Online Reverse Auctions Are Patented
August 10, 1998
Web Concern Gets Patent for
Electronic Business Model
By PETER H. LEWIS
A small start-up company in Connecticut has been
awarded a broad patent that appears to protect not
just
the virtual nuts and bolts of its electronic commerce
system, but also its entire business model for buying
and selling goods and services on the Internet.
The company, Priceline.com L.L.C. of Stamford, best
known for allowing consumers to "name your own price"
for airline tickets, said it would be issued United
States patent No. 5,794,207 tomorrow for both the
method and the use of "buyer-driven commerce" from the
Patent and Trademark Office. Priceline in effect
convinced the Patent Office that it had invented a new
way of doing business, one that was fundamentally
different from any other form of electronic commerce
today.
Priceline's "reverse auction" method is such a narrowly
specific approach to online business that analysts said
few other Internet commerce companies were likely to be
significantly restricted by the patent. But the Patent
Office's growing willingness to protect an entire
Internet business model -- and not just the technical
wrinkles -- could set a precedent with far-reaching
implications for electronic commerce.
"Internet-related business patents are extremely
important," said Carl Oppedahl, a intellectual property
lawyer in Frisco, Colo. He cited the continuing case of
E-Data, a New Jersey business that is suing more than a
dozen companies over its patent claims to control
fundamental aspects of electronic commerce. Depending
on the outcome of the E-Data case, Oppedahl said,
"Microsoft levels of money either will or will not
change hands, and there are likely to be other
Internet-business-method patent lawsuits with similarly
high stakes."
Several computer-related
business-method patents have
been upheld by the courts in
the last decade. But the
Priceline patent is one of
the first awarded since the
United States Court of
Appeals for the District of
Columbia Circuit affirmed
last month that a "practical
application of a
mathematical algorithm, formula or calculation" could
be protected.
As such, Priceline's patent could touch off a race to
control the underlying framework of electronic
commerce.
In the Priceline system, consumers submit a bid, known
as a "conditional purchase offer," to buy goods or
services -- airline tickets or automobiles, for example
-- from unknown sellers at a certain price, and they
guarantee the offer with a credit card. Priceline
presents the offers to the sellers, who then have the
option of either fulfilling or rejecting the bids, or
making a counteroffer. Priceline then completes the
transaction.
For example, a buyer might wish to buy two airplane
tickets from New York to Seattle. He or she would set
conditions: the flight must be on a major airline on a
certain date, allowing one change of planes if the
layover is no more than two hours, and the price per
ticket can be no more than $300. Any airlines that
participate in the Priceline system can review the
offers, and the first one that responds, meeting all
the conditions, gets the sale.
Andrew B. Whinston, director of the Center for Research
in Electronic Commerce at the University of Texas at
Austin, said that from a traditional economic
perspective, the Priceline business model was hardly
radical. It seems very similar to the method by which a
government agency or a corporation puts out
specifications and conditional purchase orders to
multiple contractors or vendors, he said.
Besides Priceline's use of cryptography and other
networking technologies, what appears to be new and
original, said Whinston, who holds professorships in
both economics and computer science, is that by using
computers and the Internet, the company is able to
bring this method of buyer-driven commerce to
consumers.
"Because it has one buyer
and multiple sellers, it is a
mirror image of Internet
auction companies like
Onsale.com, in which you
have one seller and multiple
buyers," he said.
Priceline officials said that
the patent would also cover
the "apparatus" the
company developed to
authenticate customers'
identities and verify their
ability to pay, to protect the
anonymity and privacy of
both buyer and seller, to
enable sellers to browse the
list of offers, and to
complete the pact
electronically.
Although Priceline does almost all its business on the
World Wide Web, company officials noted that its
buyer-driven method could also be carried out through
electronic mail, voice mail or fax.
Jay Walker, Priceline's chairman and chief executive,
said that the business model for buyer-driven commerce
on the Internet was developed over the course of
several years by researchers at Walker Digital, an
unusual company he formed several years ago as a
combination research center, invention factory and
patent law office. The patent, Walker said, was among
nearly 200 that his company had filed in the last three
years, including some that seek protection for new
electronic business methods as well as for the
technical systems that make them possible.
Walker Digital sold the rights to the buyer-driven
system to Priceline.
Priceline said last week that it had received $20
million in private financing from the venture capital
firm General Atlantic Partners. The investors expect
revenue from Priceline's business operations, but the
real potential payoff will come from the licensing of
its methods to other electronic commerce companies,
Walker said.
"Priceline is really entering into an
exciting space, one that I know many
other large organizations, notably
Microsoft, have also looked at," said
Kenneth H. Smith, director of online
retailing research at Mainspring, a
Boston-based consulting company. "My
assumption is they will be challenged on
this patent."
Smith and other analysts noted,
however, that the Priceline model was very likely to
appeal to a relatively small niche of buyers who know
the exact specifications and reasonable prices for the
product or service they want.
Travelers must be willing to fly at unpopular times,
for example, and give up their choice of airline and
perks like frequent-flier miles.
Priceline asserts that it has sold 40,000 airline
tickets to leisure travelers in its three months of
operation, despite the fact that only a handful of
domestic airlines now participate in the system. Even
so, the airline industry reports that the average
number of seats that fly away empty every day is about
500,000. Walker said that there was untapped demand for
those seats at the right price.
The company recently broadened its offerings to include
new cars, but the participating car dealers are limited
for now to the New York area.
Walker said Priceline would soon expand its online
products to include hotel rooms, automobile financing,
credit cards, personal computers, home mortgages, life
insurance, rental cars, cruise ship vacations and other
services.
James McQuivey, who analyses online retail strategies
for Forrester Research in Cambridge, Mass., described
Priceline's broad strategy as "brilliant" but said that
its success would depend on the selection of goods that
are offered. "There's really no incentive for the
airlines to play," he said, because all the seats are
managed by relatively few sellers. "In the car
business, though, power is diffused through more than
20,000 dealers."
Smith of Mainspring was also sanguine about Priceline's
patent. "I think they have a real chance," he said.
"More so than in any other industry, the Internet
allows a new and interesting business a chance to
deliver value into the marketplace. At the same time,
it can quickly deliver the message from the market if
the value proposition is either not wanted or not
needed.
"In other words, you get a chance, but you find out
very quickly if you're going to be a failure."
Copyright 1998 The New York Times Company |
