from barrons.............
Samberg: Just like there was disintermediation in the banking industry, there will be disintermediation in the Internet.
Gabelli: Instead of going to the mall to shop, you go to the electronic mall.
Samberg: In this case, I'm talking about the travel industry. The name of the company is Preview Travel. It came public through Hambrecht & Quist, in November, at 11. There were a whole bunch of deals. The market has been crummy for these kinds of things. The stock trades at 9. [The stock has since surged as high as 15 1/4 on a couple of brokerage-firm recommendations and an appearance at an Internet conference. Art, who "gleefully" admits that he "sucked up a lot of the stock in December," also ruefully notes that since it's a small-cap, the stock's move hasn't made much difference to his partners. But he isn't in Preview Travel, Art says, for the "cheap thrills" of a 50% short-term spike. Over three or four years, it'll go up fivefold, he avers.] Preview is one of three companies that are leading a major paradigm shift in how online travel gets done, how it interacts with travel agents and the way tickets are usually booked. The other two were Microsoft's Expedia and a spinout of Sabre Group, which is Travelocity. Sabre is American Airlines' computer reservation system. Preview Travel already has two million members registered. They will give you pricing, availability and reservation services. Unlike the other two services, you can see from six to 30 different flights. It's a more robust system. It is a software kernel wrapped around Galileo's Apollo computer reservation system. There are four computer reservations systems. This one is very user-friendly, very easy to use. They have signed deals with both America Online, where they are the primary and preferred travel booking agency, and Excite, where they have an exclusive. They're paying these people a lot of money; that's their cost. Why are they going to succeed? Travel agents are under enormous pressure right now. The airlines have continually cut commission rates; they are now down to the lesser of 8% or $50. These guys -- Preview -- are already being paid 5%, so they're down at a level below the airlines' direct cost. Preview's cost to process a ticket is already about $19; the industry average is $25. Preview's average cost will go down to $10 within the next two years, and they will not have to add very much cost at all to do it. The system is in place.
Black: Ticketless travel?
Samberg: It is going to be ticketless travel. There are a few more features that have to come into being to make it really take off, but ticketless travel is going to take off. There were 6% fewer travel agents in November than there were at the beginning of last year. This is disintermediation; travel agents are going to have a hard time competing with this.
Neff: Also, the airlines' cutback on discounts is putting a lot of pressure on.
Samberg: Travel agents are trying to get extra revenues by charging you a fee for, for example, delivering the tickets. Or trying to add fees to what they get paid by the airlines. It ain't going to work. I mean, that's not the way this world is working. So, what I see in Preview Travel is a company that's growing at 20%, sequentially, each quarter. It will not make money for the next three years. In the year just ended, revenues from their online business were $6 million. That will double and then probably double again. These are really good people. It's a Kleiner Perkins deal and America Online is the largest shareholder. Their deals with Excite and American Online are such that in the third and fourth quarters their costs started to ramp up. So for '97 they'll report a loss of over $10 million and this year they will lose about $20 million. Then the losses will come back down and by the year 2000, they will be profitable on both an earnings and a cash-flow basis.
There are a lot of positive leverage points. No. 1, they have the infrastructure and there are huge economies of scale. No. 2, they are starting to add services. They are now selling cruises, hotel reservations, etc., where margins are bigger than on airline tickets.
<Picture: [Ziegler]>
Q: How do you value this?
Samberg: I think this company is being built to be sold at some point. The company is being valued currently at -- there are 11 million shares, so it's about a $100 million market cap. If you look out to the year 2000, which you have to do in something like this, they will be doing about $50 million of airline bookings. That's worth five times revenues. Their core business, which is to make travel documentaries, is a break-even operation doing about $7 million. It's worth maybe one times sales. So this thing has a $25-$30-per-share value, looking out three years. I'm willing to hold it because they are the dominant company.
Rogers: Do they run out of money before they start making money?
Samberg: No.
Gabelli: What do those two million subscribers pay per month?
Samberg: They don't pay anything.
Q: What's to prevent every travel agent with any initiative from imitating this?
Samberg: It's just too late. There is a lot of software code here. You are competing with Microsoft. I just don't think anybody is going to get into this business any longer. This is one of those things where the window opens and the window closes.
Ziegler: How do you get your ticket?
Samberg: Through the mail, right now. What is going to happen is that you are going to be able to use electronic ticketing. One of the problems right now with E-tickets is that if you have to change your ticket at the gate, it is a bit of a hassle. But that will all be in the computer by the end of this year. So the value of the service is going to increase. |
