Having seen the Internet gobble up the lucrative business of printing classified ads, the soon-to-be former newspaper giant Gannett (GCI) is going all-in on the digital version of automotive classifieds.
The company is spending $1.8 billion to buy out its partners in Cars.com, a digital platform intended to link drivers with the people and dealerships selling vehicles; Gannet owns 27 percent of the venture, alongside four additional newspaper companies.
The move comes as the media empire spins off its print publications. Gannett shareholders are no doubt wondering if Cars.com is worth $2.5 billion, and it was probably easy for Gannett’s Excel jockeys to make a case. The website has a bit of first-mover mojo. It has been in business since 1998 and makes money by selling classified ads to dealers, the same model Trulia (TRLA) and Zillow (Z) use for house listings. About $6.2 billion will be spent on digital automotive ads this year, according to EMarketer, an increase of almost 20 percent over last year. If Cars.com captures even a quarter of that, its $2.5 billion valuation will not seem dear.
But the business of selling cars is even less-evolved than that of selling ads and newspaper articles. Car dealerships, at the moment, are rather like weekly papers in 2000: They still have a sweet business model, but their competitive advantages are vanishing fast.
Buyers, for one, have never been more informed. And with a proliferation of car reviews, transaction data, and incentive statistics have come a crop of Cars.com competitors—companies that promise they have better, more useful models.
CarGurus, for example, aims to be the Google (GOOG) search of the car hunt. It sells premium placement as ads but promises that its recommendation engine will only percolate up the best options, based on location, price, and the model a user is looking for.
CarGurus also has a decent track record in the startup game; Chief Executive Officer Langley Steinert was a co-founder of TripAdvisor (TRIP). “From a technology standpoint, I didn’t see a lot of cutting edge thinking going on when I researched the space,” Steinert told Bloomberg Businessweek. “And more importantly, I didn’t see that there was a real balance between dealer interests and consumer interests.”
TrueCar (TRUE), meanwhile, essentially acts as a broker between dealerships and buyers. Once the two sides agree on a make, model, and price, the driver can print a “price certificate” guaranteeing the offer. TrueCar collects $300 from a dealer every time someone follows through on a purchase. The company went public in May. According to recent figures, it handles about 3 percent of new cars sales in the U.S. It trades at a market value just shy of $1 billion.
Edmunds.com offers a “Price Promise” as well, in addition to a deep catalog of editorially stringent reviews and a hotline that gives prospective buyers tips on searching and haggling. And then there’s Kelley Blue Book and AutoTrader.com.
If any of the rival companies attains a best-of-breed status in digital car-shopping—the kind of advantage Google (GOOG) has in search, Zappos (AMZN) has in shoes, and Etsy has in crocheted potholders—Cars.com could become a clunker for Gannett. It’s interesting to think about why the company is buying, but it’s equally interesting to think about why the four media companies that have been its partners decided it was the right time to sell.