Be Your Own Barcode

By Karl Taro Greenfeld

Priceline, the company most renowned for reintroducing William Shatner to prime time, has come to represent both what is transformative and what is just plain annoying about the Web. Think of any overhyped Web term or concept: disintermediation. The auction economy. Virtual communities. Stupid TV spots. Priceline, based in Norwalk, Conn., is a poster child for these and other new- economy cliches, especially the one about how it doesn't need to make money today because it will make tons of it someday. Next year. Maybe.

The business model--allowing customers to name what they are willing to pay for plane tickets, hotel rooms, toothpaste, phone calls to Lithuania and then pocketing any difference between that and the wholesale price--is made possible by the Net and some nifty patented transaction software. Only through the Web could you match millions of bids with millions of products, all without a fixed price.

Certainly, it is a very cool concept, one that founder Jay Walker predicts will eventually eliminate price-tag shopping. Never mind that fixed pricing in one form or another has been around since the time of Xerxes for a reason: people like it. As Walker points out, though, myriad products--from FedEx shipping, where rates increase with the speed of delivery, to groceries bought with coupons--fall into the variable-price category. Thus Walker argues that he is merely pushing an already flexible system to its logical extreme.

In the roiling early days of the dotcom economy, this logic made perfect sense to investors, who drove Priceline's stock to $119 a share. Profits were years away, but that was something that worried your old uncle in the boring old economy. Now, of course, the hottest concept sweeping the Web--with the NASDAQ off 26% and e-tailers disappearing faster than Energy Department hard drives--is actually making a buck.

And last week that prospect got more complicated for Priceline when major airline companies confirmed that they will invest in a website, to be called Hotwire, that will compete with Priceline to sell unused airline seats. Unlike Priceline, though, Hotwire will set prices rather than auction airline seats. The news, piled on top of weeks of dotcom doom, punished the stock, which finished the week at $37.97.

So far, Priceline has excelled at liquidating products--plane tickets, hotel rooms, conceivably even produce--that have what economists call "time sensitivity." If airlines or hotels don't sell seats on particular flights or rooms for certain nights, those assets become worthless. Such businesses are a natural fit for Priceline, which formed partnerships with airlines and hotels. Travelers typed in their bids and picked up their tickets, and Priceline took flight, selling 20,000 tickets a day.

The rapid ascent of the company, however, has left some consumers grumbling, citing hidden charges, weird flight itineraries and lousy customer service. "My experience is that you don't get what you think you're gonna get," says Herb Zimmerman, a Lancaster, Pa., stockbroker. "The thing that perturbed me most was the excess charges that were added [to the airline-ticket price] for fuel and miscellaneous." Other customers have complained that hotels rated as four-star turned out to be less than stellar. Frequent user Raquel Johnson of Bloomington, Minn., though happy with the service, warns, "Read all the fine print." Priceline does ask customers to initial all the rules and restrictions accompanying each purchase, shielding the company from liability for potential travel mishaps and disappointing accommodations.

But that hardly stops the griping. In Priceline's home state, the Connecticut Better Business Bureau has logged 111 complaints against the company thus far this year, compared with only one against Lee Travel Group, Connecticut's largest off-line travel agent. Perhaps even more damning: of the 77 complaints lodged against travel agents with the U.S. Department of Transportation in 1999, 27 were against Priceline, despite the fact that Priceline booked only 1% of all flight traffic.

Priceline chief executive Dan Schulman has responded by setting up two new customer-service call centers and hiring several hundred additional customer-service representatives, bringing the total to 650. Schulman says, however, that Priceline's first priority is delivering savings rather than service. "We don't provide the level of service that Amazon provides," he notes. "Customers need to understand the level of service that they can reasonably expect."

As Priceline moves into new, less time-sensitive businesses, customers may find the company struggling to deliver on price as well as service. The $6.5 billion question (the figure represents Priceline's market capitalization) is whether the company can succeed in these new markets. That's one reason the stock price has suffered. Another: Priceline's accounting policy, which books every dollar of a transaction as a sale, even though most of the company's $482.4 million in revenues last year funneled to wholesale suppliers.

Priceline must now make its reverse-auction process work with items like gasoline, packaged groceries and credit cards. Such products are worth just as much tomorrow as they are today, giving suppliers little incentive to dump inventory by partnering with Priceline. "The Priceline dilemma, if they can't secure partnerships, becomes one of increasing costs to them and decreasing benefits to their consumer," says Sam Peltzman of the Graduate School of Business at the University of Chicago.

In the case of groceries, Priceline's inability to make deals with such major manufacturers as Procter & Gamble and Kraft has meant that customers lured by the 90-day free-trial period have found prices rising after they signed on. "I think what they do is sucker you in with a really low price," says Amy Anuszewski, a software engineer in Reading, Pa. "Once you're hooked, they start charging a monthly fee and higher prices."

Overall, Priceline savings present a crazy-quilt pattern. The company has succeeded in lining up partnerships with second-tier telephone companies eager to unload excess long-distance capacity, such as Net2Phone and ZeroPlus.com so consumers shopping for long distance via Priceline can get good deals. But with major oil and gas companies such as Exxon-Mobil and Texaco, Priceline has struck out. Oil companies that spend millions building brands are loath to sell gasoline via a site that puts price before brand.

Priceline claims that 35% of its customers this year are returning for more business, and it has steadily cut its losses from 12[cents] a share a year ago to 4[cents] today. But reaching CEO Schulman's goal of turning the corner into profitability by 2001 will require Priceline to partner with suppliers in markets where its model has not yet proved to have an advantage.

And then there is Hotwire, and other competitors are sure to follow. Ironically, the very spread of this sort of business model could create Priceline's biggest challenge. With ever faster, always-on gizmos connected to the Web, we will all have access to ever more information. And if we all know the lowest accepted bid for a certain flight or box of cereal, then won't that bid become the de facto price? Priceline's revolution would then have led us right back to where it began: the world of fixed prices.

--With reporting by Mike Eskenazi

With reporting by Mike Eskenazi