Article 62 of 200
On The Cover
The Forbes Lunch: An Edison for a new age?: Jay Walker became
an instant billionaire with a novel way to broker cheap airline
tickets. He's got a lot more clever ideas where that one came
from--and he wants a monopoly on all of them.
BY Dyan Machan
05/17/1999
Forbes
Page 178
Copyright 1999 Forbes Inc.
If I offered you a billion dollars for your left arm, would you sell it?" asks
Jay Walker, the hyperactive founder of Priceline.com. "Of course not," his
guest replies.
"Then you're a billionaire on paper," he says defiantly. "You have a
billion-dollar asset. I have a billion-dollar asset. It's a bunch of paper."
That's an imaginative way to think about value. But then Jay Walker makes a
living with his imagination. His idea factory, Walker Digital, has 12 patents
on business methods, including two that underlie Priceline.com. He has
patents pending on 240 other ideas.
In March Priceline, the name-your-price Internet business that sells airline
tickets, cars, hotel rooms and home mortgages, went public at $16 a share,
soared during its first trading day to $88 and kept going. At a recent $130 a
share, it's worth $18.5 billion and Walker's 49% (including shares owned
indirectly through Walker Digital) is worth $9 billion. The company is only
a year old.
Leisure travelers like this idea. In the first quarter of 1999 Priceline sold
195,100 tickets, half again as many as it sold in the first nine months of
operation.
Here's how Priceline works. You put in a lowball offer for an airline ticket,
and if an airline has seats that will otherwise go empty, it may just hit your
offer. The typical roundtrip fares between New York and Los Angeles fall in
the $300-to-$350 range. For business travelers there's a fair amount of
inconvenience to using Priceline. To win your cheap seat, you have to risk
uncertain conditions that might include a layover or change of planes.
Who'd have thought this idea would be worth $18.5 billion? Walker, 43,
professes to be more interested in the idea than the money: "You want to be
recognized for your intellectual achievement, not for the fact that a bunch of
day traders took your stock to a price that may or may not represent the real
value of the firm."
Fine. We are not having lunch in his Stamford, Conn. office to just talk
about Priceline (or to sell a left arm). We're here to learn about Walker
Digital, 90% owned by its namesake. Priceline is based in part on a patent
issued to Walker Digital for an innovative business process, buyer-driven
commerce, that is fleshed out by some specific software design. The software
lets prospective buyers communicate a binding purchase offer to potential
sellers. It's much like the over-the-counter stock market every day.
In fact, Priceline uses parts of 19 Walker Digital patents. Walker was a
coinventor of all of them. In return for assignment of intellectual property
rights to Priceline, and a $500,000 investment, Walker Digital received 7.5
million Priceline shares, now worth $980 million.
Get a patent, start a business. The process sets Walker apart from fellow
Web billionaires Jerry Yang and Jeffrey Bezos, whose fortunes are built on
being first, not being exclusive.
So what exactly is a business process patent? Must it incorporate high
technology? Not necessarily, although Walker does use some nifty encryption
along with its off-the-shelf Oracle database. To get its patents, Walker
Digital needed to prove that its ideas added to the publicly available pool of
knowledge in a novel way. In the lawyer's phrase, Walker had to advance the
state of the art.
The very idea that anyone can get a patent on a business process found more
backing last summer (see box, p. 183). Actually, process patents are not new.
Alexander Graham Bell received one in 1876 for a process to transmit
sounds; countless patents have been issued for chemical processes.
But a business process? A way of treating customers? The notion of putting
buyers and sellers together anonymously? It is not so obvious that
"processes" like these are entitled to patents.
Walker, his boyish hair flopping with evangelical zeal, says that inventors of
Web businesses are every bit as entitled to patents as inventors of
microphones and chemical processes.
"Walker Digital is about reengineering the DNA of the future of business,"
he declares. "What we hope is that a group of thoughtful people can together
reinvent whole sectors of the global economy. And not only can we reinvent
them, we can own those inventions."
Walker Digital's idea lab is modeled after Thomas A. Edison's famed
laboratory in Menlo Park, N.J. According to Walker, Edison's proudest
achievement wasn't the lightbulb, but his lab, where he put together a team
of scientists to solve a problem. Prior to Edison, scientific discovery was the
domain of the solitary inventor. "Edison created a methodology to solve all
kinds of problems," says Walker.
Walker Digital has 25 employees. Half are inventors, most in their early 30s
with master's degrees in a variety of disciplines. (Ph.D.s are too educated to
be as worthwhile for his business, Walker notes.) No surprise, the other half
are lawyers with patent experience. They brainstorm once a week to identify
Internet-oriented solutions to problems that can be patented, then licensed or
turned into businesses. "Edison's world was electromechanical," Walker says.
"We're in a bits world."
As some chicken curry is placed atop patent applications scattered on his desk
(which is near a 7-foot character from Star Wars, the bounty hunter, fully
armed, and a wall on which hang flags that made trips to the moon), Walker
flies into his own hyperspace, using multiple metaphors involving 747s, Star
Trek and prehistoric biology to discuss the future of his lab. The only way to
ask a question is to raise a hand. Walker finishes his thought, and calls on
me.
Isn't patenting a business process a bit unconventional? His response: It was
once unconventional to drill for oil in the ocean. "Look, there are two
possible choices: Either I'm eccentric, that's when you're right and ahead of
the curve, or wacky, that's when you're wrong!"
Walker built his premise for Walker Digital in 1991 after reading a trade
journal article on how the banking system moves a trillion dollars securely
around the world using public key cryptography. This system finesses an
age-old problem in cryptography, that the sender and receiver of
confidential messages have to keep the encoding key locked up. That's
because the decoding key is readily discernible from the encoding key.
(Example of exaggerated simplicity: If the encoding key is to move all the
letters forward two spaces in the alphabet, shifting MONEY into OQPGA,
then the decoding key is to move them backwards two.)
In public key cryptography, there is no way to discern the decoding key
from the encoding key. So the intended receiver of a secret message (say, a
bank wire-transfer department) can safely publish the encrypting key for all
the world to see.
On this breakthrough in cryptography hangs much of the world's high-
security electronic commerce. The three mathematicians who came upon the
algorithm behind this system won a patent and created RSA Data Security
from it (now part of Security Dynamics). In a sense, they were patenting an
abstraction, a mathematical formula; but to implement the formula requires
some software, and software is patentable.
The lightbulb went on in Walker's head when he read about this. The patent
law, indeed, could protect an idea, or an application of an idea, not just a
physical thing like a gearshift or a microphone. "It is constitutionally
mandated," he says, waving his hands in the air.
But not anybody could turn an abstraction--like putting buyers and sellers
together--into an instant $18.5 billion.
"I've always been an entrepreneur," Walker says. "I start businesses for a
living." A native of Queens, N.Y., he is the son of a successful real estate
developer. He takes an impatient breath, bored talking about his background:
"If you're going to trace my life, we'll be here a week. I was a Boy Scout.
Okay?!"
Not your average Boy Scout. He was a Monopoly player who figured out
how to win consistently, and published a book on his techniques. "My dad
just can't understand why I didn't go into real estate after Monopoly," sighs
Walker. His mother, who died when he was 18, was a champion bridge
player who escaped from the Nazis when she was 6. "I get my
competitiveness from my mom," he says. Both parents encouraged him to
take risks.
He did. At age 9, he started a newspaper. At age 10, he traveled to Europe
on his own. At summer camp, at age 13, he would bring candy in bulk and
sell it at prices below what the camp charged. "I was a black marketer," he
grins. "I was serving customers. I simply bypassed the monopoly."
Oh yes, Monopoly. "In college [Cornell], I realized Monopoly was a game of
skill and, despite the dice, a skillful player always won. So I wrote down the
mechanism by which the Monopoly player would never lose. I called Parker
Brothers and said: 'I've got good news for you. Monopoly's a game of skill
and I could write a book telling everybody how to play better.' They said, 'If
you do, we will sue your ass.'"
Parker sued him to prevent publication of 1000 Ways to Win Monopoly
Games, banned him from further competition in Parker-sponsored
tournaments, and later dropped the suit. His legal fees ate up all of the
$50,000 profit he received from selling 100,000-plus copies.
Still, he stuck to publishing. He started a weekly paper in Ithaca, N.Y., which
Gannett squished, leaving him $250,000 in debt after college; a company that
pushed catalog sales through retail outlets (it died when the glue on his price
tags came unstuck); a marketing company that placed ads in catalogs (it just
didn't work); and a business that sold light sculptures (why didn't Edison
think of that?).
Then he hit on something. In Europe, it is not uncommon for a magazine
publisher to get indefinite renewals with a sort of negative option; the
subscriber's bank account is automatically debited every year for the
subscription price until he cancels. Could something like that be implemented
here?
In 1992 Walker teamed with Michael Loeb (son of former Fortune editor
Marshall Loeb) to offer automatically renewed magazine subscriptions tied
to a credit card. Loeb had the publishing ties, Walker the ability to set the
system up on a computer. He has a patent pending on it.
NewSub Services was a hit. Today it has 30 million subscribers and $300
million in sales. No one ever really tried to duplicate the system, and
NewSub is considering a public offering.
Walker, restless, wanted to try out another idea. He sold a third of his 50%
stake in NewSub to raise $25 million and put that money into starting
Priceline.com. Some of his money, boosted with outside capital (see box
below), went into an expensive and very successful ad campaign featuring
Star Trek's William Shatner. In this regard, Priceline is no different from
Amazon : If you want to win on the Web, you have to spend early and
lavishly on marketing.
What's up Walker's sleeve next? Like a magician, he picks up a stack of
papers: "Pick a patent, any patent!"
No. 5,862,223 (issued Jan. 19, 1999) establishes a market mechanism to
connect users of professional services (like medical advice) to a worldwide
database of professionals who can dispense advice over the Web. No.
5,884,272 (issued Mar. 16, 1999) creates a system for anonymous
communication between people. This could be used for police hotlines.
Patent No. 5,797,127 (issued Aug. 18, 1998) describes the selling of options
on airline seats. "Wouldn't you like to lock in a low airfare without tying up
money and without risking the loss of the ticket if travel plans change?"
Walker asks.
Walker doesn't have to invent a new business to prosper. Eight pending
patents, he says, will reinvent fast food retailing. He'd like to get McDonald's
Corp. to sign up. "Everybody will have a PDA [personal digital assistant],"
he says. "In the information revolution, everybody's going to be able to get
on line at McDonald's from their car, desktop, wherever."
A new company, Digital Quickserve, will license the idea to food
franchisers, taking a piece of their sales. Royalties. Intellectual patents. It
sure beats selling hourly advice.
Priceline will get a piece of the action wherever it can. It just brokered a
deal with First USA, the leading Visa card issuer, for Priceline credit cards,
which offer users discounts on Priceline services. Walker hopes to see
revenues of $200 million over the next five years from the deal.
Monopolies are nice, but let us not forget patents can be challenged. If the
Sabre Group, the global ticketing service, took a mind to copycat
Priceline.com, then Priceline might sue Sabre for infringement and Sabre
might countersue.
In his best Jim Carrey routine, Walker starts flailing his arms sarcastically
exclaiming, "You mean, I get to go to the courts?! When do I begin this
opportunity to fight really big companies? And, after years of battle, I know
the better person will always win, right?"
For now, Priceline is winning. Through March of this year its ticket volume
came to $45 million, up from $35 million in nine months of operation last
year. It is no longer subsidizing sales in order to prime the pump. In its first
three months of business it paid airlines $1.13 for every dollar's worth of
tickets sold. In the fourth quarter of 1998 it paid 88 cents.
Throw in marketing and other costs, and Priceline is still losing
money--what Web upstart is not?--but not as much per dollar of sales as it
did early on. Walker plans to keep beaming William Shatner at prospective
customers. The marketing budget will rise from $24 million last year to $64
million this year. Analysts estimate the company will break even in 2001 on
revenue of half a billion dollars.
With lunch almost over, we let Walker riff, geek-like, on the future.
"Computing is becoming universal. Mips [millions of instructions per second
of processing power] will be free and ubiquitous. Mips trend to zero [cost]
and bandwidth trends to infinite. Network access trends to continuous. What
we do at Walker is ask, How will business be reinvented, given that reality?
It's a question most businesses are not working on."
Will there be more Pricelines? Walker responds: "Hopefully, very few.
Pricelines take a lot of work." He expects to license certain patents to
established companies. He turns to biology to explain. "If you invented a new
strain of corn, would you rather be a farmer or Monsanto? Life is short, be
Monsanto!"
Wacky or eccentric? Will Walker Digital be the Menlo Park of the digital
age? Will Walker's paper billions become real money? Be careful about
betting real dollars against Jay Walker.
(See related Forbes Lunch articles: "Barbed wire on the Internet," "Bouncing
around," and "Edison wannabes" -- Forbes May 17, 1999.) |
