Dueling Fools

Dueling Fools
July 21, 1999

What's My Priceline?
Bull Argument

by Paul Larson (tmfparlay@aol.com)

What is Priceline? The company is best known for the "name your price" airline tickets, but Priceline now sells hotel rooms, cars, and home mortgages through its system. One way to describe the firm would be to call it a reverse auctioneer. Another way the company's founder -- who Forbes magazine recently dubbed as a "New Age Edison" -- describes the firm as that of a demand-collection system. Whatever way you describe what Priceline does, the company has meshed a new (and patented) operating model with information technology to create a business that is going to be a dominant force over the next several years.

Simply said, Priceline increases the market efficiency in the industries where it operates. Not only do consumers get a shot at buying something far below what they might pay through other channels, but businesses are also offered the chance to unload excess inventory that may otherwise go unused. Said another way, Priceline adds value to both its consumers as well as its business partners. Value is created for the consumers in the way of steep discounts, while value is added to its business partners by reducing or eliminating a major cost in all industries -- opportunity cost.

Another key service Priceline gives its business partners is a gauge of demand below listed prices. This type of information is extremely useful for operating managers since it allows companies to more effectively set their price and to be more efficient overall. The way Priceline is able to cross-advertise and bundle products with its adaptive marketing system also allows the company to catalyze activity in the markets it operates. Priceline is simply adding value and increasing efficiency wherever it goes.

Priceline started last spring by peddling excess airline seats, but the company has quickly moved into other industries such as cars (both rental as well as for purchase), hotel rooms, and home loans. Much like Amazon.com (Nasdaq: AMZN) can easily add new retail categories to its business model, Priceline is quickly expanding beyond its core travel service categories to embrace a wide variety of other industries with its unique way of settling prices for goods and services. In a few years, it would not be surprising to see hundreds, if not thousands, of things for sale using Priceline's patented pricing system. The potential scope of the company's business is mind-boggling.

The company's patent almost assures Priceline will continue to lead the unique reverse auction market. Priceline is essentially without peers at the moment, and I can think of few other firms that have such a vibrantly growing market all to themselves. Not many companies have a model that can match the scope of eBay (Nasdaq: EBAY), but Priceline is one of them. Yet unlike the eBays and Amazons of the world, Priceline doesn't have to worry about well-funded competitors coming in and nibbling away at market share.

Let's now talk about some of the interesting attributes of Priceline's business model. Much like eBay, Priceline is little more than a very effective matchmaker, putting in contact motivated buyers and sellers. The company is not buying, storing and shipping tangible goods. Rather, it is marketing an intangible service, which means Priceline has little working capital needs. In fact, the company, like Amazon, first collects from its customers before dispensing what it has sold, giving the company a negative cash conversion cycle. For those not understanding what this means, it's almost akin to a car that can run without gas.

Being based on the Internet, the company also does not need to spend gobs of cash to sustain and grow its business. Similar to numerous other e-commerce companies, this "light" business allows for awesome growth without spending awesomely for inventory, real estate, bricks and mortar. Sales growth is likely to far outpace invested capital growth in Priceline's business, increasing asset turnover over time.

Another extremely attractive fact about Priceline is that the company's business model is highly scalable. The company can ratchet up the size of its business with extreme ease. This means that incremental sales are likely to far outweigh incremental costs, which should lead to expanding margins over time.

Mix increasing asset turns with expanding margins and you have an explosive profit scenario. The company may not be profitable now, but just wait.

Priceline also as has an awesome brand, an attribute that may become increasingly important in the future. Nearly half of all American adults have heard of Priceline, which is a pretty amazing fact given that the company has only been in business about a year and a half. William Shatner is a good pitchman, but he ain't that good. In other words, I think the brand-awareness stems largely from word-of-mouth of happy customers and speaks volumes about the attractiveness of Priceline's service. Have you named your price yet?

Priceline is truly trekking where no company has gone before. It takes much contemplation to actually "get" the Priceline story and see the incredible potential the company has. Nevertheless, the possible scale and scope of what the company can do is nothing short of phenomenal, and Priceline is shielded from competitors via patent. I think what we've seen from the company thus far is the proverbial tip of the iceberg.

Next: The Bear Argument