Breaking the Strangle Hold

Compared with Universal Computer Systems Inc.'s $2.8 billion takeover of Reynolds and Reynolds Co., DealerTrack Holdings Inc.'s $58.9 million acquisition of Arkona registered nary a raised eyebrow on the news meter.

It's true, Arkona is a small and almost insignificant dealer-management system vendor. It has only 800 customers and generated only $14 million in its best year — nothing to get excited about.

But long term, look for the DealerTrack/Arkona hookup to impact the industry far more than UCS's bold move will.

DealerTrack's pick up of Arkona is simply a play to force the market into a world where open secure platforms and seamless integration is the reality. DealerTrack has the applications. But it lacked a DMS — the means to tie all the applications together.

For the last 20 to 30 years, nobody has been able to mount any serious threat to the stranglehold ADP and Reynolds has on dealership technology systems. Between the two firms, 80% of the market is “locked” up.

Because of the lack of serious competition, Reynolds and ADP have had the luxury of not really keeping up with modern technology. Both companies will argue this point, but critics say their systems are built on old technology.

Reynolds and ADP believe the applications market is where the money is. So they aren't going to make it easy for other vendors with competing applications to integrate into their systems.

The result is that integration with other systems and applications (true, real-time integration of data, not periodic batch downloads) is difficult and expensive. All sorts of creative contortions are used to get the various systems in the dealership to have some semblance of integration.

Look at your own store. Do your employees have to manually enter customer data from the CRM application into the DMS tool? How about the finance and insurance applications? Dealers complain often about how much double and triple manual entry of data that goes on.

That's not to say ADP and Reynolds are the bad guys. What company in its right mind is going to open the marketplace for increased competition when it controls the market? Essentially, that is what everyone wants the two big players to do.

Good luck.

DealerTrack CEO Mark O'Neil says he tried for years to convince the big players to move toward open integration. “But we couldn't get the message across,” he tells Ward's.

Then DealerTrack's dealer clients began pressuring it to provide more. You're already providing all the pieces,” they told O'Neil. Give us the entire system.

In early- to mid-2006, DealerTrack and Reynolds were far along in talks that would allow for deep integration of the two systems. But once UCS acquired Reynolds, the talks stopped. That's when DealerTrack approached Arkona.

O'Neil hopes his firm can build Arkona into a more credible and serious DMS vendor and finally force other vendors into adopting a more friendly attitude.

There is plenty to doubt whether O'Neil can pull it off. If the execution of the strategy is flawless, it likely will be at least three to five years before the industry sees any effect.

There are other vendors on the horizon with the same idea DealerTrack has. Microsoft Corp. likely will have a working DMS that is in several pilot dealerships to show off during next year's National Automobile Dealers Assn. convention. And it is preaching the same open integration message.

JMsolutions also is lurking out there. There is no indication that it is in the market for a DMS, but it is a serious and big player with a lot of applications and money — just like DealerTrack. So a DMS buy makes perfect sense for the Florida-based company.

The question is whether O'Neil and others will finally force a change in the industry. I believe so, but it's going to take longer than they envision.

Cliff Banks is editorial director of Ward's Dealer Group. He can be reached at [email protected].