Thursday, February 3, 2005

Edmunds.com comes out ahead of the market by not going public

By Doron Levin

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Edmunds.com, a leading Web site devoted to car shopping, could have been a casualty of the Internet bust had its founder decided to cash in his chips.

Instead, Peter Steinlauf, 56, elected to stand pat after listening to presentations by bankers who were pitching to take it public. Rather than take on public shareholders, Los Angeles-based Edmunds in 2000 raised $80 million in private capital from Cnet Networks Inc. and others.

With that capital plus internally generated cash, Edmunds has been working nonstop to transform reams of automotive market data into useful information. Data such as the transaction prices of vehicles at dealers, adjusted for myriad trade-ins, discounts and allowances.

Prior to the Internet, car buyers had precious little information other than the sticker to make an intelligent decision about the second-biggest purchase they ever would undertake, after a home.

Services and magazines provided information such as invoice prices from manufacturers to dealers. Even these numbers were likely insufficient, though, since they mostly couldn't account for available subsidized leases, free optional equipment or cut-rate loans.

Besides, invoice prices couldn't indicate what value the market put on a car -- only an approximation of what the dealer paid.

Now it's possible to find out -- if you navigate the Web with precision -- exactly what today's current wholesale or retail market price is for, say, a 2003 Chevrolet Malibu in northern California. Today's price could be different than yesterday's, and different than the price in Maine.

Using related tools, car dealers can determine the exact value of their inventory on a daily basis and, given fluctuating interest rates and prices, then figure out whether it's smarter to send vehicles to wholesale auctions or buy more from manufacturers.

Edmunds.com employs at least six mathematicians with doctorates, as well as numerous software engineers, on a staff of almost 300, to write programs and figure out the algorithms for calculating such numbers as TMV, the "true market value" for new and used vehicles researched on its Web site.

Steinlauf, whose family owns two-thirds of Edmunds.com, says the company would have to be much larger for a public offering to make any sense, given the expense, legal obligations and distractions of operating under shareholder and regulatory scrutiny.

Since Edmunds doesn't have to chase quarterly profit goals, it's in a position to take bigger risks developing the expensive software tools meant to impose transparency on data generated by dealers and automakers -- data thatoften make shopping a mystery.

Edmunds earlier this month introduced Inside Line, an online enthusiasts magazine.

If enthusiasts get so revved up from Inside Line's content that they start shopping for a vehicle using TMV or other Edmunds software , the initiative will work as planned.

Steinlauf could keep Edmunds a private company for a long time. It's looking like an asset with great potential to become more valuable.

Doron Levin is a columnist for Bloomberg News.