In the pre-bubble 1990s, car buying online was all about empowering the consumer to purchase a car directly from the manufacturer and never having to spend hours negotiating a price with a car salesman. Buying a car today is a different story, and if Santa Monica, Calif.-based Zag.com has their way, will bring people willingly back into dealer’s showrooms to buy their cars.

The difference is subtle but substantial. Today’s online car “purchase” is really nothing more than a widespread lead-generation effort, where dealers pay Internet sites such as CarsDirect.com to send them potential customers’ names. Zag is creating an entirely new sales channel. They began with what GM’s Saturn has offered offline — a guaranteed, no-hassle upfront price — and use computerized inventory tracking along with a series of rebates to produce an entire new method and lower prices for more people buying new (and eventually used) cars.

Here is how it works. You, as the potential car buyer, go to one of a number of Web sites that are part of the Zag network: right now, DriveOne.com is the only one generally available, but soon Zag will have others that it will offer in conjunction with credit unions and membership buying clubs such as the American Automobile Association (AAA). You select the make and model and various options and enter your Zip code. If a Zag-authorized dealer is within 50 miles, the site will provide an up-front guaranteed price certificate for that configuration of car. You print this out and take it to the dealer, who has to sell you the car for that price. As an incentive, DriveOne is offering you a $250 rebate for any new car sold through its site, regardless of whether or not you finance or lease the car. And more importantly, “the customer is price-protected for every car on that dealer’s lot. If you change your mind or change the configuration, you still know what the up-front price will be,” says Zag CEO Scott Painter. Talk about total transparency. “It is a better way to buy a car, and better pricing than the dealer gives most of their customers,” says Brian Reed, the VP for Capital One in Mclean, Va.

The program works by tying together four discrete elements that have never been connected before: pre-qualification for car financing, dealers providing an up-front price, a national computerized current car lot inventory, and fleet purchase programs where typically the margins — and average selling prices — are lower. Each is an important leg of Zag’s business, and if they can execute on all four cylinders, the company can deliver more cars at cheaper prices.

Zag has a close relationship or outright ownership with the major players in each area. The company is partly owned by Capital One, the largest car financier in the country. Zag itself purchased Autoland last year, the force behind more than 300 credit union car buying services in the country. They also own Automotive Invitational Services, the auto-buying program operator that serves more than six million members of 12 AAA clubs around the country.

It has taken Zag several years to pull everything together. They needed to wait for the convergence of four trends. First, the Internet is where the majority of car shoppers begin their research, and most consumers are comfortable with one or more of the various online car shopping sites such as cars.com, Yahoo Cars, and CarsDirect.com. Both car information specialists Edmunds and Kelly Blue Book have poured money into enhancements to their Web sites. “But while the Internet is a great source of information, buyers aren’t in control,” says Painter. Second, dealers are using more computerized inventory and back-office management database systems, especially the larger and new car franchises. These databases offer the ability to track specific car configurations and match them to buyer’s requests.

Third, while fleet services and buying clubs have proliferated, they are still very fragmented and no one has a national footprint. Yet, more dealers have experience with these volume purchase operations and are thus willing to work with Zag to drive even more customers through this channel.

Fourth, dealers are spending more marketing dollars on acquiring Internet based leads. “Today’s dealer spends $20 per lead, most of which they get from Internet sites. What people don’t realize is that you have to surrender your name to get a price quote with today’s online car buying sites,” says Painter. However, the quality of these leads is dropping, as more Internet sites sell the same leads to multiple dealer networks. Zag is attractive to them because it pays a fixed $250 per car purchased. “We charge them nothing if they don’t sell the car,” says Painter.

So what can go wrong with Zag? Right now, the company is only in a few major markets and with just a few dealers, and entered the New York metro area in September. There are dozens of independent databases that must be maintained, not to mention that dealers have to be diligent about updating their computerized inventory records. Dealers will have to train their salespeople to learn how to use Zag’s systems and spend less time haggling over upselling floor mats and undercoating. Finally, Zag has had some problems with its automated email replies when new car buyers sign up, and not all dealers have received training on their network yet. Painter says all of these are growing pains and hopes to have all fixes in place by mid October, to put more people in the driver’s seat. But the bottom line? We are still talking price. “The challenge for anyone selling cars is proving that your price is attractive,” he says.

(This story was written for and (c) by the New York Times but not yet published by them.)