Can a Slew of New Rivals Spoil Priceline's Party?
BW ONLINE DAILY BRIEFING
STREET WISE by Amey Stone August 17, 1999
businessweek.com
Investors will want to watch closely to see if the upstarts catch on
When investors piled into Priceline.com (PCLN) after it went public in March, driving its stock up ten-fold in only a month, it wasn't just because the company had come up with a neat way to sell airline tickets. It was because Priceline had created a new way of buying and selling goods over the Internet that seemed applicable to many different products and services. Its patented process, where buyers name their price, commit their credit card, and agree to accept the first offer that meets their conditions, was applauded by analysts as one of the most exciting new E-commerce models to come along.
But now, new buying and selling models are cropping up on the Internet that aim to give customers greater flexibility than Priceline's service and don't appear to infringe on its patent. While none of these new sites compete directly with Priceline, which currently offers mostly travel and financial deals, such as mortgages and home equity loans, they all promise to expand their offerings and, like Priceline, change the way goods and services are bought and sold over the Net. For investors in Priceline, which has the clear advantage in terms of customer reach and brand recognition, these upstarts surely bear watching.
Take NexTag.com, which launched on Aug. 9. This site, currently offering only computer hardware and software, allows buyers to select the brand, the price, and the seller, and then negotiate with vendors without having to commit a credit card. Buyingedge.com, which announced on Aug. 12 that it obtained $10 million in venture funding from CMGI Inc. (CMGI), also has a process that allows consumers to haggle online with vendors for certain products. Unlike Priceline, these sites don't lock customers in to making a purchase. "Buyers have a lot more decision-making power if they can look at offers and make their own decisions," says Gary Martino, CEO of buyingedge.com. Buyingedge.com is a subsidiary of Information Management Associates (IMAA), which gained 2 3/32 points, or 50%, on Aug. 16, to close at 6 5/32.
SUPERIOR MODEL? Other new sites aggregate groups of buyers and then negotiate with sellers to push prices down. Accompany.com and Mercata both do "price-pressure auctioning" and have great potential (although neither are currently publicly traded), believes Steve Harmon, CEO of e-harmon, an Internet investment firm in San Francisco. Harmon believes their business model is superior to Priceline's because he thinks they take better advantage of the Internet, "leveraging off the huge installed base of Internet users to help people help themselves."
Although these sites so far aren't direct competitors with Priceline, they are angling for the same price-sensitive shopper, says Michael May, digital commerce analyst at Jupiter Communications. However, he thinks the whole group has somewhat limited growth prospects because the sites overemphasize price. "Consumers want to be able to make informed decisions at a good value, but the majority will not be able to give up flexibility, convenience, and selection for a few dollars," he says.
So where does all this leave Priceline? For one thing, growing like gangbusters. For its second quarter reported on July 19, revenues jumped 126% over the previous quarter to $112 million, it sold 440,000 airline tickets (up from 186,000 in the previous quarter), and it had 852,000 new customers try its process -- up from 531,000 in the first quarter of 1999. Its net loss, still substantial, narrowed to $14.3 million, or 10 cents a share, from $17.2 million the prior quarter.
Its shares are also a lot cheaper than they once were. The company has been caught up in an Internet sell-off that especially punished high-flyers still in the red (Priceline isn't expected to start turning a profit until 2001). The stock has lost nearly 60% of its value from the April high of $165. It closed on Aug. 16 at 68 3/4 after gaining 2 1/4 points.
WHAT, ME WORRY? Despite the new rivals and the Net-stock swoon, analysts have stuck by Priceline. The Aug. 16 gain was sparked by a Donaldson, Lufkin & Jenrette report reinstating coverage of the company with a buy rating and a $190 price target. Analyst Jamie Kiggen predicts Priceline will bring in $762 million in revenues in 2000 and credits the company for "unprecedented growth rates" and its "focus on delivering consistent bottom-line results."
Wit Capital analyst Ryan B. Alexander, who also rates the stock a buy, says he isn't surprised that competition is emerging. But he thinks Priceline's business model builds in such a strong relationship with its partners that it should be able to offer consumers a better deal than the others. Does Priceline feel threatened by the newcomers? It's not letting on, if it does. "There's room in the marketplace for many different models," says Brian Ek, Priceline's communications vice-president. "Each works for certain types of consumers in its own way."
For now, Priceline has the muscle and the first-mover lead to give it a huge advantage over other fledgling services that are also trying to put buyers in the driver's seat. But investors who bought Priceline believing it has a lock on a revolutionary new model for buying goods online, will be wise to watch these new sites that think they have an even better idea.
Stone is an associate editor at Business Week Online _ _ _ |
