Priceline.Com

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PRICELINE.COM

From a consumer's point-of-view, it was a great concept, one that truly seemed to leverage the power of the Internet for the benefit of the consumer. The concept was deceptively simple: Let the consumer decide how much he or she would be willing to pay for an item, then find a business willing to match it. From a business point-of-view, though, there were many questions. How many airline companies, for example, would really consent to providing tickets on a name-your-price basis to consumers? And if it worked for airline tickets, could the concept be successfully applied to other goods and services?

These were some of the questions that Jay Walker and his company, Walker Digital, believed they could answer when they established the pioneering name-your-price Internet business, Priceline.com. When Priceline.com opened its Web site in April 1998, it was limited to offering airline tickets. Travelers could book tickets through Priceline.com by listing their points of departure and arrival and their travel dates (but without specifying a time of day), and then naming the price they were willing to pay for the tickets. Participating airlines, which Priceline.com refused to identify at first, had supplied Priceline.com with a database of unpublished fares, which Priceline.com searched each time a ticket request was made. If tickets were available at the requested price, Priceline.com would issue them within an hour for domestic travel and within 24 hours for an international ticket. Buyers were notified by e-mail, first to acknowledge their request and then to confirm whether the tickets had been issued. The tickets were nonrefundable and non-transferable, and flyers had no control over the time of day they would be flying.

Although Priceline.com claimed to have the participation of several major airlines in its program, the company refused to identify them, honoring the airlines' desire to have consumers pay higher prices by ordering through other sources. It was reported that Continental, U.S. Airways, and American Airlines were not involved and that Northwest Airlines and Alaska Airlines were in discussion with Priceline.com. It later became known that Delta Airlines was a major investor in Priceline.com. Airlines were willing to participate in Priceline.com 's program, because they felt that Priceline.com was offering tickets that otherwise would have gone unsold. The airlines did not perceive the Priceline.com model to be a threat to the published fare system, but rather as a complement to it. On its first day of business, Priceline.com claimed to have 621,000 visitors and requests for $575,000 worth of tickets. However, the company did not say how many ticket requests were actually filled.

EXPANDS NAME-YOUR-PRICE CONCEPT TO OTHER GOODS AND SERVICES

During 1998 Priceline.com expanded its business model to let consumers name their price for hotel rooms and, on a limited basis, automobiles. Consumers who successfully bid on a car paid $25 to Priceine.com for each completed sale, with dealers kicking in another $75 to Priceline.com. Later in the year Pricline.com began offering hotel rooms from more than 1,000 participating hotels on a name-your-price basis to consumers. While consumers could not pick a specific hotel, they could specify a two, three, four, or five-star rating for their hotel along with a specific city, an area within the city, and the nights they wanted to stay. Matches were confirmed within an hour, and a non-refundable and unchangeable reservation was issued.

In August 1998 Priceline.com was granted a patent on its business model. The model was developed in 1995 by Walker Digital, whose business was to generate patentable business ideas and sell them to other companies. According to Inc. magazine, "Priceline.com 's patent covers 'bilateral buyer-driven commerce,' in which a consumer names the price at which he or she is willing to buy a product, lists acceptable substitutes for that product, guarantees the intention to buy with a credit card, and then transfers to a 'controller' the authority to conclude the transaction. The controller then alerts sellers, who may accept the offer and charge the buyer's card." While Priceline.com was hoping to generate revenue by licensing its patented business model to other Internet firms, many remained skeptical whether such "business model" patents were enforceable and whether the courts would uphold them.

By the end of 1998 Priceline.com was selling 1,000 airline tickets a day. Its aggressive radio and newspaper advertising strategy (later expanded to include television) featured the actor William Shatner as a spokesperson and resulted in the company having name recognition among at least a quarter of the U.S. adult population, or some 50 million people, according to a study by Opinion Research Corp., which listed the top five Internet "megabrands" as America Online, Netscape, Yahoo!, Amazon.com, and Priceline.com.

GOES PUBLIC IN 1999 AND FURTHER EXPANDS ITS BUSINESS MODEL

Priceline.com 's initial public offering (IPO) on March 30, 1999, was one of the hottest Internet IPO's of the year. The company raised about $115 million from the initial sale of shares at $16 each. By April 18 the stock had reached nearly $60 a share. When the company announced on April 26 that more than 1 million customers had tried Priceline.com in its first year, the stock rose to $121 a share. Forbes noted that Jay Walker's initial $25 million investment in the company was now worth $4.3 billion.

During 1999 Priceline.com expanded its business model to include mortgages and automobiles. It created a new automobile unit and hired Maryann Keller, a veteran auto analyst, to be in charge. Her mission was to take the company's automobile business, which was available only in New York, nationwide. Later in the year AutoNation Inc., the world's largest car retailer, agreed to a three-month test in the Tampa, Florida area, whereby it would submit bids to try and sell cars to consumers who had named a price for a specific vehicle on Priceline.com.

Priceline.com first offered mortgages through an alliance with LendingTree Inc., which would forward mortgage requests to 22 lenders in its network. Priceline.com and LendingTree subsequently added home refinancing and home equity loans. Later in 1999 the company expanded its mortgage business by establishing a joint venture with Alliance Capital Partners of Jacksonville, Florida, called Pricelinemortgage. The companies claimed their online mortgage application process would save consumers up to $1,000 in closing costs.

Meanwhile, more major airlines were signing up and providing seats to Priceline.com, including Continental and Northwest. The company claimed that it had improved its matching rate on reasonable bids from 11.2 percent in 1998 to more than 42 percent in 1999. Priceline.com made money on each transaction by purchasing tickets from the airlines at prices lower than consumers were willing to pay for them. Those tickets were selected by Priceline.com from a private fare database to which the airlines had contributed a portion of their ticket inventory.

As a public company Priceline.com reported losses of $17.2 million in its first quarter of 1999 and $14.3 million in its second quarter. Second quarter revenue reached $111.6 million, nearly double the company's first quarter revenue. A secondary offering of stock and convertible debt raised some $500 million in new capital in 1999. As part of the offering Delta Airlines sold 1.5 million of its Priceline.com shares, which were worth about $145 million. Although the company did not expect to turn a profit anytime soon, its stock remained popular with investors. Its services were also a hit with consumers. A single-week sales record of 50,000 tickets prompted Priceline.com to announce that it had captured more than two percent of all leisure airline ticket sales in the United States. By the end of the year United Airlines, US Airways, and American Airlines had joined Delta, Continental, Northwest, TWA, and America West as participating airlines.

CUTBACKS AND FALLING STOCK PRICES MARK 2000

Prior to the start of 2000 Priceline.com announced it would begin offering groceries on a name-your-price basis through a new venture called Web-House Club. The new service was introduced in the New York City area in November 1999, with some 600 stores participating. Customers could name their price for groceries and other non-food items, but they could not specify specific brand names. If their prices were accepted, customers would be quickly notified by e-mail, their credit cards charged, and they could print out a voucher that would be accepted by a nearby store. Participating retailers hoped the new service would boost store traffic and increase the average size of each consumer's market basket. Priceline.com planned to roll out the service nationally over the course of the coming year, with Philadelphia and the Baltimore-Washington, D.C. markets getting the service next. Although WebHouse Club had a specific financial relation to Priceline.com, it was set up as a separate privately held company and its revenue figures were not consolidated with those of Priceline.com.

One of the first indications that 2000 might be a difficult year for Priceline.com also came toward the end of 1999, when Microsoft Corp. announced it would offer reverse auctions for hotel rooms on its travel site, Expedia. After Microsoft offered its Hotel Price Matcher service for about a month, Priceline.com brought a lawsuit against Microsoft to defend its patent on buyer-driven commerce. The news caused Priceline.com 's stock to fall to just one-third of its previous high.

At the beginning of 2000 Priceline.com launched several new services. The company announced it would add domestic and long-distance telephone service for business and residential customers through an agreement with Net2Phone, a provider of IP (Internet protocol) telephony. After an initial test period, Priceline Long Distance was launched in May 2000 with three service providers: Net2Phone, Deltathree.com, and ZeroPlus.com. The service allowed consumers to bid on prepaid phone cards for long-distance service.

Priceline.com also began to offer deals on car rentals, with National Car Rental System Inc. and Budget Rent-A-Car Corp. participating. The Hertz Corp. and Alamo Rent A Car LLC joined the program in mid-2000. An agreement with NextCard Inc. resulted in the creation of a co-branded Priceline.com credit card, which allowed customers to name their own terms for a co-branded Visa or MasterCard credit card. In addition the company expanded its new car sales service to 13 additional states, making it available in 26 states. Ford Motor Co. also agreed to a Florida market test, whereby customers could submit a bid for a car through Ford's Web site that would be distributed to Ford dealerships in the customer's area. By May the auto service was available in 48 states, competing directly with sites such as CarsDirect.com, Autobytel.com, and Autoweb.com.

Another new venture was Perfect YardSale, formed by Priceline.com and an Atlanta, Georgia-based company of the same name. Perfect YardSale would use the Internet to match buyers and sellers of secondhand goods. Perfect YardSale would generate revenue from fees collected from sellers for listing their goods and for successful sales.

Priceline.com found the early results from Web-House Club encouraging. In the New York metropolitan area it had achieved two percent market penetration in the first three months and hoped to achieve three to five percent. WebHouse Club had 150,000 active members and sold more than 5 million grocery items in its first three months. In April Safeway grocery stores joined the service, followed by Kroger in June.

Rising gasoline prices in early 2000 made Priceline.com 's announcement that it would offer gasoline on a name-your-price basis seem well-timed. To obtain their gas, consumers picked the grade of gas, at least three gas stations from a list, and a price. They would then be notified if any stations accepted their bid. Consumers would receive a refund if the pump price dropped below their bid price before they purchased their gas. Offered through WebHouse Club, the name-your-price gasoline service appeared to have garnered little support from the petroleum industry when it launched on May 20, 2000. Priceline.com hoped that the major oil companies and refiners would subsidize part of the savings to attract new customers, but none were willing to participate in the program. As a result, Priceline.com subsidized the consumer discount from different sources, including fees from paying retail partners, revenue from paid advertising on its Web site, and third-party sponsors. Priceline.com formed partnerships with about 5,000 independent gasoline marketers. The service was also available through about 25,000 outlets that accepted the US Bank Voyager Fleet Card, the debit card that also administered Priceline.com 's gasoline card.

FIRST OF MANY PROBLEMS

Slumping sales of airline tickets caused Priceline.com to announce its third quarter revenue would be down $20 to $25 million from the second quarter and well under analysts' expectations. The announcement in September 2000 caused the company's stock to lose 42 percent of its value in one day, reaching a 52-week low around $10 a share. By the beginning of November the firm's stock was trading for less than $5 a share, and the company announced it would lay off 16 percent of its workforce, or about 90 workers. Another 48 workers were let go at the beginning of December. Around this time Priceline.com began to experience a series of executive departures, including its chief financial officer Heidi Miller and the head of its automotive unit Maryann Keller. Company founder Jay Walker vacated his position as vice chairman at the end of 2000 to spend more time focusing on the business challenges facing the firm.

At the beginning of October 2000 Priceline.com announced that it would shutter its WebHouse Club affiliate, through which the company offered name-your-price groceries and gasoline. At the time of the announcement WebHouse Club had been operating for 11 months and had about 2 million grocery and gasoline customers, with some 7,200 grocery stores and 6,000 gas stations participating. The reason given for the closing was that the company was unable to raise enough capital for the coming year to complete its business plan and start turning a profit.

Other problems facing Priceline.com in the final quarter of 2000 included the advent of a competing airline ticket service, Hotwired.com, which was backed by a Texas investment group and six major airlines: America West, American, Continental, Northwest, United, and US Airways. Unlike the Priceline.com model, though, Hotwired asked consumers to indicate when and where they wanted to travel and let the airlines submit bids for the tickets. Consumers would then have 30 minutes to purchase the lowest quoted ticket. Priceline.com was also falling prey to growing consumer complaints about its service. The Connecticut Better Business Bureau received so many complaints that it suspended Priceline.com 's membership for about three months, reinstating the firm toward the end of December 2000.

In spite of these problems, Priceline.com remained optimistic. The company's revenue for all of 2000 rose more than 150 percent to $1.24 billion, compared to $482.4 million in 1999. With these trends under way, the firm hoped to begin generating profits in the early 2000s.