Can you build an $11 billion business out of selling ice cream cones before they melt or fruits and veggies before they rot? That's the essential proposition behind one of the more unusual -- and on Wall Street, at least, instantly popular -- stock offerings to come along in quite a while: a company in the business of unloading unsold airline seats over the Internet before the planes take off.
Don't laugh, because if Stamford, Conn.-based
succeeds in extending its concept of "demand collection" marketing from airline tickets to other so-called brand-neutral consumer goods and services, the company could easily revolutionize much of consumer marketing in America.
As readers of Eye to the Keyhole know all too well, we've been plenty skeptical about how much money can actually be made through consumer marketing on the Internet. And though the stock prices of the companies in this much-hyped medium have themselves nearly all shot into orbit, their underlying businesses have remained fundamentally flawed.
can't make any money because its marketing and sales costs eat up its entire gross profit, and it's been pretty much the same for just about every other Internet company you can think of. The cost of simply establishing the business and building brand awareness has been hugely more expensive than anyone thought -- and, in the end, all that gets developed for the money is a new way to do the same old thing.
priceline.com may well turn out to be the first Internet company for which this critique does not apply, a company that really does represent a new way of marketing goods and services to consumers. We'll get into the particulars of what it actually does in a minute. But for now it is enough to know that, if the approach works -- and that's a big if -- you could easily find yourself five years from now using the priceline.com Web site to buy or sell futures contracts to hedge your groceries purchases ... or to acquire cheap electricity to light your house ... or purchase long-distance telephone service at cut-rate prices.
Meanwhile, if you're a businessman, you could find yourself using priceline.com to acquire new customers far more cheaply and efficiently than you do now. For example, let's say a consumer wants to stay in a luxury hotel in Chicago for a night, but doesn't want to spend more than $125. So he keys in his request to priceline.com. But even if it turns out that the cheapest any Chicago hotel will let a room go for is $175, he might still get a deal.
That's because other companies in the priceline.com computer might be willing to pay the difference if a consumer will simply buy their product. Since it can cost $100 or more for a bank to acquire a new credit card customer through direct mail marketing, a message from a bank like
could pop up on the priceline screen offering to provide the $50 to clinch the deal if the consumer will agree to sign up for a credit card.
In short, if priceline.com succeeds, a very large chunk of the American consumer market could be turned on its ear, becoming a colossal blind auction that treats consumer commodities, like airline tickets, as little more than marketing premiums to sell brand-sensitive goods and services. The question is: Will priceline.com be able to make much money -- or indeed, any at all -- from doing just that?
Some folks sure think so. The company is, after all, barely two years old and already is worth billions -- on paper at least -- to its backers and bankrollers. They include the ex-No. 2 man at Citibank, Richard Braddock, who runs the company, as well as such high-visibility board members as the shrewd former co-chairman of
, Nicholas J. Nicholas Jr., and the relentlessly energetic editor of the
Columbia Journalism Review
, Marshall Loeb. Previously, Mr. Loeb had held down the top editing spots at
, and who knows what else.
That trio alone gives priceline.com a media world cachet that no other Internet start-up has yet been able to match. And the company's saturation bombing of the airwaves with radio and TV promotional commercials featuring actor
extolling priceline's "name your own price" concept has lifted its visibility among the general public as well -- even for folks who wouldn't know a Java applet from a grapefruit. Just flip on the TV and there's Mr. Shatner pitching priceline.com and its Internet retailing site: "This is going to be big -- really big..."
Meanwhile, the company's stock went public in a deal underwritten by
Morgan Stanley Dean Witter
back on March 31, creating an instant $12 billion market cap for the company -- of which Mr. Braddock gets $1.2 billion, though, sadly for him, in restricted shares that can't be sold for at least a year. Ditto for Mr. Nicholas, who gets $324 million, and for Mr. Loeb, who gets $2.8 million. (See how journalists always finish last in these things?)
Anyway, I'm personally very happy for the lot of them because they're all hale fellows who add a level of respectability to the Internet simply by being part of it. On the other hand, in fairness, one must ask an obvious question: Are these prices justified for a business that remains untested and uncertain? In fact, they represent nothing more than Wall Street's continuing hyperventilation over any stock with a ".com" in the name. It's a love affair that's gone on for the better part of a year now, and signs of excess are now erupting in all directions -- particularly when it comes to escalating volatility.
We begin with the ever-rising Observer Internet Sucker's index, which now stands at $449 billion, about 18% of the value of the
industrials. Since the start of the year, the Internet industry has been characterized not simply by soaring stock prices, but also by some of the wildest volatility on Wall Street in anyone's memory, as each new bit of unsettling news about tech and Internet stocks causes the sector to convulse to greater and greater extremes.
revenue is reportedly weakening ...
misses its numbers ...
warns of softening demand. Investors hear news like that and sell everything. Then the panic abates momentarily, and the crowd rushes right back in to buy back what it's just sold.
Consider a stock called
About a year and a half ago, the stock sold for barely 8. Vault forward to this month: On April 12, Net.B@nk touched 162. The very next day, it jumped to 241 -- a 50% increase in a single trading session. In the next two sessions, it fell apart all over again, dropping all the way back to 128. Yet by the end of the day April 15, it was once again selling for 160. If the stock market were a person behaving that way, you'd want to have it locked up on Prozac someplace where you could go for visits safely on Wednesdays and Sundays.
So let us turn to priceline.com, whose own performance in the market has pretty much mirrored the Internut sector as a whole. The shares were priced for trading at 16 in the initial public offering March 31. Yet no sooner did they reach the market than they soared to 86 in the first few minutes of trading. Then they fell back to 67 in the next few days ... then recovered to 99 three days after ... then finally wound up settling on April 15 at just under 80. Where they are now, as you read this, I haven't the foggiest idea.
What does this say for priceline.com? It says that at an April 14 market cap of $14 billion, this one little 200-employee company was worth nearly as much as
combined -- or two-thirds as much as the two largest airlines in America,
Delta Air Lines
, the parent company of
Of course, this doesn't make any sense whatsoever and everybody knows it ... just as they know that 194 per share doesn't make any sense for
or 188 for Amazon.com, or any of the rest of them. Using a dividend discount model for stock-price valuations,
Dreman Value Management
of New Jersey figures Yahoo! is worth 15 per share, and the other Internet stocks come off just as overpriced.
That's because, lacking real earnings, these stocks are all being valued by Wall Street on multiples of their revenues. priceline's own revenue is nearly doubling every quarter and could easily hit $300 million by the end of the year. But applying the Dreman analysis involving Yahoo! on a back-of-the-envelope basis, priceline is probably not worth much more than 20 per share, max -- which is really all that institutional investors were willing to pay for it in the IPO. The risk in the investment is that the company will not be able to expand its business beyond airline tickets -- in which case, as the company's IPO registration statement says flat-out, "we may never make a profit."
The way the deal works with airline tickets is simple. You want to fly to Los Angeles on the cheap? Then log on to priceline's Web page, select your destination and time of departure and key in what you're willing to pay. The priceline computer will compare your request with all available seats in its computer system and look for any that are being offered for a lower price than you're willing to pay. If it finds one, the computer will confirm the sale and priceline will pocket the difference between the quoted fare price by the airline and the price you've offered to pay.
At latest count, the company had 18 airlines signed up to provide fare listings in this manner and is producing matches for about 6% of consumer requests. Unfortunately, simple arithmetic suggests that to keep up its current growth rate, priceline.com will soon have to sell every excess seat-ticket in the entire U.S. air transportation sector every day -- which doesn't seem likely in any event -- after which the company will be able to grow no faster than the airline industry as a whole.
But before that happens, the company hopes to broaden out into everything from home mortgages to hotel rooms to new and used car sales ... and not far beyond that, to such consumer commodities as electricity purchases from regional grids, futures contracts on food staples in order to lock in grocery budgets, regional
bandwidth contracts to cut long-distance telephone costs, gasoline contracts and on and on.
The variations are as limitless as the economy, with brand-neutral consumer commodities being used to promote and sell brand-specific goods and services to targeted individuals without all the mass-market promotional overkill. If priceline.com can pull off this trick, there is no question that it will dramatically shake up consumer marketing in America. If it can't, its current 80 stock won't be worth much more than 80 cents. Either way, this is going to be an interesting situation to watch.
Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column. While he cannot provide investment advice or recommendations, he welcomes your feedback at