Yesterday global private equity firm CVC (through its Nine Entertainment subsidiary) sold 49.1% of its stake in classifieds site
Carsales.com.au for about $565 million.
The buyers were “institutional and sophisticated investors”.
Presumably these buyers gave Carsales a very thorough inspection. It certainly looks good. As the
Sydney Morning Herald writes, “Carsales was one of the burgeoning areas of the media company's business, posting interim profits of $27.7 million, a 45 per cent rise, after a 39 per cent rise in operating revenues to $40 million.”
It’s the kind of Internet business that’s the envy of the old media world. What’s even more impressive is how Carsales overcame old media’s market advantage.
Drive.com.au and
CarsGuide.com.au, owned by Fairfax and News Corp. respectively, should be market leaders given their long-standing classifieds businesses and close ad sales relationships with dealers. Instead, Carsales leads the way in site visits and listings.
Good usability = leadership
Carsales founder and Managing Director Peter Roebuck started the company in 1997 “as a result of his disappointment with the inconsistency of information contained in traditional classified ads when he was trying to buy a car for his wife” (per
The Register.)
In addition to making the site highly usable for car buyers, Roebuck gave dealers an effective platform for advertising the vehicles on their lots. For dealers, every lead from these platforms (which are often seamlessly integrated into dealer websites) costs about $30. For private sellers, every ad costs upward of $60. For Carsales, it’s an online “river of gold”.
But can Carsales compete with free?
The buyers of Carsales evidently thought it was worth paying an enormous price/earnings multiple to get in on this fast-growth, high-profit business. But did they get a good deal?
Over the long term, Carsales faces what could be devastating competition: the market changing power of free.
One of the idiosyncracies of the Australian online media marketplace is the slow growth of free classifieds. In the U.S. and Canada,
Craigslist.com dominates online classifieds. The site isn’t pretty — it was originally designed when most people had dial-up access and it hasn't changed much since then. But it’s usable and almost entirely free (Craigslist covers its costs by charging for job ads in some cities.) That’s made it the 7th most visited website in the U.S. and the leading classifieds service in any medium worldwide.
Craigslist sites for Australian cities have been around for about seven years, but with no promotion or viral spark, they remain ghost towns. Instead Ebay subsidiary
Gumtree.com.au appears to be taking the lead in free online auto classifieds (
Trading Post, which offers free ads for items less than $500, still charges $40 for online car ads).
Ebay has been putting its marketing might behind Gumtree, promoting it across its auction pages. Promoting free classifieds seems like a strange strategy for a site that depends on paid auction listings, but Ebay is well positioned to dominate Australia’s free classifieds business. In addition to generating user revenue from “promoted” classified listings, Gumtree also generates advertising income for Ebay, and gives them an opportunity to create new Ebay auction sellers from the Gumtree user base.
Right now Carsales has 47,582 listings for cars in Melbourne. Gumtree has 4,275.
By 2020, my guess is that these numbers will be reversed. The power of free will take its inexorable toll on all paid classifieds. Consumers will be the biggest winners. And a $1.1 billion price for Carsales could look like the ultimate used car scam.