More Questions for priceline.com After Grocery Operation Shuts Down

Updated from 10 a.m. EDT:

High-profile Internet flameout, aisle four!

Priceline WebHouse Club, which licensed priceline.com's (PCLN) name-your-own-price technology to sell groceries and gasoline, said it will cease operations by early next year.

Sliding priceline over six months

WebHouse said it didn't think it would be able to raise enough capital to reach profitability. While April's Internet stock market crash has made it difficult for consumer e-commerce companies to raise money from venture capitalists or in the public markets, the WebHouse announcement is a surprise; just this summer it started selling gas and said it was planning a third round of financing.

WebHouse's closing deals a blow to priceline, whose shares fell $3.56, or 38%, to close at $5.81. While priceline wasn't a direct investor in its licensee, it received $4.3 million in reimbursement for expenses associated with services it provided and $361,000 in royalties during the second quarter from WebHouse and another soon-to-be-defunct licensee, Perfect Yardsale, and had, through a warrant, the right to take a majority stake in WebHouse. Priceline recorded a noncash gain of $189 million in the fourth quarter of 1999 to account for the warrant, and will now take a noncash loss in the third quarter. Priceline and WebHouse share a founder in Jay Walker, who was also a significant WebHouse investor.

The Extension Question

Beyond the financial details, though, this is sure to raise questions about how far priceline's business model can be extended -- questions that are fresh on investors' minds in light of its recent announcement that it will miss third-quarter revenue expectations. Before today's news, priceline's shares had fallen more than 40% since that announcement on fears that the company is too dependent on its main airline business (the cause of the projected shortfall) and that it's going to be tough to extend name-your-own-price to big growth categories.

"The question is how do you monetize the priceline brand?" says Faye Landes, an analyst with Sanford Bernstein. Name recognition alone doesn't guarantee you have a viable business, she says, noting that this problem isn't unique to priceline -- Amazon(AMZN), too, is working to extend its strong brand in the book business to new categories like patio equipment. (Landes rates priceline shares a neutral and her firm hasn't done underwriting for the company.)

Other analysts were also concerned about what this says about priceline's ability to diversify. Following today's news, Lauren Cooks Levitan, analyst with Robertson Stephens, cut her rating on the company's shares to a long-term attractive from a buy, while U.S. Bancorp Piper Jaffray's Anthony Gikas cut his rating to neutral from buy. Sara Farley, analyst with PaineWebber, also downgraded priceline shares to neutral. (Robbie Stephens has done underwriting for priceline; U.S. Bancorp Piper Jaffray and PaineWebber haven't.)

priceline spokesman Brian Ek disputes the notion that all this calls into question priceline's business model, repeating that the company's nonairline businesses, like long-distance phone service, are expected to have grown 20% in the third quarter from second-quarter levels. Moreover, other licensees, such as international operations in Japan and Europe, are doing fine, he says. More details will come when priceline releases third-quarter results on Nov. 2.

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