Through our electronic system—'cause all of the dealers now are moving to an electronic interface on our database—they can put their product in there. So when you're on the Internet and you put in a request for a Suburban, out will come a little menu that says, "This dealer has made available to you running boards, regular $395, $225. Cellular phones, regular $295, $50 with activation." So you can buy these things from the dealer without being pressured.

Now. What benefit does that give to you or the dealer? Well, we're telling the dealer, "If you've taken out $600 worth of personnel costs in the car, and those personnel costs are there to try to sell you the cell phone, sell you the running board, take it off the cost of your after-market product and give the customer a benefit for coming to you shrink-wrapped. And let the customer make the choice, where they've actually pulled the product out of you, rather than you've pushed it down their throats."

We have got dealers where the lightbulb has gone on across the United States, and they go, "I got it!"

And then we have dealers that still are saying, "I got it!"—and then they go back to their dealership and they're saying, "Those people aren't going to tell me how to do my business." And they continue to stay ax murderers.

Well, when they do that, we find out who they are pretty quick and take them off the program. And we look for guys with a lightbulb on that says, "I'm in this for the long haul, and I'm going to take care of the customers and I'm going to make this work."

When dealers come to you what are they driven by? Terror? [laughter]

In May, 1995 a dealer back East called me up and he said he wanted to sign on the program. So I talked to him and I explained to him how the program worked just like I've talked to you, and he said, "I want you to know this, Pete Ellis—I'm going to take this program, I'm going to send you a check."

Remember we grant dealers exclusive territories, so if there's three or four dealers in Oakland and I give it to one, the others that didn't get it are out. So this dealer said, "I'm taking it to protect my territory. But make no mistake about this, Pete Ellis, you are the enemy."

That's a little conflicted of him, isn't it?


He said, "I'm going to take it to protect my territory," and that's the fear.

And I said, "Wait a minute, we're your savior, not your enemy, because if the marketplace wants a change in the way people buy cars, and e-commerce is going to become a model, then the investment that you've made with us to stay at the cutting edge in the very front of this transition will keep you ahead of your competitors.

"Rather than be someone that you look at as an enemy, we should be looked at as your salvation and your savior in this thing, because that's truly who we are. We're making a huge investment in a technology infrastructure to drive down your costs and to bring you more customers, and, essentially, your competitor across the street, who wants to try and match you dollar for dollar in terms of pricing, will not have the competitive advantage you do. And over time, it'll be like him putting a 12-gauge shotgun to his head and pulling the trigger.

"So you will win in this deal. But in order to win, we've all got to be partners in this and I'm meaning it's a triumvirate: The customer, you, and us."

In a non-adversarial relationship.

Yeah, yeah. We're your friend.

And so now, we have dealers that really understood this, and have made substantial investments in making this work in their businesses. In a lot of dealerships across United States we account for about 40% of their volume.

At some point in time, when most of our dealers are seeing a good portion of their business come through their doors through Auto-By-Tel, our thought is: "Take down your old structures. Get rid of your old sales models and just convert to a totally consumer-friendly model that offers low costs—and we have become your catalyst to change to a new selling model that you never had before." That's our long-term goal. The thing that we hope at the very end is that all of our dealers are the ones that are left standing and doing real well, because they addressed the issues head on with the consumer.

In this letter I was reading from earlier, Andersen came out and said that the car companies are interested in trying to beat the other competition. They're not interested in trying to figure out how to change the channel and make it better for the consumer. Because whatever is better for the consumer is consumer-driven and if it's consumer driven the manufacturers lose control. And they don't want to lose control.

And that's, in a sense, entirely what the Internet is about—seizing control back, doing end-runs around existing power structures.

Yeah, the consumer ends up control-->ing it, you know.

Do we win every time? No. Will we win every time? Each year it's going to get better.

We have some things right now that happen at dealerships that we don't care for, we find out about it, and we get into it, but at least we're that third party that's doing it. And because I understand the industry and our people in here understand the industry, we're a lot more effective than any one individual could be.

I think it's been that model that has really driven our volume so high. We started this company with the idea that we were going to have 15–18,000 customers a year. A year! And in the sixth day that we lit the product on Prodigy, we got 1,348 requests for cars.

You definitely struck a nerve.

We thought, "Wow!"

I just checked this morning (April 15). We had 3,700 requests for cars today. Just today.

Were those all firm purchase requests?

"I want a 1998 Toyota Camry in black with all these things and I'm buying within 30 days." Most of them within a week. We've got a highly qualified, highly motivated, highly educated, ready-to-pull-the-trigger buyer. The numbers continue to get bigger because there's a lot of people using the system and it's working for them, and we continue to monitor the process and build the quality of our dealer group.

We know that when this thing gets judged in five years, it's not going to be how many people came through to buy a car, it's going to be how many people came through and bought a car. That's how we're going to be judged.

How does Auto-By-Tel make its money?

Dealers pay us monthly fees and we make origination fees from lenders for credit.

Do you get a cut of each car sale?

No, no we don't. It's too complicated to do it that way.

We charge a dealer based upon his product and his area. We do get a cut on each fee on the loans, but if a customer comes in to this thing and we're one or two points below any competitors out there, what do they care if we made 50 or 75 bucks? We've got to have some way to support the infrastructure.

Our travel rate in December was a million requests. We had a huge increase in January, in February and March, and our travel rate now is a little bit more than one million three.

What does "travel rate" mean?

People asking for cars. We're over 100,000 a month—well over that. The new car industry is a 15-million-car industry, approximately—14.5–15 million. Three million go to Hertz, Avis and whatnot. Twelve million go to the retail customer.

We are going to touch 10% of a trillion-dollar industry this year in terms of people coming through the system to buy a car. Not everybody buys a car from us, but we're touching 10% of the whole marketplace in the US for cars. It's huge.

As we get better and better with our dealers and control a better aspect of sales ratios at dealers because of our standards, our monitoring of standards and training of the dealers, we've got a very healthy product.

What percent of serious inquiries actually result in sales and how does that compare to the analog world?

We've got dealers in this system that are selling over 50% of the customers that come through the Auto-By-Tel system for their dealerships. We've got one dealer that's going to speak to our dealer group in May—we're going to do a satellite telecast to all of our dealers. He claims he's doing 78% of the people that come through the system, which is huge.

Traditionally, dealers do about 17%—17 to 20%. And I'd say that if we blend the good dealers and the bad dealers, we're probably somewhere in the upper 20s—25-30%, which is higher than traditional.

Our national goal by the end of this year is 50%. We've really turned the heat up on that, and part of it is our communication with dealers. We have a big dealer meeting at the end of this month with some of our top dealers to discuss strategies and how we implement fulfillment at dealerships.

Then in May, we'll talk to most of our dealers by satellite. They go to these classrooms and it's interactive, they can actually ask us questions. We talk to all of our dealers and we lay out how the strategies are put together and how to go back and make it work for customers. And then we drive that home with training sessions every month across the US. So I think we can get there. I think we can get very close to a 50% close ratio by the end of the year.

When I first saw your site it was much simpler than it is now. How did all this come about and what kind of alliance-building did it take to do it?

In the very first days, we had, "Make a request for a car." We had no spec or research information, and we were still doing pretty well. But we saw vendors out there on the Internet that were supplying information to customers, and we thought, "Boy, that's it. Let's go get the vendors on our site, where we get a customer better educated. Because the more information they have, the more apt they are to buy a car."

Historically, what has happened is that the car sells for $20,000. The customers think that the dealer paid 15, so they go to the dealer and they offer him 13 and they go through [sounds of slapping each other around]. Whereas now, if you know that the dealer paid 18, and maybe he's got a $500 kick or a rebate on it, so he's in at 17.5, and he tells you you can buy it at 18, you're going to say yes. What the heck, let him make a couple of hundred bucks.

We learned that having the customers have that kind of information was helpful. Not only to the customer, because it met expectations; it also worked well for the dealer because he wasn't having to go defend his position. Within about six months of the time we lit the site on the Internet we started bringing the information up and did contracts with suppliers.

We're working on something now, so that when you go through our site and you click on a Ford and you start clicking on equipment packages, it will give you totals: retail, wholesale, rebates, everything on it. And then you can just put: "I want this car," and you push, and you don't need to fill out a form. We'll have all the information that you just logged in with.

The natural progression for us, because of my background in the car business, is for me to try and build efficiencies in insurance and financing and after-market products, and used cars. Once we attack the new car model and put the platform together, the distribution platform together, then we go do used cars.

The only way we could figure used cars out was to give people a safe environment to buy them. When you buy a new car, it's a commodity. A Ford Explorer is a Ford Explorer. But a 1992 Ford Explorer is not the same as another 1992 Ford Explorer.

So, what we did with our used car product was to give the customer a money-back guarantee. It's a certified vehicle, so when the dealer sells you a car, if it's a lemon or you don't like it, you can take it back and get all your money back. That way we commoditize the used car.

That's a condition of the dealer being an affiliate?

That's right. So it's a real safe car.

Plus we put pictures up and we have a lot of warranties with the car, so we've really done, I think, a good consumer service there on that side.

One of the other big success stories on Internet business, similar to you in some ways, is Amazon.com. They have no physical bookstore themselves at all, but they have a huge virtual bookstore that's got millions of little distributors.

Do you foresee a time that your model becomes so successful that the storefronts start shrinking and the physical lots start shrinking. They just pull cars from the dock as needed and their real estate costs go down and their property taxes go down. I would think some of these guys that say that they're doing 50% of their business with you would start looking at the rest of their business.

Oh, absolutely. I think we're just a little bit premature in that part of the concept, but I think you're absolutely right. It has to go there.

And the next natural step maybe—I've been there for two years, the factories haven't been—is that when you put in an order to us here, we know how to extract and make that order exactly like a factory order. Then we send it right to the factory, and the factory gets it right to the dealer through a distribution point. Then we've taken one step out.

So that when you put in a request for a Cadillac STS black or whatever, Cadillac just moves it right to the dealer once you've said, "I'm going to take it." They're aware of the customer, as well as the dealer.

Then we get to leave Cadillac in control of the process. [laughs] In their own mind they got to say, "Well, we got to play in this thing. We got to be in control."

We're actually talking to a couple of manufacturers because they see that as they've tried to compete with us or tried to implement parts of this model, it doesn't work. GM put this Buy Power program out and it was incredibly unsuccessful. They're trying to change parts of it, but in order to survive in the upcoming years the manufacturers are going to have to look outside their own four-walled buildings. It doesn't mean going on the Internet. It means partnering up and doing things that they never thought they'd do before.

The whole partnering thing is something that you've been extremely successful in dealing with at a number of levels. One of the things that struck me in reading your materials was that you were talking about how in a conventional model, your car dealer would spend $15,000 for a full-page ad in the Saturday L.A. Times to bring customers into his store, and so if he did this every week, he'd be out $60K a month just for advertising. But if he goes with Auto-By-Tel, you've essentially taken over his promotional task, right?


The L. A. Times hates you...?

You know that most newspapers in the United States will not allow our dealers to put our logo in? Boston, L. A. Times, I don't think the Register does either.

So you're totally the enemy.


Contractually, we used to have in our agreements that the dealers had to put our logos in their newspaper ads if they were over a certain size, identifying themselves as an authorized Auto-By-Tel dealer. All across United States, we had dealers call us and tell us we couldn't do it. And then in Canada, when we tried to advertise full-page ads of Auto-By-Tel, they wouldn't take our ads. I couldn't go to the L. A. Times and place an ad for Auto-By-Tel. Isn't that something?

There's these various newspaper conventions and the headlines are: "How to combat Auto-By-Tel." [laughs] That's a headline! I'm going, "My God! Now I've got the newspapers after me."

But you, in turn, take the fees that the dealers pay you, and you go and have arrangements with the various search engine sites, and you buy Super Bowl airtime, and stuff like that.

And you know, I'd go have arrangements with newspapers if they'd let us.

It seems to me it's pretty interesting how short-sighted they are. Over time they can't win.

Some newspapers put together a deal called "Cars" to try and combat us, where they had local dealers and they could put up their cars. But the reality is they can't control the process.

How do they go tell the dealer: "By the way, you just cut that customer's hands off and we're going to get rid of you?" How do you do that? That's your revenue stream.

What kind of technological plumbing does it take to run all this? Does it all sit here on your site? Is that computer room that I saw the brains of Auto-By-Tel?

We actually have other computer rooms here, too. We have a lot more going on.

But all the operations are located here?

Yeah, but we can't do that internationally. In the European Bloc countries you're not going to be able to transmit consumer data outside of certain areas.

That was sort of an unexpected backlash of their privacy laws.

Right. So as we go forward, with Auto-By-Tel-UK or whatever, we'll move those servers and everything, and we will export the technology and systems to the local countries.

The car business was sort of a natural for this new approach because it was so customer-hostile and just so egregiously ugly for all concerned. It was ripe for improvement and you were in a position to improve it. Do you see any other similar opportunities out there that people aren't taking advantage of?

We can see a lot of things happen on the Internet that are attacking a lot of businesses that can use some type of distribution restructure. Insurances are going to really be interesting. I think this new technology is going to be phenomenal for that.

I just bought a home. I got it financed on the Internet. I went to either Excite or to Yahoo and went into Home Mortgages, went into comparison home mortgages, selected the company with the lowest rate, and applied and got my loan with them in a couple of days.

On the Internet. A home mortgage! [laughs]

And buying a home traditionally is an even uglier process than buying a car.

I think about all the homes that I've bought traditionally, and I thought I was sophisticated, but here's what happens. You go buy a home and then your broker tells you, "You know, I've got a mortgage banker or mortgage broker that you go to and they'll get it for you." But by the time you got all the points and all the stuff that you went through, the mortgage banker made some money, the broker did, then the other company. They told you, "They're the best company to go to." Why they're the best company to go to is because they all got fees.

You go on the Internet, it's totally transparent. Just as transparent as the auto purchase is. So I think that that's going to be a great place.

Financing of any product is going to be a great place on the Internet. You need to be able to have something that is identified as a commodity on the Internet. Amazon.com can go sell a book because people know what that book is. I think it could be potentially more dangerous to sell a piece of jewelry because there's no branded jewelry. How you're going to bring QVC onto the Internet real well, I don't know.

I think clothing could do it. Polo. Armani. Somebody who's got a name brand recognition could, I think, go on the Internet and change their distribution process, but at great pain because they're liable to destroy their stores, their retail outlets. So I don't know. But someday.

People have asked us if we'll get into boats or motorcycles or stuff like that, and I suppose that if we were kind of piggy, we'd go out there and try to figure out how to do that right now, but we have got such a job to do.

Your plate is kind of full.

Yeah, it's pretty full. We're just going to stick with this.

Copyright © 1998 by Mary Eisenhart and MicroTimes. All rights reserved.