FTC Officials Back Tesla's Direct-To-Consumer Car Sales Model

In an unusual move, three top officials with the U.S. Federal Trade Commission on Thursday voiced their opposition to laws that ban automakers such as Tesla Motors Inc from selling their cars directly to consumers.

Laws that ban auto manufacturers from also running dealerships are "bad policy" and outdated, the FTC officials said in a blog post. Such laws are currently in place in Arizona, Maryland, New Jersey, Texas and Virginia.

The authors were Andrew Gavil, director of the FTC's Office of Policy Planning; Deborah Feinstein, director of the Bureau of Competition; and Martin Gaynor, director of the Bureau of Economics.

The views are their own and not those of the commission, the three said in the posting, a rare occasion in which FTC officials weighed in directly on an ongoing dispute. It is not clear if the FTC is considering other action on the auto sales issue, but the agency's opinions on laws often hold some weight.

None of the authors of the blog post owns a Tesla, a commission official said.

Dealers argue that their business model is good for consumers because dealers compete on price and offer long-term service. They see direct sales of any sort as an existential threat.

The clash pits South African-born Elon Musk, the billionaire CEO of Tesla, which makes electric cars, against these 17,000 car dealerships, often family-owned, across the United States.

The FTC officials pointed out that the Internet has changed how people shop for everything from toothpaste to a taxi ride. They urged lawmakers to be skeptical of auto dealers' arguments that they need protection.

"Change can sometimes be difficult for established competitors that are used to operating in a particular way, but consumers can benefit from change that also challenges longstanding competitors," the FTC officials wrote.

A dealers' group took issue with the blog post, saying "fierce competition between local dealers in a given market drives down prices both in and across brands."

"If a factory owned all of its stores it could set prices and buyers would lose virtually all bargaining power," said Jonathan Collegio, a spokesman for the National Automobile Dealers Association.

Tesla said it was pleased with the blog posting.

"We agree wholeheartedly with the FTC's conclusion that restricting Tesla's direct sales model is 'bad policy'," said spokesman Alexis Georgeson in an email.

AN OUTDATED TRADITION?

The franchise system was set up in the first half of the 20th century by automakers who did not want the expense of building up their own sales force. The FTC officials said that regulations were created to protect dealers from abusive practices by automakers.

"In this case and others, many state and local regulators have eliminated the direct purchasing option for consumers, by taking steps to protect existing middlemen from new competition. We believe this is bad policy," Gavil, Feinstein and Gaynor wrote in their blog post.

"Regulators should differentiate between regulations that truly protect consumers and those that protect the regulated," they wrote.

The conflict between Tesla and dealers came to a head last year after Tesla introduced its Model S, a $60,000-plus sedan that aimed for a wider audience than the two-seat, $101,000 Roadster sports car it introduced in 2009.

Despite the bans, Tesla has found a way to convince customers to look at its cars. In states where sales are prohibited, Tesla employees show cars in "galleries" and tell customers to complete the sale over the phone or online.

Tesla, which was founded in 2003, had total sales in 2013 of about 22,500 cars.

Musk has said he is not interested in overturning the existing franchise system, but he doesn't want to participate.

Tesla closed little changed on Thursday at $207.86 per share.

(Reporting by Diane Bartz, editing by Ros Krasny, Doina Chiacu and Andrew Hay)