O.T. - WSJ "Heard on the Net" thing on Priceline.com and their upcoming IPO.
February 19, 1999
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.
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.
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.
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.
Write to Carrie Lee at: carrie.lee@news.wsj.com
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