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Priceline.com: Unproven Business Model, But Delta's On Board By January 22, 1999 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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