From CBS MarketWatch:
cbs.marketwatch.com
Company Priceline.com
Whom We Talked To Jay Walker, chairman
IPO Date Mar. 30
Offering Price $16
Stock High 165
Stock Low 58
Last Update: 7:56 PM ET May 7, 1999
Profile: New York-based Priceline.com (PCLN: news, msgs) operates an Internet retail service that allows customers to name their price when buying airline tickets, hotel rooms or home mortgages. Customers specify what price they are willing to pay for the good being offered, and then Priceline forwards the bid over to sellers to see if one of them is willing to accept that price.
The company expects to start offering its system to sell various other products as well, including automobiles, long distance telephone service and credit cards.
Notable: Priceline.com sold 10 million shares at $16 a share vs. the original $7 to $9 range listed in the company's earlier IPO filings. The company, which lost $17.2 million on $49.4 million in sales for the first quarter, is worth more than $20 billion on Wall Street, including outstanding options. Yet that hasn't stopped some research analysts who didn't even help sell the Priceline deal -- such as Goldman Sachs' Rakesh Sood and Wit Capital's Jonathan Cohen -- from giving the stock the thumbs-up.
* * *
Let's start with Q1. A solid quarter. When you guys went public, my main concern was that I had yet to see momentum as far as the consumer base was concerned despite the large amount of advertising money you spent last year. Are you happy with the growth that you saw in the first quarter?
Walker: We are very pleased with our first-quarter growth, and are most pleased with the fact that we added over half a million new customers in the first quarter.
What do you attribute that to?
Walker: Two primary factors we think drive our growth. The first is that the average Priceline customer tells 18 other people about their success with Priceline. That kind of word of mouth is more like a movie than anything else. When you see a great movie, you say, 'Hey, I saw this great movie. You ought to try it.' That is advertising that money can't buy.
You rarely see those kind those word-of-mouth numbers on a consumer product of any kind. A microwave oven might be the kind of thing where you'd say 'Wow! I saw this thing that can cook rice in a minute.'
The second big impact is that the service's horizontal nature reinforces the core message. People say 'Name my own price for an airline ticket. Is that going to work?' But when they hear wait a second, I can name my own price for a hotel room, for a mortgage, for a new car, suddenly the concept is easier to understand and is more believable. And I think that's why total offers were up so nicely.
What about acceptance of what you call reasonable offers?
Walker: We are currently averaging about 35 percent -- so it's up dramatically -- on our reasonable offer acceptance. In some markets, it's as high as 75 percent, especially the major city pairs.
What about hotels?
Walker: The hotels we rolled out nationally about a month ago to all 50 states, over 1,100 cities and towns, so that service is growing strongly.
You also announced that you had $11 million worth of car sales.
Walker: That's just a test market [in New York] and no financing. All cash.
That is kind of impressive. How many dealers did you have in the system?
Walker: All dealers are automatically in the Priceline system. Unlike Autobytel or CarPoint, dealers don't pay to be in Priceline. We go to every car dealer in the county in which you are willing to pick up the car that's authorized by the manufacturer.
So if you want to buy a Chevy Blazer, all Chevy dealers in Fairfield County get your offer without your name. We never give your name to a dealer. See, how the lead generation services work is you go there, they get your name, they give it to a car dealer that pays them money, and then the car dealer calls you and offers you his best deal, quote, unquote.
With Priceline, you come to the service, you name your price exactly for the car you want, we take your name off the offer, we then bring it to all car dealers in the counties in which you're willing to pick up the car. The first one that signs the deal, we then give them your name.
You plan to roll that out nationally by the end of the year?
Walker: That's correct.
What other products do you see?
Walker: We have three home financing products, and they're doing nicely. We have home mortgages, home refinancings, and home equity loans. And in the first 90 days, we had $120 million worth of accepted mortgages. And there's no advertising yet for that service.
Typically, when Priceline launches a new service, we spend from 90 to 180 days essentially improving it by getting real customer feedback and getting it all ready for scale. Then we turn the advertising on to drive scale. In the home financing services, we haven't even turned the advertising on.
So you plan advertise for each of your different verticals?
Walker: Very much so.
What other verticals do you see coming out later this year?
Walker: We've told the marketplace that we're going to have a credit card product where you'll be able to name your own interest rate on a credit card. And we've also told the market place that we're going to have retail products.
"We think the [patent infringement] claims against us are frivolous and without merit, and we will prevail."
Let's talk about the model. In some cases, you earn commissions.
Walker: Sometimes we're fee-based and sometimes we earn a market spread is how we talk about it. Sometimes we're a market maker and sometimes we earn a fee. For example, in automotive, a dealer pays us $200 for every car they sell after they sell it. In mortgages, we earn a fee for each referral that consummates a mortgage.
In the case of airline tickets and hotel rooms, however, we make a spread. If you offer $70 for a three-star hotel in downtown Chicago and we can buy it for $60, then we make a $10 spread. You get the price you want and the seller gets the $60 he asked for.
What's the average spread that you're making, let's take airline tickets, because it's your must mature model?
Walker: It's about $10 currently.
And you expect it to increase.
Walker: Yes. We have seen historically that as we collect more demand and become more important to our suppliers, that our prices from the suppliers steadily decrease.
"If American [Airlines'] business customers start booking through Cheap Tickets, uh-oh."
Typically with your traditional travel agencies, airlines have shown a real desire to exert their influence.
Walker: Absolutely. That's why we are not a travel agent in that sense. A travel agent sells the brand that the customer wants and that the airline has. So if Delta Airlines wants to sell a seat to Atlanta, and you're an online travel agent, Delta Airlines says, "Why should I pay you to sell a ticket on Delta, I can sell it on my own Web site."
Priceline says to the customers if you don't care which major airline you're on, then give us your credit card and the price you want to pay. Now when we go to Delta, we tell them we have a customer here who doesn't care if they fly on Delta, American, United. That's incremental to you, Delta, because if you don't say yes someone else will. That's traffic you wouldn't have had otherwise.
We are incremental revenues, as opposed to simply [being] the distribution system that the airline can do itself.
But the airlines have been getting better at generating incremental revenue through last-minute savings.
Walker: They really can't do much of that. Here's why. They look like they're getting better, but the truth is no airline can afford to discount its product on its own Web site below the price that it sells it through travel agents. They can do it for very limited periods, but otherwise ... nobody's going to pay the retail price if everybody can just go to the airline's Web site and pay less.
Airlines do have resale agreements with folks like Lowestfare.com, Cheap Tickets (CTIX: news, msgs) ...
Walker: Remember, the bulk fare agreement is only as good as it keeps quiet. If you can go to Cheaptickets.com -- and they're a fine company -- and if you can buy a ticket on American Airlines (AMR: news, msgs) at Cheap Tickets for $100 less than you can buy it from American Airlines, how much longer are you going to shop at American Airlines. Or, to put it another way, does American Airlines need help to discount its own product. Of course not. If American wants to discount it, it will.
Now American uses consolidators like Cheap Tickets because that helps American Airlines try to steal traffic from others, so long as the word doesn't get out to American's own business customers. If American business customers start booking through Cheap Tickets, uh-oh.
They all have exactly the same problem. That's the old gray-market idea. A gray-market reseller is a great idea as long as you don't advertise. Once a gray-market guy advertises, once you can buy a Canon camera for a third less than you can buy at retail through the gray market, guess what. Canon can't maintain its retail prices anymore.
So what's beautiful about a demand-collection system is it allows the seller to have its cake and eat it too. They can continue to sell at retail at their retail prices, and they can have a demand-collection system collect branded-neutral demand. Then they can decide how much of that brand neutral they want to sell without disrupting their retail price, because anybody who's in the demand-collection system doesn't know what brand they're going to get.
Let's talk about the applicability of the name-your-price business model. With your market value, this model has to succeed and it has to do well.
Walker: Let's talk about that for a second. For an e-commerce business to succeed, it needs really to have four things.
It's got to have something a lot of consumers want. In our case, that's savings. People want to save money. It seemed to do pretty well for Wal-Mart.
Number two, it's got to leverage the power of the Net to create some kind of sustained value. Obviously we do that because only on the Internet would it be possible to collect demand that was guaranteed by credit cards. You couldn't do it any other way.
Number three, you've got to run the company well with the right management. Without the right management you can't make it. In our case, that's Rick Bradduck, who's the former CEO of Citibank and we've also got a great board. And Rick has built a phenomenal team here at Priceline. If you look at the average tenure of the senior management here, it averages 15-20 years of experience.
And the fourth thing you've got to do to be a successful e-commerce company is you've got to build some kind of competitive advantage into your business. In the case of EBay (EBAY: news, msgs), the competitive advantage is they have a large market first so it feeds on itself. Metcalfe's Law. In our case, it's patents. We have a patented business model that gives us a competitive advantage over other companies that would simply want to copy.
So when Amazon (AMZN: news, msgs) decided they wanted to be in the auction space, they just simply announced a competitor to EBay. No barriers. We believe that our patent portfolio -- and its' not just one patent, it's two issued and 18 pending patents -- is a very strong competitive advantage. After all, the entire pharmaceutical industry is built on patents.
What the market is saying, I believe, is not what our value is or isn't. The market is saying that there's really going to be two groups of companies in the e-commerce space. A handful of blue chips, real leaders, and then everybody else. And if you've look at the blue chip, they're going to have all four of these things. Something everybody wants, leverage the Net, run it well and competitive advantage. I believe the market is saying, 'Hey, Priceline's got all of those things.'
Therefore, our valuation relative to Amazon or EBay is going to make sense, because that's the marketplace's opinion about the future of the Internet.
With airline tickets, it's pretty easy to know what the going rate is, and you don't have to be do much to get informed about it, but it seems like other products consumers just often don't know what price is reasonable.
Walker: Let me tell you what we're doing there. In our hotel service, we provide a price range as a guidance for customers. In our car service, we provide both the retail price, the MSRP, and the dealer cost on every option available for every car.
So why wouldn't everyone put in a bid $5 above the dealer's cost?
Walker: Because if you try to buy a hot car for $5 over dealer's cost, you're not going to get it. You're welcome to try. But consumers are smart. Americans really know how to shop.
Folks like Onsale (ONSL: news, msgs) and Buy.com have pretty much stated that they're going to sell at cost. If you start selling these consumer electronics ...
Walker: No seller can afford to destroy the integrity of their retail price. Nobody. And those retail prices are always well above the manufacturing cost of an item. That's our story.
Let's just say a manufacturer makes a TV and it costs them $120. He sells it to a retailer for $170, and the retailer sells it at cost, $170. Well, congratulations. That's an interesting sustainable model for the retailer, but that's another discussion. But the manufacturer still has excess units. They still have a warehouse full of stuff at $120.
If the manufacturer starts selling to the retailer at $160, all it's doing is destroying its own market. By the way, the marginal manufacturing cost -- if the actual manufacturing cost is $120 -- is $90. In other words, to keep the manufacturing line running probably only costs that manufacturer $90 [per TV].
He's got a lot of room [to maneuver]. The only problem is he can't violate the retail economics or if he does he's not going to have any distribution system left because all of the distributors are going to go out of business. That's why a demand-collection system protects the retail price integrity and protects the distribution system.
People don't like to talk about valuation now. The market's huge, the model is ingenious, but I still say you still get to the point where this company is a $20 billion-plus company with expected profits in 2001.
Walker: If we show people how to sell their excess inventory in every major industry where there is excess inventory, we are a very valuable company.
You talk about the importance of the patents. There are a couple of disputes going on regarding the patents. It's not surprising considering the value that could be in that patent. But like you said, it's an issue investors should consider. Any latest developments, and how do you think is this going to pan out?
Walker: We think the claims against us are frivolous and without merit, and we will prevail ...
One of the reports I read, the analyst said that he was impressed that you were sticking to your profit guns. There's another pretty valuable e-commerce company out there that has said continually "We're going to increase our losses [to capitalize on the market opportunity]." Is this something you are really serious about?
Walker: One of the things that happens when you have the former president of Citibank running your company, OK, is that they take the budgeting process very seriously around here. And our story that you can expect to see a steady path to operating profits at Priceline is more than just a story. We are very serious about it.
We believe strongly that we can not only grow the top line here but that the power of this business model allows us to show investors the steady path to profitability that they really want to see.
Darren Chervitz is the IPO reporter for CBS MarketWatch.
|
