Priceline.com launched a hotel reservation service in
October 1998, and one month out was booking 1,000-1,500
hotel rooms/week. Participants include Marriott, Sheraton
and Westin. Priceline.com should have an easier time
growing this business, since hotels are more flexible with
rates and travelers more likely to make reasonable offers.
The company recently added cars and plans to offer home
mortgages, rental cars, cruises, time shares, vacation
packages, insurance and other financial services and
retail products.
Adaptive marketing programs are expected to bring in
incremental revenue -- and also increase its customers''
success rate. These programs allow consumers to increase
the amount of their offers at no cost to them by
participating in a sponsor promotion -- such as signing up
for a new credit card.
Delta Gets Priority Treatment
Most tickets issued by priceline.com were for two airlines -
TWA and America West. In September 1998,
priceline.com signed a special deal with Delta Air Lines.
Unlike the looser agreements with other suppliers, the Delta
agreement is for a 10-year term. The airline is entitled to
revenue sharing, and priceline.com is required to use the
highest qualifying price to fulfill ticket requests for Delta
subject to a minimum profit margin.
Delta has the right to approve new airline participants and
may exclude priceline.com from serving certain markets.
The airline also is entitled to a piece of priceline.com itself.
It has warrants to purchase up to 15.1 million shares of
priceline.com common stock at $1.16 per share -- subject to
achieving certain ticket sales.
The most interesting part of the Delta deal is that
priceline.com will license its buyer-driven commerce system
to the airline on a non-exclusive basis.
What does Delta want with priceline.com? It sees an
opportunity to sell excess inventory. It also can use
the priceline.com technology on its own Web site. It can
sell empty seats on a system that does not compete
with its direct sales initiatives and is not handcuffed by a
rigid pricing system.
The airline quickly is becoming one of the most aggressive
airlines on the Internet. It announced in mid-January a $2
surcharge on all round-trip flights that are NOT purchased
on its Web site, delta-air.com. Later in the month, it
announced a multimillion dollar, five-year deal with iXL, an
Atlanta-based Internet services firm. In the first year of the
contract, iXL will provide Delta with $10 million in Web-
based products and services.
Delta is aware that current, inflexible pricing systems are
limiting growth potential of Internet travel. Without testing
new ways to sell air travel, Delta, and other airlines, will
never give customers what they want - the lowest fares
possible. Airlines are currently learning new ways to sell
seats on priceline.com''s dollar. At least Delta is willing
to take some of the risk. And priceline.com gets some
assurance that Delta will participate in its system -- even if
other airlines don''t.
What''s The Potential?
It is potential, not current business that makes priceline.com
so interesting. Consumers requested 1.1 million airline
tickets, representing $243.9 million in potential bookings.
If all requests were filled (not just 10%), priceline.com
would be close to MSN Expedia''s 1998 gross bookings
of $250 million in 1998. Demand is there -- it''s a matter
of educating users about prices and getting airlines to
cooperate.
Look for priceline.com to tweak its system to make it more
agreeable to skeptical consumers and more airlines to make
routes available on the system. In the short term,
priceline.com will sacrifice margin to stimulate bookings on
the hotel reservation service as well, which will continue to
curtail revenue and profits. On the airline side of the
business, however, margins should improve as customers
get more experienced with the system. If Delta does work
with priceline.com by offering seats at reduced prices, and
the booking success rate improves, priceline.com should be
able to earn the spread that''s been so elusive.
One thing''s for certain -- it will be interesting to watch what
happens to priceline.com''s stock price after the IPO goes
effective in February. If it enjoys the incredible spikes of
other Internet IPO''s, such as MarketWatch.com,
theglobe.com and eBay, investors will be rich, even though
the company has yet to show real revenue, much less
profits.
(Reprinted with permission from PhocusWright''s The Insighter,
January 22, 1999 - Volume 1, Number 14)
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