Priceline.com Incorporated

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Priceline.com Incorporated

800 Connecticut Avenue
Norwalk, Connecticut 06854-9998
U.S.A.
Telephone: (203) 299-8000
Fax: (203) 299-8948
Web site: http://www.priceline.com

Public Company
Incorporated: 1998
Employees: 359
Sales: $1.03 billion (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: PCLN
NAIC: 541512 Computer Systems Design Services

Former Internet high-flyer Priceline.com Incorporated has surprised the skeptics by surviving the collapse of the tech stock market at the beginning of the 2000s. Priceline.com has pioneered a patented Internet-based “demand collection” pricing system that connects purchasers with sellers under the company’s registered “Name Your Own Price” slogan. Priceline.com applies that pricing system to sales of airline tickets, hotel rooms, and car rentals, and vacation and cruise packages. The company also offers home financing services, including mortgages, mortgage refinancing, and home equity loans. In addition to its main U.S.-oriented Priceline.com e-commerce web site, the company operates priceline.co.uk for the U.K. market, and licenses the Priceline system and brand to Hutchison Whampoa-backed Priceline Asia in Hong Kong. The company also offers more traditional discount travel services through Lowestfare.com. Priceline has proven that demand for its pricing system exists—revenues topped $1 billion in 2002, despite the difficult travel market. Profits, however, have proven more elusive; its share price, which peaked very early on at $165, has dropped to as low as $1.10. Richard Braddock is the company’s non-executive chairman, and Jeffrey Boyd is Priceline’s CEO.

Entrepreneurial Origins in the 1980s

Priceline.com was the brainchild of Jay Walker and his think tank Walker Digital. By the time he founded that company, alimited partnership, in the early 1990s, Walker had started some 20 different businesses—including launching his own newspaper at the age of nine. One of Walker’s first successes came while studying as an undergraduate at Cornell University. Walker came to the conclusion that the popular board game Monopoly was, in fact, a game of skill, not chance. Putting his ideas into a book, 1000 Ways to Win Monopoly Games, Walker sold more than 100,000 copies and earned himself a lawsuit from the game’s manufacturer. (Walker won the lawsuit.) In a break from school, Walker launched a new weekly newspaper, which survived for a full year.

After receiving a bachelor’s degree in industrial relations, Walker set out to blaze an entrepreneurial trail in the early 1980s. By the end of the decade, Walker had put a string of businesses behind him—ranging from a company that sought to place advertisements in catalogs, another that sought to sell catalogs in retail stores, and another that sold light sculptures, succeeding in attracting a number of prominent customers.

At the beginning of the 1990s, however, Walker hit on a new product: ideas. Walker’s brainstorm came after reading about the success of the public key encryption system, which had been successfully patented by its inventors and which formed the basis of a company, RSA Data Security. Walker recognized that, like any other invention, one could successfully patent an idea, or, in Walker’s case, the development of new business models. This discovery laid the basis of Walker Digital, which was incorporated as a partnership (90 percent owned by Walker himself) in 1994. In the meantime, Walker set out looking for ideas.

Walker quickly found his first successful business model. Joining with Michael Loeb, son of the Fortune magazine editor, Walker launched NewSub Services in 1992. Walker’s idea, later patented, was simple—adapt the European model of magazine and newspaper subscriptions, which are linked to customers’ bank accounts and thus automatically renewable, to the U.S. market. The concept was a success, and eventually succeeded in attracting more than 30 million customers. NewSub Services later renamed itself Synapse Group and became majority controlled by AOL Time Warner.

Walker had moved on to new entrepreneurial frontiers, however, selling one-third of his 50 percent stake in NewSub Services in order to raise $25 million for his next venture. In 1994, Walker founded Walker Digital as a think tank for business-oriented patents, based on the model of Thomas Edison’s collaborative Menlo Park laboratory. Walker Digital’s team of thinkers quickly began churning out ideas—and patent applications. By the end of the decade, the company had more than 300 patents to its name.

Pricing Revolutionary in the 1990s

By the mid-1990s, Walker Digital had developed the business model for a new style of pricing system that sought the inverse of the customer-retailer relationship. Under Walker’s system, customers were to “name their own price,” placing a bid at a price they were prepared to pay for a particular product. Retailers then would choose to accept or refuse the offer. Among other advantages, the system enabled retailers to unload surplus merchandise without calling attention to the discount pricing.

By 1996, Walker had targeted the first area in which to deploy the new business model. The airline industry appeared to be the perfect testing ground for the idea—on any given day, airlines were flying with some 500,000 empty seats. Walker proposed setting up a service that would allow airlines to sell off the empty seats at discounted prices—without advertising the cut-rate fares.

By 1997, Walker Digital had put into place the concept and software structure for priceline.com, an Internet-based “name your own price” ticketing service that matched customers to airlines. Customers placed bids for the round trip of their choice, and the price they were willing to pay. In return, customers accepted certain limitations—such as the choice of airline and exact travel times, while also accepting at least one connecting flight. Priceline, which reserved the right to reject unreasonably low bids, used its database software to match buyers with airlines willing to accept the price bid. Priceline was formally created in 1997, backed by the rights to part or all of some 19 Walker Digital patents, and a $500,000 investment from Walker himself. In exchange, Walker and Walker Digital took a 49 percent stake in the new company, headquartered in Connecticut.

Yet Priceline nearly did not get off the ground. Walker met with resistance from the major airlines, then in the process of developing their own Internet web sites and reluctant to assist a potential competitor. By the beginning of 1998, Walker had succeeded in attracting just two relatively small airlines, TWA and America West. Walker pressed ahead with the venture anyway and launched priceline.com in April 1998, backing the launch with a highly popular advertising campaign featuringformer Star Trek star William Shatner as company spokesperson. Shatner was paid in part with shares in priceline.com.

The site was immediately successful, with more than 600,000 “hits” on its first day and more than 30,000 ticket sales in its first two months. Priceline.com, unable to meet the demand through TWA and America West alone, instead was forced to buy tickets on the retail market—subsidizing customer orders at an average of $30 per ticket. The company’s losses mounted quickly. As Walker told the Financial Times: “I took an enormous risk launching Priceline, both personally and as a company. It took a lot of guts.”

By mid-1998, the company appeared ready to collapse. At the same time, Walker faced a great deal of criticism, in part because of his boldness in patenting business models and, in part, because to many, priceline.com appeared to be simply a variant on the discount coupon—a means of identifying priceconscious consumers among the larger, brand-loyal public.

The turning point for the company came in August 1998. Walker handed over the reins of the company to Richard Braddock. “As an entrepreneur,” Walker told the Star Ledger, “I’m good at assembling resources and starting a company and getting it up and running, but I’m certainly not the right person to be running a $100 million company.” The arrival of Braddock, former president of Citicorp, gave Priceline a boost in legitimacy. It also helped overcome the airlines’ resistance, and that month, Priceline signed on its first major airline, Delta. As part of that deal, the company agreed to warrant some 12 percent of its stock to Delta. With Delta onboard, the company was able to make steady gains in convincing other airlines to make their surplus seating available through Priceline.

Priceline quickly expanded its range of products to include hotel room reservation and car rental services. The company also began extending the “demand collection” system to other markets, such as car sales, launched in the New York area in July 1998. By October of that year, the company had sold more than 60,000 airline tickets and posted some $2 million in car sales.

By the beginning of 1999, the company was booking orders for more than 1,000 airline tickets and 1,000 hotel rooms per week. The company’s first quarter sales that year neared 200,000 tickets, some 50 percent more than it had sold in its first nine months. In April 1999, Priceline went public, with a listing on the NASDAQ. Initially priced at just $16 per share, Priceline became one of the stars of the tech stock boom—by May 1999, Priceline’s stock had shot up to its all-time high of $165 per share, valuing the company, which, like most Internet stocks of the time, had yet to turn a profit, at nearly $19 billion. Walker’s own share of the company, including his holding through Walker Digital, was valued at some $9 billion.

Company Perspectives

Priceline.com is an Internet-based transactional service that offers products in two categories: a travel service that offers leisure airline tickets, hotel rooms, rental cars, packaged vacations and cruises; and a personal finance service that markets home mortgages, refinancing and home equity loans through an independent licensee.

Walker himself played down the stock’s star status, telling Forbes: “You want to be recognized for your intellectual achievement, not for the fact that a bunch of day traders took your stock to a price that may or may not represent the real value of the firm.” Nonetheless, the company’s stock value encouraged the other major airlines to join the service; with promises of similar stock option packages, Priceline succeeded in signing on the rest of the major airline holdouts, including United, American Airlines, and US Airways, the first, second, and fifth largest airlines, by the end of 1999. By then, the company boasted a customer base of more than four million people. It also claimed one of the highest recognition rates among Internet-based brands. Sales, too, were gaining strongly, jumping from just $35 million in 1998 to more than $480 million in 1999. That figure more than tripled by the end of 2000.

Surviving into the New Century

Riding on its own momentum, Walker and Priceline started out the year 2000 with ambitious expansion plans. With the Priceline ticket and reservation system gaining steadily—daily revenues were topping $3 million—the company took a twopronged approach to expanding its operations. The first of these involved exporting the priceline.com concept, signing on licensees overseas. These included the priceline.co.uk, in the United Kingdom; MyPrice in Australia and New Zealand; Priceline.com Europe, created by General Atlantic Partners and headed by former Burger King CEO Dennis Malamatinas; Hutchison Whampoa’s Priceline Asia in Hong Kong; and Softbank’s Priceline.com Japan. In another expansion move, the company acquired online discount travel agent Lowestfares.com, combining the Priceline model with more “traditional” online ticket sales.

At the same time, the company sought to extend the Priceline-held business model into other markets. In January 2000, the company announced its intention to launch its own national Internet service based on the Priceline model, with service to start in Atlanta. That venture never got off the ground, however; instead, the company began offering long-distance telephone services. More promising was a partnership formed with Alliance Capital Partners to create Pricelinemortgages, which began offering home mortgage, mortgage refinancing, and home equity loan products. Meanwhile, Walker Digital began developing additional concepts, launching WebHouse Club to apply the Priceline concept to grocery and gasoline sales, and My Yardsale, which brought the concept to the used goods market. Meanwhile, Richard Braddock became company chairman, and Daniel Shulman was hired as CEO.

Yet nearly all of Priceline’s expansion ventures foundered—with the only survivors remaining the Priceline UK and Priceline Asia sites, and the Pricelinemortgages services. Meanwhile, Priceline was facing increasing consumer pressure as well. In September 2000, the Connecticut Attorney General’s office announced that it was investigating some 100 consumer complaints against the company. The company was already facing a groundswell of consumer dissatisfaction, in particular for the sometimes overly long layover times between connecting flights. Soon after, that state’s Better Business Bureau delisted Priceline. When both WebHouse Club and My Yardsale announced that they were shutting down in October, the already fragile investor confidence in the company collapsed completely. By the end of 2000, as the Priceline ventures in Australia and Japan were abandoned, the company’s shares had dropped to less than $1.50 per share—leading to a public dispute with spokesperson, and shareholder, Shatner.

After addressing consumer concerns, Priceline was readmitted to the Better Business Bureau in December 2000. At the end of that month, the company addressed shareholder concerns when Walker announced his decision to leave the company and sell off most of his holding in the company. Despite posting a revenue increase to more than $1.2 billion in 2000, Priceline’s continued losses—at $25 million—and the apparent inability to apply its business model to other markets, seemed to doom the company as yet another failed tech stock in the Internet bust at the turn of the century.

Priceline began a restructuring drive at the beginning of 2001, which included the layoffs of some 150 employees. In May 2001, the company dropped CEO Shulman and Braddock instead took on a dual role as chairman and CEO. The company also stepped up its customer relations efforts.

By the summer of 2001, Priceline surprised the financial community by posting its first ever quarterly profit. While the company’s cost-cutting exercise had helped, it also benefited from the slump in the U.S. economy, which drove more customers to seek its discounted service. In the second quarter of that year, the company signed on more than one million new customers; at the same time, it had built up a strong repeat business among its growing customer base. The company also received praise for quickly abandoning its expansion drive to focus on its core product. By August 2001, the company’s shares had climbed back to the $9 range. Yet the company was unable to shrug off the effects of the September 11th terror attacks. By the end of 2001, its sales had slipped back to $1.16. Nonetheless, it managed to contain its losses, which reached just $7.3 million for the year.

Key Dates

1994:: Jay Walker founds Walker Digital, a think tank, and begins developing new business models.
1996:: Walker applies for a patent for his “demand collection” pricing system.
1997:: Walker founds the Internet business Priceline.com.
1998:: Priceline.com begins operations in April, recording 600,000 hits on its first day.
1999:: Priceline goes public at $16 per share; one month later, the stock is trading at an all-time high of $165 per share.
2000:: Priceline acquires Lowestfares.com and shuts down attempts to extend its pricing model into other products; Jay Walker resigns from the company at the end of the year.
2001:: Priceline posts its first—and only—quarterly profit.
2003:: Amid slumping sales, the company ends its car sales and long-distance telephone services; a partnership and investment agreement is reached with Travelweb LLC.

In July 2002, Priceline hired a new CEO, Jeffrey Boyd, who shared the chief executive spot with Braddock before becoming the company’s sole CEO at the end ofthat year. Braddock took on the role of non-executive chairman at that time. Meanwhile, Priceline struggled throughout the year, hit on one side by declines in the travel industry amid fears of terrorism and the impending war in Iraq, and on the other by the steady lowering of regular airfares as airlines struggled to fill their seats. By the end of 2002, the company’s losses deepened against falling sales, which dropped to slightly more than $1 billion for the year.

Priceline’s difficulties continued into the year as air traffic collapsed with the outbreak of the new war in Iraq. At the same time, the company shut down its car sales business, as well as its long-distance telecommunications operation, dropping another 65 employees from its payroll. Nonetheless, Priceline was not ready to give up the fight and began to look for new partnerships. In March 2003, Priceline agreed to buy an $8.5 million equity stake in online hotel reservation network Travelweb, owned by such hotel groups as Marriott International, Hilton Hotels, Hyatt, and others. While Priceline appeared to edge toward more traditional sales outlets, its core discount niche nonetheless seemed to have found a solid consumer market. Now Priceline needed only to find a way to turn a profit from its pricing revolution.