February 19, 1999
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Priceline Is Expected to Soar,
But Turbulence May Emerge
By CARRIE LEE
THE WALL STREET JOURNAL INTERACTIVE EDITION
Priceline.com has picked a challenging time to launch its $115 million initial public offering, but don't expect the online auctioneer to be dogged by the recent slump in Internet stocks when it goes public next week.
The company's style of allowing consumers to name their own price for airline tickets and hotel rooms has potential to make it an electronic-commerce standout -- and another Internet IPO rocket.
Investors already are registering their enthusiasm. They have created a message board on the Silicon Investor Web site (www.techstocks.com) titled "Priceline.com... another hot IPO?"
Despite the early optimism, Priceline (priceline.com) still faces a daunting road. Tough competition, a legal battle over its patented reverse-auction system and a heavy reliance on airline-ticket sales could all hamper its success.
Priceline officials declined to comment on the IPO, citing securities regulations that prevent them from talking before the IPO takes place.
Morgan Stanley Dean Witter is the lead underwriter for the offering, which is expected to be priced after the market closes on Monday. The number of shares that will be sold and their offering price haven't been announced.
The Stamford, Conn., company's IPO could be the spark that reignites enthusiasm for Internet stocks, says Randall Roth, an analyst at Renaissance Capital, an IPO research firm in Greenwich, Conn. Net stocks have wallowed recently -- after an explosive start to the year -- and have caused some overall nervousness on Wall Street.
Other analysts say Priceline's shares will get an added boost because it is pioneering a unique approach to electronic commerce: It lets shoppers name the price they are willing to pay for airfare or hotel rooms, and then pairs them up with a seller willing to match the offer.
"As you've seen with Amazon and eBay, the first mover tends to get a premium. Their name is synonymous with the technology," says Mr. Roth. "You're paying for potentially huge growth, it's a new company and a new merchandising channel altogether. Priceline has staying power, it's one of the premier [Internet] concepts," he says.
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But Priceline isn't entering a business vacuum. Online auctioneers, most notably eBay, are plentiful. It also faces competition from established ticket sellers on the Web such as Travelocity, Preview Travel and Microsoft's Expedia, as well as from traditional travel agencies and airline-ticket consolidators, who also sell unused tickets.
Additionally, the company could face competition from the airlines themselves. In a filing with the U.S. Securities and Exchange Commission, Priceline says its business "would be particularly at risk if the airlines choose to establish their own buyer-driven commerce system to sell excess inventory."
Moreover, Priceline will likely be subject to the cyclical whims of the travel business, where it has derived nearly all of its revenue so far, selling empty seats for airlines at cheapened prices.
While Priceline has agreements with 18 airlines to supply tickets, 95% of that business comes from three carriers. The agreements don't guarantee supply and can generally be terminated upon relatively short notice. Also, Priceline's arrangement with Delta Air Lines requires Delta's approval for the addition of new carriers, and restricts the volume and routes that may be offered by other carriers.
Although there's much talk about its potential, like many other Internet startups, Priceline has yet to turn a profit since it was formed in July 1997 and started selling leisure airline tickets last April. It lost $90.2 million in 1998. However, revenue growth is strong, hitting $35.2 million by the end of December after more than doubling in the last three months alone.
And that's encouraging for its core supporters, who to date have put up more than $100 million in venture capital. The group includes Vulcan Ventures, an investment firm run by Microsoft co-founder Paul Allen; Jim Manzi, former chief executive of Lotus Development; and General Atlantic Partners, a Greenwich, Conn., technology investment firm.
Priceline Attempts to Go Where No Site Has Gone Before (June 10, 1998)
Still, Priceline says it doesn't anticipate posting a profit anytime soon, and it expects to continue to spend heavily to build its business. Indeed, the company said in its filings to the SEC that it has sold a "substantial" number of airline tickets below cost since it began business. Meanwhile, although Priceline received bids for about 1.9 million airline tickets from its inception through 1998, its system made matches for only 134,878, or about 7%, of them.
Jay Walker, who founded Priceline and remains its vice chairman, says that today the company averages a profit of between $5 and $10 on each airline ticket it sells. As for the percentage of bids that are fulfilled, he says: "Our total satisfaction rate is pretty good."
Analysts, too, don't see the low match-rate as a concern. "The key is not necessarily what percentage of bids are successful. What's more important is getting the right kind of customers, [those who are] going to be profitable," says Mr. Roth, the analyst at Renaissance Capital. "You want people who are recurring good customers."
Priceline has its champions among small investors on the Internet.
"With Shatner promo'ing it, price will go where others have gone," one participant on the Silicon Investor message board wrote, referring to the company's pitchman, actor William Shatner, and to the highflying performance of other Internet IPOs. Mr. Shatner, who had a leading role on the Star Trek television series, has been hired to promote the company in radio and print ads since last April.
The company has lured big names on the management side. Last August, Richard Braddock, True North Communications ex-chairman and former Citicorp president and chief operating officer, became Priceline's chairman and chief executive. He owns 10.8% of Priceline's shares. Mr. Walker, the founder, owns 47% of Priceline's shares. He also is chairman of Walker Digital, the Stamford, Conn., intellectual-property lab that invented Priceline's e-commerce system.
Priceline's buyer-driven commerce system is patented, but the company says that doesn't necessarily prohibit competitors from developing similar Internet-based business models that are centered on customer offers.
Priceline's key patent has been challenged by Thomas Woolston, an inventor and entrepreneur from Alexandria, Va. In a filing with the U.S. Patent and Trademark office, Mr. Woolston claims that he first sought a patent for a computerized "buyers auction," which lets travelers name their price for airline tickets and hotel rooms.
Inventor Disputes Key Patent of Online Auction Site (Jan. 13)
If Mr. Woolston prevails, it could significantly hurt Priceline's business. He has licensed his issued and pending travel-services patents to Aden Enterprises, owner of cheapfares.com, a profitable Priceline.com competitor based in Omaha, Neb. But Priceline officials aren't worried. "We believe Mr. Woolston's claims have no basis in fact or law," says Mr. Walker. "We do not consider cheapfares.com to be a significant competitor in any way."
As it tests the waters with customers, Priceline is trying out additional products and services. Last July, Priceline.com started selling new cars on a trial basis in the New York metropolitan area, and Priceline starting taking bids on hotel rooms last October. In late January, Priceline started offering name-you-own-terms home mortgages, home equity loans and home refinancing with LendingTree, a Charlotte, N.C., company that electronically relays applications to participating banks.
Phil Leigh, an analyst at Raymond James & Associates in St. Petersburg, Fla., says it will take time for Priceline to mature. "The concept clearly has promise, but it will take time to learn which products" best fit the business model, he says. "They are appropriately establishing a critical mass of customers. When they get this, they will have a real business."
Priceline's offering is hitting the market at a time some investors appear to be getting nervous about the high valuations of Net stocks. The Internet Stock Index, or Isdex, which measures the performance of the 50 largest pure-play Internet stocks, has fallen by one-third since mid-January, and lost over 20% in the past two weeks. The index is run by Mecklermedia, a New York firm.
To be sure, Internet stocks still have plenty of appeal. This year's eight Internet IPOs have risen an average of 157% from their issue prices, according to CommScan, a New York research firm. Online service provider Prodigy Communications, business-to-business e-commerce venture VerticalNet and Internet-based healthcare information firm Healtheon enjoyed strong debuts last week. |
