From Raging Bull:
Priced Too High?
If you've turned on a radio in the past six months you've undoubtedly heard
Star Trek's William Shatner pitch you on the merits of Priceline.com's
(PCLN) "name your own price" Internet service for acquiring everything from
airline tickets to cars to loans. In the unforgettable words of Shatner,
"this is going to be big - really big."
The company's splash into the public markets has been just that. In March,
Priceline.com went public at $16 a share and soared to $88 on only its
second day of trading. In the process, Priceline.com founder Jay Walker
quickly joined the ranks of the Web's paper billionaires. The company's
market capitalization has already risen to a staggering $19.21 billion.
Priceline.com enjoys a larger market cap than retailing behemoth Sears
Roebuck (S) ($18.71 billion) or airline giant AMR Corp. (AMR) ($11.73
billion), the parent company of American Airlines. Delta Airlines (DAL),
which was an early investor in Priceline.com, has a stake worth roughly
$2.5 billion in the "buyer driven e-commerce company."
Considering that Delta's entire market cap is only $9.43 billion, it could
be inferred that the company's stake in Priceline.com is represents
one-third of its own value. Staggering, isn't it? Should Priceline.com
really be worth twice as much as Delta? Probably not, but comparing the
two companies should be construed as an apples-to-oranges comparison to
begin with.
After all, Priceline.com's executives promise that their patents and
business models will revolutionize numerous industries, and the company is
indeed enjoying explosive 160% quarter-to-quarter sales growth. So fine, I
can give Priceline.com the benefit of the doubt and grant that they are
worth more than a stodgy airline like Delta or American. After all, I
don't think we are going to see American selling cars, hotel rooms or loans
anytime soon. Priceline.com will.
Amazon.com Vs. Priceline.com
Let's compare Priceline.com instead to consumer e-commerce king Amazon.com
(AMZN). Priceline.com's market cap rivals that of Amazon.com, which sports
a value of $22.1 billion. However, Amazon.com reported last week that its
quarterly sales rose to $293.6 million, which is almost six times the $49.4
million of quarterly sales which Priceline.com reported earlier this week.
In other words, the Street values Priceline.com nearly equal to Amazon.com,
but on a much smaller revenue base.
Amazon.com also enjoys a much larger customer base than the younger
Priceline.com. According to Amazon.com's latest earnings report, the
company boasts over 8.4 million customers, compared with only 1 million Web
surfers who have used Priceline.com's site in the company's first year of
operation. Although Priceline.com added another 531,000 new customers in
the first quarter of this year, that's still a serious gap. Once again,
the Street seems to be saying that Priceline.com's customer eyeballs are
more valuable than Amazon.com's eyeballs. I find that hard to believe.
One can argue that Priceline.com enjoys much more explosive growth than
Amazon.com, based on that 160% sequential gain in revenue for the latest
quarter. One must wonder however, if after two to three years in operation
Priceline.com will register the same 15% to 20% sequential sales growth
rate of Amazon.com.
Priceline.com Kool-Aid
An overwhelming number of analysts believe Priceline.com is destined to
become a ground-breaking service that can quickly enter numerous vertical
e-commerce markets and capture a large chunk of the market place. Already,
they are classifying Priceline.com as one of the new "Internet blue-chips"
along the lines of Yahoo! (YHOO), eBay (EBAY) and America Online (AOL).
However, I've looked at Priceline.com long and hard, and I'm far from ready
to fall into that "Priceline.com will revolutionize the world" camp. I'm
just not ready yet to drink the same spiked Priceline.com Kool-Aid that is
being passed around Wall Street lately.
Maybe my scrutiny for Priceline.com's business model originates from the
fact that I have actually played with its various services and been
disappointed each time with the results. Or maybe it's because I can
actually take an objective look at the company, because I don't have to
play Priceline.com cheerleader like numerous investment bankers and
Internet analysts trying to win over the company's lucrative future
underwriting business.
Priceline.com's overall service provides the opposite of what most
consumers seem to want on the Web. I have long felt that Web shoppers
expect superior customer service, speed, convenience, ease of navigation
and a comprehensive product selection, as well as competitive prices from
their preferred Web merchants. If online shoppers were only concerned
about snatching up bargain basement deals, they would have long ago
abandoned Amazon.com and CDnow (CDNW) for the rock bottom "at cost" pricing
of e-tailers like ONSALE and Buy.com.
Inside The Buyer Driven Myth
Jay Walker's "buyer driven e-commerce model" really isn't that "buyer
driven" after all. In most traditional retail environments, consumers know
exactly what they are purchasing when they open their wallet. Walker's
model seems more akin, however, to standing behind a counter at a carnival
with one hand tied behind your back, throwing darts. The customers know
they'll win a prize eventually and they have fun in the process, but they
aren't sure they'll get lucky and win the grand prize or be stuck with a
cheap stuffed animal.
Under Priceline.com's current format, it's as if consumers must go on a
semi-blind date when they enter credit card information and place their
bids. Think about it. Consumers know their final destination but, the
aren't sure what restrictions Priceline.com will impose to get them there.
Sending a credit card number and ticket bid is like sending a snapshot to
your blind date, who then makes the final decision. Either they agree to
the dinner date or reject you cold. I don't know about you, but I've never
been a big fan of blind dates to begin with.
Priceline.com's service appears geared to thrill seekers and risk takers
who don't mind carrying the various restrictions to save a few bucks. The
company's early success proves such customers exist, but how large a
portion of the population do they really represent? And do bottom feeders
really make the best customers? They're more likely to jump at the
cheapest service available than to show brand loyalty.
Choice And Convenience
Consumers want choice and convenience. They want to know exactly what they
are purchasing for their money beforehand. In Priceline.com's current
incarnation, consumers must spend a considerable amount of time filling out
various forms and filling out tedious billing information to place a bid on
an airline ticket or hotel room. The consumer must then agree to a long
list of restrictions that includes being willing to fly at any time between
6 a.m. and 10 p.m., and only being able to select the airport and travel
date for a one-shot bid. If the bid is rejected, the user must select a
different travel date or airport. Customers are also not allowed to earn
any frequent flier miles on tickets purchased through Priceline.com.
I remember comments from analysts and media during the push technology
craze of 1996, when numerous magazines proclaimed PointCast as the next
Yahoo!. Push technology has since become an outdated idea, because Web
surfers generally want to pull information and news from Web sites at their
own convenience, not have it force-fed, or pushed, to them. Ironically,
Priceline.com's system seems more push than pull. Although customers
select their final destination and approximate time frame, they are forced
through so many restrictions that they lose a good deal of their freedom in
the process. With travel site choices like Expedia, Preview Travel and
Travelocity already offering rock bottom prices and freedom to boot, why
should the consumer choose Priceline.com?
Grabbing Patents
Priceline.com's biggest claim to fame may be its growing patent portfolio.
The company holds patents that protect a variety of its business methods
and e-commerce sections. It's a novel and relatively new idea to patent
actual business methods, and Jay Walker has made a career out of developing
patents at his business process lab, Walker Digital. In Walker's perfect
world, numerous vertical industries would turn to Priceline.com when they
want to offer similar e-commerce systems. Those foolish companies which
don't partner with Priceline.com, Walker would gleefully sue for patent
infringement.
It's an interesting path to follow and one that might work, but will
shareholders really want to bet on a company that could be locked in a
variety of expensive and drawn out legal battles? Inevitably some sizeable
competitor will challenge Priceline.com in this "name your price" space
before the end of the year. So far, however, Web titans like Amazon.com's
Jeff Bezos and Yahoo!'s Jerry Yang have succeeded by being innovators not
litigators.
Priceline.com's Future
I also have to question how large the market for "leisure airline travel"
and "leisure hotel rooms" really are. A PaineWebber airline analyst places
the size of the excess inventory airline ticket market at $19 billion, much
smaller than the $63 billion figure that Priceline.com often touts. Where
would that leave Priceline.com? The company has already stated that their
services are not crafted for the business traveler.
I'm not about to say Priceline.com's system will be relegated to the trash
heaps of cyberhistory, and a strong brand, not a collection of patents,
could turn out to be the company's true trump card. But I wonder if a year
from now the pundits will conclude that Priceline.com's system was only a
complimentary new pricing system, not a radical new business model that
could dislodge traditional pricing mechanisms.
It's obviously something that even Walker realizes about his creations.
After all, it was Walker who recently told Forbes magazine, "Look, there
are two possible choices. I'm eccentric; that's when you're right and
ahead of your curve, or wacky; that's when you're wrong."
Regardless, the Street's love affair with Priceline.com shouldn't end
anytime soon. Studies have already shown that Priceline.com boasts a brand
awareness almost equal to e-commerce powerhouse Amazon.com.
So do I think Walker and his management team are on the same par with the
lofty achievements of Bezos and the marketing gurus at Amazon.com? I'll be
a believer when Priceline.com passes that company in total revenue. Good
luck. |
